Why Lenders Need To Watch Out for Appraisal Bias

Financial services organizations know they need to comply with fair lending laws when it comes to their in-house policies and procedures. But what many banks and other lenders might not realize is that activity outside their walls could represent a rapidly growing source of fair lending risk.

Fair lending regulators have recently ramped up scrutiny on one of the most common types of third-party vendors that mortgage lenders rely on: home appraisers. The regulatory and political dialogue around appraisal bias is gaining volume – quickly.

Appraisal bias is in the national spotlight

Appraisal bias, also known as home appraisal discrimination, happens when an appraiser assigns a lower value to a home because of the race of the people who own the home. Appraisers might also make value assumptions based on the racial makeup of facilities, businesses, and schools in the surrounding area.

Appraisal bias has become an increasing topic of scrutiny for regulators since 2021, when President Joe Biden announced the formation of the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE). PAVE’s mission is to investigate and root out racial and ethnic bias in home appraisals.

Not long after PAVE was established, a case involving a potentially biased appraisal drew national news headlines and even more regulatory attention to the issue.

In 2022, a Black couple in Baltimore claimed that an appraisal company undervalued their home based on their race. To support their claim, the couple contacted a friend, who is white, to pose as the homeowner and make it appear that the home was occupied by a white family. Then, the couple hired a second appraiser to appraise the home.

The second appraisal resulted in a valuation that was almost 60% higher than the original appraisal – clear proof, the couple said, that their home had been underappraised because of their race.

The couple later filed a lawsuit against the mortgage lender who had hired the first appraiser. In 2024, that lawsuit reached a settlement for an undisclosed amount of money and an agreement from the lender to make policy changes.

Lending organizations that act now to address potential appraisal bias can protect their reputations and significantly mitigate the risk of future regulatory consequences.

Even in the absence of detailed guidelines, lenders should think about the regulatory and reputational risks they take on when forming relationships with appraisers and relying on appraisals. To approach this issue proactively and to mitigate risk, lenders can:

• Expand fair lending activities, such as periodic and annual program reviews, to include any third-party relationships that could introduce potential bias or discrimination into the lending process
• Perform due diligence, such as a news search or conversations with peers, when contracting with a new appraiser or renewing an existing contract
• Put controls in place to review appraisal reports for potential red flags such as coded language or subjective statements that might indicate racial or ethnic bias
• Evaluate communication procedures with lending customers for clarity and transparency, including information about how and when customers can register a complaint of appraisal bias and challenge a valuation they believe is unfair
• Conduct an immediate fair lending risk assessment and program review to assess and strengthen policies, procedures, training materials, and controls that relate to third-party appraisers and other vendors

Lending organizations that act now to address potential appraisal bias can protect their reputations and significantly mitigate the risk of future regulatory consequences. And more importantly, they can serve as leaders in the movement to serve all customers equitably and eliminate discrimination in lending.