VIDEO: Appraisal Discrimination Example
In this Compliance Clip, Adam discusses a hot topic in fair lending: appraisal discrimination. This is a topic that comes from our recent Fair Lending Hot Topics program and is something that every financial institution should be aware of, as regulators have said they are seeing “a wave” of this issue across the country.
For those wanting to take a deeper dive into fair lending hot topics, be sure to check out our Fair Lending Hot Topics class at www.compliancecohort.com/fair-lending-hot-topics.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to give an example of appraisal discrimination. That's right. We're talking about fair lending and we're talking about a hot topic, otherwise known as appraisal discrimination.
This is a topic that came up and was discussed in the December 2021 inter-agency webinar on fair lending. In this webinar, they gave an example from the J.P. Morgan Chase Bank Conciliation Agreement. What happened here was the presenter in the webinar talked about how there was an instance where an African-American homeowner living in a predominantly African-American neighborhood in Chicago was looking to refinance her home with J.P. Morgan Chase. So she applied for credit, applied for this refinance, and had an appraiser come out to her home, it was approved otherwise. What happened is the appraised value came in, but it came in low. She was upset. She thought her home value was worth more. Now, anybody who's been in banking for any amount of time knows that all customers think their home is worth more. It's a very common thing that happens. However, this person, this applicant actually decided that what she would do, because she got denied at Chase because her appraisal was low, is she would go to a competitor and apply. So she did. She went to a competitor, and she applied for another refinance, didn’t tell them necessarily about her prior denial, and just went through the process of the refinance, had another appraiser come to her home. This time, when a new appraiser came to her home, what she did is she made sure that she took down all personal items - pictures, artworks, anything that would show her race. She took it out of her home. In fact, what she did, I believe, is have a third party person come in and represent her and let the appraiser in so that the appraiser did not know the race of the homeowner. And what happened was that her home value in this new appraisal was much, much higher than it was with JP Morgan chase.
So here we have an instance where Chase had an appraiser that came in and her pictures, her race was prevalent and the appraisal came in low. Then she had another lender where the appraiser came in, a different appraiser came in, conducted the appraisal, not knowing the race of the homeowner, and the appraisal came in higher. From experience I know that not all appraisers are created equal. So there's probably some elements that we don't know. That said, this was a conciliation agreement and Chase ended up with some major restitutions.
What the presenter explained was interesting here because they said this was the first discriminatory appraisal case that they saw. So this was the first time they had covered this concern. But now they're seeing a wave of cases throughout the country. To me, this is something that's interesting because I've seen this before with the regulators, they find something, they spread the word and they start looking for it everywhere. I see this as a hot topic, something you should be paying attention to. And in fact, this is a topic that we've covered in our recent Fair Lending Hot Topics program that's available in our store, compliancecohort.com/store. In fact, this is where these slides are coming from.
Now, what's interesting about the relief. The relief kind of tells us some things you can do in your organization to make sure you don't have an issue with appraisal discrimination. The relief includes $500,000 for the complainant, but then it talks about public interest relief, including training for the staff, including the process to reevaluate appraised values, as well as fair lending training. In your organization, what you can do is make sure that those people who are conducting your appraisal reviews are in fact trained to make sure that the appraised value looks appropriate for the neighborhood, for the place it's located. Also, they should be trained to look for any potential discrimination or potential discrimination in their appraised value. I think that's really a key thing. Secondly, relief included that JP Morgan Chase had to conduct and provide periodic reminders to its staff of best practices and requirements to comply with policies and procedures. I've said for years that training only lasts a period of time. What happens is when we train our team, they comply for a period of time and then there's this curve where they fall off. And I've been a big proponent for a long time of periodic reminders. I believe that training should occur, start to fall off, you hit a periodic reminder, you see it level out, you conduct training again, it levels out and periodic reminder and so on and so forth. That's what the relief included as part of the settlement with J.P. Morgan Chase.
Also Chase had to include a review process to reevaluate appraisals. They had to conduct a change to their Appraisal Transmittal Letter that probably included a fair lending clause stating that you will not violate fair lending laws, and you will conduct your appraisal in a matter that does not discriminate. And they also had to change their adverse action notice process. I'm not sure what that entailed exactly, but it's definitely something to look into and see if you have any concerns when it relates to a denial. Maybe, maybe when there is an adverse action notice, you have a second review of that appraisal or denials for appraisals.
The other thing I would consider is during your appraiser review process, that you look and see if your appraisers have fair lending training. You look and see if your appraisers are qualified and if there's any complaints on them that could lead to discrimination, conducting that due diligence on your appraisers. When I was conducting this fair lending hot topics training, recently, I received a question where somebody said, well, what do we do for a smaller institution? We don't have a good sample size to know if the value is good, and how can we do that anyway, if we're not allowed to push back on appraised values and not influence an appraiser? Well, I think the biggest thing you can do is, during your due diligence process, when you're evaluating your appraisers, to determine if they understand fair lending and having conversations with them from a general perspective about fair lending, not on a specific property, but about a general perspective. You can even mention this conciliation agreement and say, “Hey, regulators are starting to look at this, we need to make sure that you're not doing this. Of course you understand this, but we need to make sure you're taking fair lending training,” so on and so forth. A lot of good information in this.
Again, this comes from our Fair Lending Hot Topics program that's available in our store, compliancecohort.com/store. This is one of the many topics that we covered. We actually take a deep dive into a bunch of nuances that are happening right now in fair lending, just like our concern with discrimination in the appraisal process. So if you're interested in taking a deep dive into what's happening in the fair lending world, take a look at our Fair Lending Hot Topics at compliancecohort.com/fair-lending-hot-topics or just go to our store compliancecohort.com/store.
That's all I have for you for this Compliance Clip.