The Federal Financial Institutions Examination Council (FFIEC) recently issued a statement of principles related to valuation discrimination and bias for member entities to consider in their consumer compliance and safety and soundness examinations, the Consumer Financial Protection Bureau (CFPB) announced in a release.
“. “The principles aid member entities in assessing whether their supervised institutions’ compliance and risk management practices are appropriate to identify and mitigate discrimination or bias in their residential property valuation practices,” the release stated.
Financial institution supervisors routinely assess the risk management processes of institutions’ residential lending activity during both consumer compliance and safety and soundness examinations.
Consumer compliance examinations focus on compliance with consumer financial protection laws and regulations, the release pointed out, while safety and soundness examinations focus on an institution’s financial condition and operations. The examination principles released by the FFIEC are designed for both types of examination.
The statement of principles should not be interpreted as new guidance to supervised institutions nor an increased focus on supervised institutions’ appraisal practices. Instead, the statement of principles offers transparency into the examination process and supports risk-focused examination work.
“Real estate valuations are a critical underwriting component in residential real estate lending, both from a consumer compliance and safety and soundness perspective. Therefore, as part of their examination processes, examiners assess institutions’ compliance management systems and risk management practices for identifying and mitigating potential discrimination or bias in residential property valuation practices,” the FFIEC release said. “Institutions are required to comply with laws and regulations, including anti-discrimination laws. When examiners identify instances or patterns or practices of discrimination in valuation practices, these findings should be reflected in the ratings assigned to an institution pursuant to the FFIEC’s Uniform Interagency Consumer Compliance Rating System.”
From a safety and soundness perspective, each of the federal prudential regulators has appraisal regulations that address appraisal practices at institutions. Evidence of valuation discrimination or bias negatively affects an institution’s safety and soundness. The FFIEC member entities are the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corp. (FDIC), the Office of the Comptroller of the Currency, the CFPB, the National Credit Union Administration, and the State Liaison Committee.
In the context of consumer compliance, “discrimination” is used to refer to prohibited discrimination based on protected characteristics in the residential property valuation process. Distinctions based on protected characteristics as a result of bias that result in a consumer being treated less favorably constitute discrimination.
USPAP has defined “bias” as a preference or inclination that precludes an appraiser or other preparer of the valuation from reporting with impartiality, independence, or objectivity in an assignment. The safety and soundness of the credit underwriting process and portfolio management may be affected as a result of deficient valuations.
“Member entities will consider the attached examination principles in the context of consumer compliance and safety and soundness examination processes and procedures relative to assessing supervised institutions’ residential real estate valuation programs, as applicable,” the FFIEC release concluded.