By Diane Jenkins, Attorney and Director of Legal, Asurity

The determination of a home’s value is a critical step in the mortgage process as it determines how much a lender is willing to extend to a borrower and on what terms.  In general, the valuation is done through an appraisal which is intended to be an unbiased assessment of a property’s value.  However, the percentage of borrowers who have received a valuation under the contract price has historically been higher among minority populations than non-minority populations.  Discrimination in the appraisal process, such as assigning a lower value to a home because of the race, ethnicity or national origin of the homeowner, is known as appraisal bias.

The issue of appraisal bias has been front and center in recent months as several key players in the financial industry take steps to address the issue.  Although true change will require a multi-dimensional approach, one common element of any plan to combat racial bias is borrower education.  It’s critical that borrowers are made aware of their right to challenge a valuation they believe to be deficient due to prohibited discriminatory practices.

The CFPB, along with several other federal regulators, issued Interagency Guidance on Reconsiderations of Value of Residential Real Estate¹ which provides examples of Reconsideration of Value (ROV) policies and procedures that may help identify, address and mitigate appraisal bias.  Much of the guidance centers around ensuring that lenders have established policies and procedures for ROV’s and that borrowers are informed as to how to raise concerns with a property valuation.

Meanwhile, FHA² in conjunction with Fannie Mae³ and Freddie Mac⁴ (the GSE’s) announced new reconsideration of value policies requiring financial institutions to establish a process for borrowers to request a reconsideration of value if they believe their appraisal to be inaccurate or deficient.  To ensure borrowers are made aware of the option to request a reconsideration of value, financial institutions will be required to provide an ROV disclosure to borrower both at application and upon delivery of the appraisal report.  The disclosure must outline the ROV process and make it clear that only one borrower-initiated ROV is permitted per appraisal.  FHA also requires the disclosure to specify what information will be required from a borrower when submitting an ROV request as well as the expected ROV processing times.

The process for a borrower-initiated reconsideration of value will be unique to each lender.  In order to provide borrowers with accurate information in the ROV disclosure, lenders will need to establish a standardized appeals process for handling borrower-initiated requests and develop clear guidance for borrowers on the process of submitting an appeal. 

Initially, the new Reconsideration of Value disclosure was required by September 2, 2024 for FHA loans and August 29, 2024 for loans being sold to the GSE’s.  However, in response to industry concerns with implementing the new requirements in time, the deadline has been extended in all cases to October 31, 2024.  Because lenders are encouraged to implement the new ROV requirements prior to the October 31^st deadline, the new ROV disclosure is currently available in the Propel library.

¹ https://www.occ.gov/news-issuances/news-releases/2024/nr-ia-2024-81a.pdf

² https://www.hud.gov/sites/dfiles/OCHCO/documents/2024-07hsgml.pdf

³ https://singlefamily.fanniemae.com/media/39081/display

⁴ https://guide.freddiemac.com/app/guide/bulletin/2024-6