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CFPB & DOJ Take An Interest In Appraisal Discrimination

Feb 24, 2022
Black Lady Justice
Staff Writer

Reports about appraisal discrimination have finally caught the attention of the Consumer Financial Protection Bureau and the Department of Justice.

KEY TAKEAWAYS
  • A lawsuit alleging appraisal discrimination has caught the attention of the DOJ.
  • The FHFA identified discriminatory statements in numerous home appraisal reports.
  • Studies conducted by Fannie Mae and Freddie Mac show appraisal disparities for communities and borrowers of color. 
  • The CFPB has created options that will strengthen oversight of these potentially racist automated valuation models. 

Reports about appraisal discrimination have finally caught the attention of the Consumer Financial Protection Bureau (CFPB), which issued a news release Wednesday outlining options to help determine whether automated home valuations are accurate and fair. 

What was it that finally set them off? Perhaps it was the mounting lawsuits waged against appraisal companies from individuals claiming appraisal discrimination. Maybe it was the discriminatory statements the Federal Housing Finance Agency (FHFA) identified in numerous home appraisal reports, or the studies conducted by Fannie Mae and Freddie Mac, which show appraisal disparities for communities and borrowers of color. 

“It is tempting to think that machines crunching numbers can take bias out of the equation, but they can’t,” said CFPB Director Rohit Chopra. “This initiative is one of many steps we are taking to ensure that in-person and algorithmic appraisals are fairer and more accurate.”

AVM Appraisals Get A Second Look 

In the underwriting process, lenders typically require an appraisal — an estimate of the home’s value. Traditional appraisals require a certified appraiser to visit the property in person and record both qualitative and quantitative data on the property’s condition. Yet, once the pandemic hit and home purchases and refinances skyrocketed, in-person appraisals needed to be mitigated as much as possible. 

Shortly before the COVID-19 pandemic, lenders and appraisers began implementing automated valuation models (AVMs), and that continued throughout the pandemic. Instead of performing a traditional appraisal, an AVM collects all the available data on the property via the web and makes a valuation based on that. Essentially, AVMs are a software-based pricing model, like Zillow’s “Zestimate” tool, using the most up-to-date information on record to make an estimate on the home’s value. Alternatives such as these were supremely useful for limiting in-person visits during the pandemic and rapidly pumping out appraisals throughout the housing boom.

However, the CFPB press release states that both in-person and algorithmic appraisals appear to be susceptible to bias and inaccuracy, absent appropriate safeguards, because most AVMs rely on the comparable sales model — a flawed system that perpetuates the legacy of segregation and racism. 

For decades, whites and minorities were purposefully segregated into certain districts, affecting property values and the distribution of resources for generations to come. Since the required comparison distance for houses is 1 mile, homes can be compared only to those recently sold in the neighborhood. Homes with low values in predominantly Black neighborhoods can be compared only to other Black-owned homes with low values. Meanwhile, homes in majority white neighborhoods with similar characteristics are appraised at much higher values.

Obtaining an accurate estimate of a home’s value is one of the most important steps in the mortgage process for home buyers, the CFPB report states. Inaccurate valuations, either too high or too low, can pose a risk to consumers. Overvaluing a home can put a family’s wealth at risk, create reselling challenges, and lead to higher rates of foreclosure. Yet, low valuations can jeopardize home sales and prevent homeowners from refinancing, which makes it harder to build wealth or finance repairs. 

“Homeowners and homebuyers are often dependent on appraisers’ views of a community and of the people that live within it,” the CFPB report states. “When those views are negative, the undervaluing of homes can be the result.”

DOJ Takes An Interest

In order to counteract appraisal bias, many minority families are “white-washing” their homes by removing anything and everything that would indicate Blacks or minorities live there. To achieve this strategy, families will replace family photos, hide racially themed artwork, and even have a white friend pose as the homeowner.

The Tate-Austins, a Black couple from Marin County, Calif., used this strategy to get a fair valuation on their home — except this time, their story captured the nation’s attention, and that of the Department of Justice (DOJ). 

The Tate-Austin family filed a lawsuit against an appraisal company, Miller & Perotti Real Estate Appraisals, for giving them an unreasonably low valuation on their home after they had spent more than $40,000 on renovations.

Janette Miller, a licensed real estate appraiser, was hired through AMC Links LLC to inspect the Tate-Austins’ house and prepare an appraisal report, after which she concluded that the house was worth $995,000 — a shocking blow to the family, according to a CNN article.

“Plaintiffs contend that Miller took into account the Austins’ race – Black – and the current and historical racial demographics of the house’s location in the unincorporated area known as Marin City,” the lawsuit states. 

The owners, Paul Austin and Tenisha Tate-Austin, decided to white-wash their home and get another appraisal. They erased any evidence of their racial identities inside the house, and asked a white friend to pose as the homeowner during the inspection. This different appraiser arrived at a value of $1,482,500, nearly a half million dollars higher than Miller’s estimate.

The couple filed their lawsuit in December 2021, and their story spread like wildfire across various news outlets, with CNN in particular stating it “underscored decades long discussions about housing discrimination, Black homeownership, and racial bias.”
 
The DOJ Civil Rights Division subsequently issued a statement on Feb. 14, 2022, stating that “combating housing discrimination, including bias in appraisals, is a high priority across the federal government.”

Although multiple stories have reported about Black couples white-washing their homes for a fairer appraisal, the DOJ noted the Tate-Austin case because it was one of a few filed under an FHA violation. This is what drew the attention of the federal government, Aryele Bradford, a DOJ spokeswoman told CNN. 

In the DOJ statement of interest it explains that the Civil Rights Division aims to “provide an overview of the FHA and to address two questions of law raised in Defendants’ Motion.”

These two questions come directly from the defendant: First, the defendants assert that the FHA does not apply to residential appraisers, to which the DOJ responds, “The statute’s text and case law make clear that it does.” 

Additionally, the defendants lay out the elements of a prima facie case (one sufficiently established by the evidence) and argue that Plaintiffs have failed to allege these elements. The DOJ responds, “Plaintiffs need not allege facts that make out a prima facie case at this stage. The Act simply requires that Plaintiffs allege a plausible entitlement to relief as a result of Defendants’ ‘discriminatory housing practices.’” 

Mounting Evidence Of Appraisal Bias

On Feb. 14, 2022, the FHFA addressed the long-standing issue of valuation bias in the appraisal industry, providing a laundry list of evidence that show racial and ethnic references found in appraisals reports. 

From millions of appraisals submitted annually, a keyword search resulted in thousands of potential race-related flags. Appraisers included the following observations that are not necessary to include in an appraisal: 

  • The percentages of racial and ethnic makeup of the area.
  • Foreign birthplaces of residents noted as part of the neighborhood descriptions.
  • The languages spoken in an area.
  • A town was described as having a "Black race population above state average.”
  • Ethnic groups that have immigrated to a neighborhood over the course of many years, with one noting it was "one spicy neighborhood."
  • A reference to a neighborhood being originally "White-Only," before becoming a "White-Flight Red-Zone" to explain why the neighborhood is mostly "Working-Class Black" now.

The list is long and shocking, and includes many examples of this thinly coded racist commentary. Yet, the CFPB clearly states that the racial and ethnic composition of the neighborhood should never be a factor that influences the value of a family's home.

Replacing people with automated technology could be a viable solution to this problem, but not if it’s going to perpetuate the same racist model appraisers have been using for decades. The CFPB has created options that will strengthen oversight of these potentially racist automated valuation models. 

Specifically, the CFPB, along with its federal partners, intends to:

  • Ensure a high level of confidence in the estimates produced by automated valuation models;
  • Protect against the manipulation of data;
  • Seek to avoid conflicts of interest;
  • Require random sample testing and reviews, and
  • Account for any other such factor that the agencies determine to be appropriate.
About the author
Staff Writer
Katie Jensen is a staff writer at NMP.
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