Imagine if the Consumer Financial Protection Bureau’s Board of Trustees was appointed by industry sponsors who paid a $7,500 fee.
In this scenario, the majority of the board would be required to be industry creditors. The board would also appoint the agency’s rule-writing staff — and they would be creditors, too.
The staff wouldn’t have to give up their industry perches while they wrote rules, and the rules they wrote would not only set the standards for industry practices, but also the criteria for entering it. The rules would be adopted in all 50 states.
That was the startling and totally hypothetical analogy made, based on the current structure of the Appraisal Foundation, in a scathing report released this week.
The report, commissioned by the Appraisal Subcommittee and led by the National Fair Housing Alliance, found that the appraisal industry, in sharp contrast to other sectors in housing finance, has been allowed to regulate itself.
“Until recently … the appraisal industry seems to have escaped the type of regulation and scrutiny faced by other participants in the mortgage market,” the authors wrote. “Our analysis finds that the appraisal industry has operated in a relatively closed, self-regulated framework.”
The appraisal industry’s “byzantine regulation structure,” according to the report’s authors — experts in fair housing, fair lending and valuation — has stunted the appraisal industry’s understanding of fair housing risk. The regime has limited its accountability and enforcement systems.
The report takes issue, primarily, with the Appraisal Foundation.
An industry-run private nonprofit, the Appraisal Foundation sets both the standards and the criteria for appraisers, which states then adopt. Appraisers, lenders, banking institutions and industry trade groups dominate the foundation’s boards, which have no representation from consumers or fair housing advocates. Congress tasks the Appraisal Subcommittee with monitoring and reviewing the Appraisal Foundation, but it has no enforcement authority.
Apart from questions of governance, the report found significant gaps in the Appraisal Foundation’s fair housing requirements and training. The report also questioned the usefulness of barriers to entry to the profession, such as requiring college degrees and up to 3,000 supervised experience hours.
The report also called on the government-sponsored enterprises to release parts of their vast trove of appraisal data, and urged lenders, the government, the GSEs and the Appraisal Foundation to standardize the reconsideration of value process, which currently lacks “any legal structure.”
The report comes just as a task force to root out bias in appraisals, led by the Department of Housing and Urban Development, finalizes its policy recommendations.
“We applaud partners like NFHA for taking up the mantle to reveal and address bias and inequities, and look forward to reviewing the contents of NFHA’s study as HUD finalizes its report to the President,” a spokesperson for HUD said in a statement.
“A lot of people are seeing this depiction for the first time,” said Lisa Rice, CEO of the National Fair Housing Alliance. “They’ve never seen it explained before. Appraisers, lenders, regulators have said to us, ‘Wait a minute, this can’t be true.’ But this is true. This is what it is.”
In response, the Appraisal Foundation said it is already implementing some of the recommendations the report made. It said it has a task force to promote board diversity, has launched a demographic survey of appraisers, and expanded outreach to Historically Black Colleges and Universities.
The Appraisal Foundation also claimed the authors did not interview the pertinent board members, but did not dispute a log of more than a dozen different Appraisal Foundation members the report authors interviewed.
“While there are portions of the report with which we have some disagreement and several inaccuracies within it, we are pleased to wholeheartedly share the goal of NFHA to take action aimed at ensuring and promoting fair housing free of discrimination and also greater diversity in the appraisal profession,” the Appraisal Foundation said.
The foundation declined to point out inaccuracies or specify where they disagreed with the authors, and declined to make anyone available for an interview.
The Appraisal Subcommittee, a federal agency, is supposed to monitor and review the Appraisal Foundation.
But the Appraisal Foundation doesn’t even have to respond to its letters, said James Park, the executive director of the Appraisal Subcommittee, which paid $247,000 in order to produce the review.
Up until 2020, Park said the Appraisal Subcommittee provided grant funding to the Appraisal Foundation — in the ballpark of $1.4 million a year, although in recent years the amount had dwindled to $250,000, he said.
While the Appraisal Foundation got the grant money, it “created a different dynamic in terms of responsiveness,” Park said, but the Appraisal Foundation started declining the funds in 2020.
Park, in an interview, declined to comment on any of the report’s specific findings, although he said he had read it.
When asked about the idea of self-regulation — unheard of in other financial sectors — he acknowledged the importance of “appropriate checks and balances.”
“The foundation has a lot of significant impact on the vast majority of the financial services industry,” said Park. “Any organization with the kind of authority to affect consumers as well as the financial services industry should have the appropriate checks and balances in place.”
Park said that the Appraisal Subcommittee, which is supposed to review the Appraisal Foundation, decided to hire an outside team to review instead, to ensure the effort was “completely unbiased, independent, objective.”
The Appraisal Subcommittee also wanted to enlist subject matter experts, not only in appraisal, but in subject areas where Park said appraisers lack expertise: fair housing and fair lending.
“Most appraisers are not well-versed in fair housing and fair lending requirements or risks and some of the implications of the work that they do relative to fair housing,” Park, who is an appraiser by trade, said.
The report also suggests areas for change that go beyond the actions of individual appraisers, or the dysfunction of their regulators.
The authors take issue with using sales comparisons, the standard method in residential appraisal, because it carries forward historical bias. Academic researchers have also argued that the sales-comparison method bakes in historical devaluation.
“Under the current structure of the sales comparison approach, appraisers are instructed to limit the comparable sales to homes within the same undervalued neighborhood of color, even if there are similar homes with higher values in comparable White neighborhoods,” the report reads. “Thus, appraisers must rely on biased data, which further perpetuates the bias.”
But not only is the sales comparison method the industry standard, the authors note that the GSEs generally require it.
The authors took issue with the GSEs for other practices, as well.
Specifically, they want Fannie Mae and Freddie Mac, as well as their regulator the Federal Housing Finance Agency, to release at least some elements of their data on appraisals.
The Housing Policy Council, which represents large lenders, and some appraisal management companies too, has also brought up that point, most recently in a November letter to HUD Sec. Marcia Fudge.
The GSE appraisal data, which goes back to 2010, is unparalleled in its scale. It is also the only source of combined underwriting and appraisal data, allowing access to demographic information. Academic research on appraisals has, so far, been limited to self-reported values.
“One thing people need to recognize is that Fannie and Freddie have the full underwriting data,” said Meg Burns, Executive Vice President of the Housing Policy Council. “Otherwise you don’t even have the full picture.”
The authors also point out there is no one repository for appraisal complaint data. Appraisal complaints are most often made directly to the lender, when a borrower asks for a reconsideration of value. That process varies from lender to lender.
Some lenders monitor and collect data on appraisal complaints, but no lenders contacted for this story agreed to share it.
The CFPB also receives some appraisal complaints from consumers, and a review shows they have received a handful in recent years. HUD, too, receives some complaints, and in May 2021 a HUD official said the volume had increased tenfold. HUD has repeatedly declined to specify how many complaints it received.
Part of the problem of accurately compiling complaint data, NFHA’s Rice said, is that “nobody knows they can file a complaint with HUD.”
Apart from potential privacy disclosure risks, lenders are understandably wary of rocking the boat with appraisers by releasing internal appraisal complaint data.
“If you are a lender your job is to get the loan closed. Getting the appraisal done is a part of that process,” Rice said. “If you make appraisers mad, it impacts your ability to be able to do business.”
But Park said his hope for the report was that it would be a “catalyst for change.”
“I hope that appraisers and other stakeholders in the appraisal and regulatory systems will take the time to read and digest it and glean from it what they may.”