Hi! It’s Tory Haggerty from Tuscan Club University’s Fair Lending School and welcome to another Fair Lending Short.
In this fair lending short, we are going to talk about appraisal bias. This topic continues to be a major risk in fair lending. So, what is appraisal bias?
Most simply, appraisal bias is when an appraiser artificially deflates the value of a home that’s owned by a minority borrower or located in a high minority neighborhood.
Appraisal bias crosses over compliance and risk management lines because finding and preventing it involves many people. Your home loan staff, lenders, and underwriters need to pay attention to the appraisal process and determine if the value is a fair value for the home. Too often, people of color are denied or withdraw their applications because of low appraisals. This leads to illegal discrimination if not addressed.
While not perfect, there are ways to add additional monitoring through your HMDA data. If you see higher denial rates based on collateral for minority borrowers, you can have higher risk, but you also need to look at those applications that did not originate. Applicants may withdraw their application because of a low home value, so you cannot get everything you need from denials alone.
When you are looking at denials or borderline credit decisions because of collateral value, that should be an indicator that more time and effort needs to be put into the appraisal review. If you know or should have known of an appraisal bias issue and don’t act, you could be held liable.
Appraisal bias destroys wealth for people of color. Help be a catalyst for change and ensure your process is fair and equitable for everyone.
Thanks for reading!
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