Biden Administration: Lenders Liable for Biased Real Estate Appraisals
CFPB and Department of Justice file Statement of Interest in Maryland federal court case.
Lenders are legally responsible for biased appraisals in real estate deals, the Biden Administration asserted this week.
“A lender violates both the [Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA)] if it relies on an appraisal that it knows or should know to be discriminatory,” the CFPB and the Justice Department said, in explaining why they filed a “Statement of Interest” in a case pending in a federal court in Maryland.
“The law is clear that mortgage lenders cannot take race, sex, or any other prohibited bases into account when evaluating the creditworthiness of an applicant,” the statement read.
A CFPB official explained the broader context.
“Lenders that discriminate against people seeking homeownership perpetuate inequities that prevent communities from thriving,” the bureau’s deputy director Zixta Martinez said.
Background and Context
In the federal court case in question, a Black couple living in Baltimore—Nathan Connolly and Shani Mott—sought to refinance their home to take advantage of low interest rates. They applied to loanDepot, which approved their loan subject to an appraisal by an independent third party, 20/20 Valuations, owned by Shane Lanham.
The couple contends that when Lanham visited the home, they and their children—all of whom are Black—were present. A few days later, loanDepot denied their application because the appraisal valued the home at $472,000.
Several months later, the family applied for a loan from a different mortgage lender.
“This time, they explained, they made the difficult decision to ‘whitewash’ their home—replacing family photographs with photographs borrowed from white friends and colleagues, replacing their artwork with stock images featuring white subjects, and having a white colleague stand in for them during the appraisal,” the agencies said.
A few days later, the home was appraised at $750,000. The CFPB and the DOJ said that while the couple was able to refinance the home, by then, interest rates were higher.
The family sued both loanDepot and the appraiser under the FHA, ECOA and other state and federal laws.
loanDepot is fighting the suit, contending, among other things, that the company cannot be held liable for making a decision based on a third-party appraiser.
Inside the CFPB/DOJ Statement
The agencies disagreed, stating, “A contrary result would directly undermine the purpose of the FHA and ECOA to guard against discrimination in housing and access to credit.”
Further, they argued, the FHA places liability on both the appraiser and the lender.
“Despite this clear authority, loanDepot wrongly insists that it could not comply with the FHA and ECOA’s requirements because its hands were tied by other federal laws concerning appraisal independence,” the agencies said.
They continued, “loanDepot’s position—which maintains that an appraiser’s independent judgment, even if racially discriminatory, is sacrosanct—would run roughshod over federal civil rights laws, including the FHA and ECOA, and regulations promulgated to effectuate them.”
Earlier this year, Lanham filed a counterclaim against the couple, contending that falsely labeling someone a racist is “among the most damaging, hurtful, and destructive attacks in today’s society.”
The NCUA and Appraisal Bias
The Biden Administration has called for a greater focus on bias in the appraisal industry.
In June 2021, the administration formed an interagency task force to study the issue, which reported that the problem continues to plague the industry.
NCUA Chairman Todd Harper has said he is working with other agencies on joint rules to establish quality control standards for automated valuations. In addition, the regulators are developing examination principles that consider how appraisal bias impacts safety and soundness, as well as consumer financial protection.