CFPB Addresses the Fine Lines of Appraisal Independence

In explaining its view of the pleading standards in a disparate treatment discrimination case, the Consumer Financial Protection Bureau (“CFPB”) shed light on its interpretation of the Truth in Lending Act’s (“TILA’s”) appraisal independence standards, providing that a lender is not required to rely on a biased appraisal.

The underlying case relates to a claim that an appraiser undervalued a home because of the homeowners’ race, and that the lender knew of the undervaluation. In mid-March, the CFPB and the Department of Justice filed a Statement of Interest in the case, addressing the applicability of nondiscrimination principles in the property valuation context. In doing so, the agencies also addressed the federal requirements for appraiser independence.

TILA and its Regulation Z prohibit lenders or other covered persons from coercing, instructing, or inducing an appraiser to cause the appraised value to be based on any factor other than the appraiser’s independent judgment. They also prohibit lenders from suborning any mischaracterization of a property’s appraised value or materially altering a property valuation. A lender that reasonably believes an appraiser has materially violated ethical or professional requirements must report the appraiser to the appropriate state agency. In addition, to comply with Regulation Z’s conflict-of-interest requirements, mortgage lenders generally ensure that the appraiser reports to a person who is not part of the lenders’ loan production function, and that no person in that function is involved in selecting the appraiser. Agencies and investors may impose additional requirements or prohibitions addressing appraisal independence.

The regulations expressly permit a lender to ask the appraiser to consider additional information, provide further detail or explanation, or correct errors. However, lenders must walk a fine line – while they may ask for additional information, explanations, or corrections, they are understandably careful in questioning an appraiser’s conclusions and are limited in their ability to obtain a second appraisal. (For instance, Fannie Mae generally prohibits its lenders from obtaining a second appraisal without a reasonable and documented basis for believing that the first appraisal is flawed.)

According to the Statement of Interest filing, however, the appraisal independence provisions do not require a lender to rely on an appraisal it knows or should know to be discriminatory. The CFPB indicates the lender can ask the appraiser to reconsider, and would be covered, under those circumstances, by the regulation’s express permission for lenders to “tak[e] action permitted or required by applicable Federal or state statute, regulation, or agency guidance.”

The CFPB does not specify what level of knowledge or suspicion will permit/require a lender to ask for a reconsideration, require a second appraisal, or take other actions. Nonetheless, the Administration has been seeking to alert potential borrowers to their ability to question their appraisals, as a key part of the Interagency Task Force on Property Appraisal and Valuation Equity (“PAVE”).

For its part, the CFPB issued a blog post in October 2022, informing mortgage borrowers that they may ask a lender to reconsider a home valuation they believe to be inaccurate, and that “responsible lenders” will provide borrowers with information about how to raise concerns about an appraisal’s accuracy. The Department of Housing and Urban Development (“HUD”) proposed some enhanced standards under which borrowers under pending Federal Housing Administration (“FHA”)-insured loans may initiate appraisal reviews, and proposed to require lenders to review all such requests. HUD also proposed that lenders may order a second appraisal only if the underwriter determines there are “indications of unlawful bias in the appraisal or other violations of . . . nondiscrimination laws.” (HUD has not yet issued a final mortgagee letter on those proposals.)

Accordingly, lenders may soon get increasing appraisal reconsideration requests from borrowers and may need to develop policies and procedures for addressing those requests.