Hi! It’s Tory Haggerty from Tuscan Club University’s Fair Lending School and welcome to another Fair Lending Short. In this Fair Lender Short I want to talk about appraisal bias. If you follow the news you know that this is becoming more and more of a hot topic item and very much 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 and/ or is located in a high minority neighborhood. In other words a home that should have the same value as another home, gets devalued because it’s either minority owned or in a high minority neighborhood. There’s bias in the appraisal process. So, it’s hard to find that within your process.
This is where we have some crossover with compliance and fair lending who try to look for these types of things, but safety and soundness and risk managers who are often the keeper of the appraisal and are the ones who make the underwriting decisions. Those individuals in your underwriting department need to be aware of this issue, they need to keep their fingers on the pulse of values of homes in your area. And when you see something, you need to say something.
This is really difficult but there are times you have to push back and say these appraisal amounts don’t make sense. There is also a way that you can monitor this through your HMDA data. Now it’s not a hard and fast way of doing it. But there’s very few ways to monitor it and this is one of those ways to do it.
When you have high denial rates to minority applicants or high minority areas and the denial reason is often based on collateral value or loan-to-value, that can be an indicator of appraisal bias issues because they’re constantly being denied for collateral value when they probably should be approved.
Have these conversations. You need to cross over organizational boundaries between compliance and fair lending and your safety and soundness and risk management and talk about these appraisal bias issues and make sure that underwriters are aware. And if you find appraisers that aren’t doing their job, you need to push back and potentially find new appraisers. Because these issues, if the regulators find them, will not fall on the appraisers, they will fall on you and it’s up to you in order to correct these issues.
Thanks for reading!
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