Regulatory Note — Appraisals of Residential Real Estate — FFIEC Statement
Last week, on February 12, 2024, the FFIEC released a Statement on Examination Principles Related to Valuation Discrimination and Bias in Residential Lending (the “Statement”). In two attachments, the Statement describes how examiners will assess a bank’s efforts to avoid bias in home appraisals from both fair lending and safety and soundness perspectives. The emphasis is specifically on the risk of the undervaluation of residential properties in minority and low- and moderate-income communities.
FFIEC published the Statement in connection with the fourth in a series of public hearings of the FFIEC’s Appraisal Subcommittee on appraisal bias. National banks and federal savings associations should keep in mind the remarks of the Acting Comptroller, Michael Hsu, at that hearing, in which he noted the OCC’s efforts to increase home ownership and to expand affordable housing.
Every bank can and should draw several lessons from the Statement to ensure that (at least in an examiner’s eyes) the bank appraises residential real estate in an even-handed manner across all communities.
Fair Lending
In advance of a compliance examination that will cover valuations, a bank should understand two basic principles:
The board must approve a compliance management system that is consistent with the bank’s residential real estate lending risk profile, and it must regularly review the strength of the program.
A bank’s consumer compliance program must have four elements – all focused directly on possible discrimination in appraisals: (i) policies and procedures for collateral review; (ii) a training program; (iii) a monitoring or auditing system; and (iv) a process for handling consumer complaints. The program must also include due diligence and oversight of the programs of third parties that provide appraisal services.
Safety and Soundness
On the prudential side, examiners will review many of the same aspects of a bank’s operations as they do now, with greater emphasis on anti-discrimination measures. These include:
The materiality of residential real estate lending in relation to the bank’s overall lending activities, size, complexity, and risk profile.
The bank’s organization, control systems, management information systems, and training programs for residential real estate collateral valuations.
The retention and oversight of third-party service providers, including their independence, qualifications, and competence.
The bank’s valuation and credit risk review functions.