Why Haven’t Loan Officers Been Told These Facts?

Applicant Complaint Nets Stakeholders In Hot Water Over Failed Reconsideration of Value Process

Rocket Mortgage, Appraiser and Appraisal Vendor Sued By HUD for Violations of the Fair Housing Act

Lenders must be circumspect when responding to an applicant’s request for ROV. Having a process in place and ensuring MLOs are well-trained is essential.

WASHINGTON – The U.S. Department of Housing and Urban Development (HUD) announced today that it has charged multiple entities with housing discrimination for issuing a biased appraisal and then denying a refinance loan application in Denver, Colorado. HUD’s Charge against the appraiser, Maksym Mykhailyna; appraisal company, Maverick Appraisal Group; appraisal management company, Solidifi U.S. Inc.; and lender, Rocket Mortgage, LLC, alleges that the appraiser issued a discriminatory appraisal that undervalued a Black homeowner’s property on the basis of her race. The Charge further alleges that, when the homeowner complained to Rocket Mortgage, Rocket Mortgage would only proceed with her refinance loan application based on the appraised value that she alleged was discriminatory. Read the Charge.

The Fair Housing Act prohibits entities and individuals involved in real estate-related transactions, including appraisals, from discriminating in the terms and conditions of the transactions because of race. The Act also prohibits anyone from retaliating against individuals who are exercising their fair housing rights, including by reporting discrimination.

“Homeownership is crucial to build both generational wealth and housing stability for Black and Brown families,” said Diane M. Shelley, HUD’s Principal Deputy Assistant Secretary for Fair Housing and Equal Opportunity. “HUD will continue to vigorously enforce the Fair Housing Act against those who seek to limit the financial returns associated with homeownership because of race or any other protected characteristic.”

HUD’s Charge of Discrimination alleges that Maksym Mykhailyna and his appraisal company, Maverick Appraisal Group, issued an insupportably low appraisal of a duplex owned by a Black woman in a predominantly white area of Denver. Other recent appraisals of the same property had steadily increased in value, yet this appraisal resulted in a dramatic drop, despite the Denver market experiencing substantial growth in home values at that time. To reach that low number, the appraisal was rife with inaccuracies and unsupportable methodological choices (such as relying on comparable properties in neighborhoods with greater Black populations and excluding potential comparable properties in neighborhoods with greater white populations) that not only artificially lowered the appraised value but deviated from Mr. Mykhailyna’s own methodology and findings about the relevant neighborhood in appraising similar, nearby properties with White owners. Both Solidifi and Rocket Mortgage reviewed the appraisal report but failed to correct it despite several red flags. When the homeowner complained to Rocket Mortgage, she was told she could only proceed with her loan application based on the appraisal that she alleged was discriminatory; ultimately, her application was denied.

“The Fair Housing Act protects all of us from discrimination throughout the process of buying a home or securing a home loan,” said Damon Y. Smith, HUD General Counsel. “As this Charge demonstrates, HUD is committed to ensuring that no one is denied a home or a mortgage because of a discriminatory appraisal.”

A United States Administrative Law Judge will hear HUD’s Charge unless any party to the Charge elects to have the case heard in federal district court. If an administrative law judge finds, after a hearing, that discrimination has occurred, the judge may award damages to the homeowner for her losses as a result of the discrimination. The judge may also order injunctive relief and other equitable relief to deter further discrimination, as well as payment of attorney fees. In addition, the judge may impose civil penalties to vindicate the public interest. If a federal court hears the case, the judge may also award punitive damages to the homeowner.

Factual Allegations

11. In January 2021, NAME REDACTED contacted Rocket Mortgage to refinance the mortgage for the Subject Property, which is a duplex in which each unit has two levels, three bedrooms, and two bathrooms. The Subject Property is located in a predominantly White area.

12. On January 14, 2021, Rocket Mortgage ordered an appraisal of the Subject Property from Solidifi. Solidifi, in turn, selected Mr. Mykhailyna of Maverick Appraisal Group to conduct the appraisal and provided him with Rocket Mortgage and Solidifi’s extensive guidelines and instructions for the appraisal.

13. On January 20, 2021, Mr. Mykhailyna met NAME REDACTED and her adult daughter, who is also Black, and conducted the appraisal inspection for the Subject Property, which had photographs of Black people displayed inside and two Black Lives Matter signs displayed in the yard.

14. On January 21, 2021, Mr. Mykhailyna submitted his appraisal report to Solidifi with an appraised value of $640,000 – a significantly lower amount than the value for which the Subject Property had been appraised eight months prior. Solidifi reviewed the appraisal for completeness, quality, valuation risk, and compliance with appraisal guidelines. That same day, after its review and approval, Solidifi transmitted the Subject Appraisal to Rocket Mortgage and DocuSign Envelope ID: 2818E250- 518-4487-818D-66664BCBA2FA was notified that she could view it.

15. After reviewing the Subject Appraisal, NAME REDACTED spoke to several employees of Rocket Mortgage about the Subject Appraisal’s factual inaccuracies, problematic comparable properties, and low appraised value, noting that she believed it was discriminatory. NAME REDACTED emphasized that housing prices in her area had been increasing over the past year, so it was not credible that her property’s value could have dropped by about 25% in the eight months since she last had it appraised, particularly given updates she had recently made.

16. Rocket Mortgage responded by presenting NAME REDACTED with a choice – she could proceed with her loan application using the appraised value she complained was discriminatory or she could have her loan application cancelled or denied and her discrimination complaint referred to Rocket Mortgage’s Client Relations Department.

17. On January 26, 2021, Rocket Mortgage requested a minor revision to the appraisal from NAME REDACTED Solidifi that was unrelated to concerns and did not affect the appraised value, and Solidifi forwarded the request to Mr. Mykhailyna, who made the requested change. Mr. Mykhailyna returned the updated report to Solidifi who reviewed the report again and sent it back to Rocket Mortgage.

18. NAME REDACTED made clear to Rocket Mortgage that she did not want her loan application terminated while she attempted to pursue her discrimination complaint. Nevertheless, Rocket Mortgage employees noted in their internal system NAME REDACTED after speaking with her that her loan application was “cancelled” and “denied,” and was sent a letter stating that Rocket Mortgage was “unable to offer” her “financing at this time.”

See the links below for recently published Interagency ROV Guidance and HUD 4000.1 ROV amendments.

 

LOSJ V4 I23 RE: HUD Mtg Letter 2024-07

Interagency ROV Guidance (begins on page 26)

Do you have a great value proposition you’d like to get in front of thousands of loan officers? Are you looking for talent?

BEHIND THE SCENES – Interagency Guidance On Appraisal Reconsiderations of Value (ROV)

WASHINGTON, D.C. – Five federal regulatory agencies today issued final guidance addressing reconsiderations of value (ROVs) for residential real estate transactions. The guidance advises on policies and procedures that financial institutions may implement to allow consumers to provide financial institutions with information that may not have been considered during an appraisal or if deficiencies are identified in the original appraisal.

ROVs are requests from a financial institution to an appraiser or other preparer of a valuation report to reassess the value of residential real estate. Deficiencies identified in valuations, either through an institution’s valuation review processes or through consumer-provided information, may be a basis for financial institutions to question the credibility of the appraisal or valuation report.

The guidance offers examples of ROV policies and procedures that a financial institution may implement to help institutions identify, address, and mitigate discrimination risk; describes the risks of deficient residential real estate valuations; and explains how financial institutions may incorporate ROV processes into risk management functions. The agencies finalized the guidance largely as proposed, with the addition of clarifying edits based on public comments received on the proposed guidance published in July 2023.

Interagency Supervisory Guidance (12 CFR 1074 Appendix A)

Supervisory agencies like the CFPB issue various types of supervisory guidance, including interagency statements, advisories, bulletins, policy statements, questions, and answers, or frequently asked questions, to their respective supervised institutions. A law or regulation has the force and effect of law.

Unlike a law or regulation, supervisory guidance does not have the force and effect of law, and the CFPB does not take enforcement actions based on supervisory guidance. Rather, supervisory guidance outlines the Bureau’s supervisory expectations or priorities and articulates the Bureau’s general views regarding appropriate practices for a given subject area. Supervisory guidance often provides examples of practices that the Bureau generally considers consistent with applicable laws and regulations, including those designed to protect consumers. Supervised institutions at times request supervisory guidance, and such guidance is important to provide insight to industry, as well as supervisory staff, in a transparent way that helps to ensure consistency in the supervisory approach.

Excerpted From The Guidance

Credible collateral valuations, including appraisals, are essential to the integrity of the residential real estate lending process. Deficiencies identified in valuations, either through an institution’s valuation review processes or through consumer-provided information, may be a basis for financial institutions to question the credibility of the appraisal or valuation report. Collateral valuations may be deficient due to prohibited discrimination; errors or omissions; or valuation methods, assumptions, data sources, or conclusions that are otherwise unreasonable, unsupported, unrealistic, or inappropriate.

Deficient collateral valuations can keep individuals, families, and neighborhoods from building wealth through homeownership by potentially preventing homeowners from accessing accumulated equity, preventing prospective buyers from purchasing homes, making it harder for homeowners to sell or refinance their homes, and increasing the risk of default. Deficient valuations may pose risks to the financial condition and operations of a financial institution. Such risks may include loan losses, violations of law, fines, civil money penalties, payment of damages, and civil litigation.

The Equal Credit Opportunity Act (ECOA), and its implementing regulation, Regulation B, prohibit discrimination in any aspect of a credit transaction. The Fair Housing Act (FH Act) and its implementing regulation prohibit discrimination in all aspects of residential real estate-related transactions. ECOA and the FH Act prohibit discrimination on the basis of race and certain other characteristics in all aspects of residential real estate-related transactions, including in residential real estate valuations. In addition, section 5 of the Federal Trade Commission Act prohibits unfair or deceptive acts or practices and the Consumer Financial Protection Act prohibits any covered person or service provider of a covered person from engaging in any unfair, deceptive, or abusive act or practice.

Appraisal Standards

The Board’s, FDIC’s, NCUA’s, and OCC’s appraisal regulations32 implementing title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 require all appraisals conducted in connection with federally related transactions to conform with the Uniform Standards of Professional Appraisal Practice (USPAP), which requires compliance with all applicable laws and regulations including nondiscrimination requirements.

Financial institutions generally conduct an independent review prior to providing the consumer a copy of the appraisal or evaluation; however, additional review may be warranted if the consumer provides information that could affect the value conclusion or if deficiencies are identified in the original appraisal. An appraisal does not comply with USPAP if it relies on a prohibited basis set forth in either ECOA or the FH Act or contains material errors including errors of omission or commission. If a financial institution determines through the appraisal review process, or after consideration of information later provided by the consumer, that the appraisal does not meet the minimum standards outlined in the agencies’ appraisal regulations and if the deficiencies remain uncorrected, the appraisal cannot be used as part of the credit decision.

The Board, FDIC, NCUA, and OCC have issued interagency guidance describing actions that financial institutions may take to resolve valuation deficiencies. These actions include resolving the deficiencies with the appraiser or preparer of the valuation report; requesting a review of the valuation by an independent, qualified, and competent state certified or licensed appraiser; or obtaining a second appraisal or evaluation. Deficiencies may be identified through the financial institution’s valuation review or through consumer-provided information. The regulatory framework permits financial institutions to implement reconsideration of value (ROV) policies, procedures, and control systems that allow consumers to provide, and the financial institution to review, relevant information that may not have been considered during the appraisal or evaluation process.

Use of Third Parties

A financial institution’s use of third parties in the valuation review process does not diminish its responsibility to comply with applicable laws and regulations. Moreover, whether valuation review activities and the resolution of deficiencies are performed internally or via a third party, financial institutions supervised by the Board, FDIC, NCUA, and OCC are required to operate in a safe and sound manner and in compliance with applicable laws and regulations, including those designed to protect consumers. In addition, the CFPB expects financial institutions to oversee their business relationships with service providers in a manner that ensures compliance with Federal consumer protection laws, which are designed to protect the interests of consumers and avoid consumer harm. A financial institution’s risk management practices include managing the risks arising from its third-party valuations and valuation review functions.

Reconsiderations of Value

An ROV request made by the financial institution to the appraiser or other preparer of the valuation report encompasses a request to reassess the report based upon deficiencies or information that may affect the value conclusion. A financial institution may initiate a request for an ROV because of the financial institution’s valuation review activities or after consideration of information received from a consumer through a complaint, or request to the loan officer or other lender representative. A consumer inquiry or complaint regarding a valuation would generally occur after the financial institution has conducted its initial appraisal or evaluation review and resolved any issues that it has identified. Given this timing, a consumer may provide specific and verifiable information that may not have been available or considered when the initial valuation and review were performed. Regardless of how the request for an ROV is initiated, a consumer inquiry or complaint could be resolved through a financial institution’s independent valuation review or other processes to ensure credible appraisals and evaluations.

Complaint Resolution Process

Financial institutions can capture consumer feedback regarding potential valuation deficiencies through existing complaint resolution processes. The complaint resolution process may capture complaints and inquiries about the financial institution’s products and services offered across all lines of business, including those offered by third parties, as well as complaints from various channels (such as letters, phone calls, in person, transmittal from regulators, third-party valuation service providers, emails, and social media). Depending on the nature and volume, appraisal and other valuation-based complaints and inquiries can be an important indicator of potential risks and risk management weaknesses. Appropriate policies, procedures, and control systems can adequately address the monitoring, escalating, and resolving of complaints including a determination of the merits of the complaint and whether a financial institution should initiate an ROV.

Examples of Policies and Procedures to Mitigate Violations of the FH Act, ECOA, and UDAAP

Consider ROVs as a possible resolution for consumer complaints or inquiries related to residential property valuations. If a complaint or inquiry includes allegations of discrimination, the institution may consider, in addition to processing the ROV, separately initiating the process the institution may have to respond to allegations of discrimination.

Consider whether any information or other process requirements related to a consumer’s request for a financial institution to initiate an ROV create unreasonable barriers or discourage consumers from requesting the institution initiate an ROV.

Establish a process that provides for the identification, management, analysis, escalation, and resolution of valuation-related complaints or inquiries across all relevant lines of business, from various channels and sources (such as letters, phone calls, in person, regulators, third-party service providers, emails, and social media).

Establish a process to inform consumers how to raise concerns about the valuation early enough in the underwriting process for any errors or issues to be resolved before a final credit decision is made. This may include educating consumers on the type of information they may provide when communicating with the financial institution about potential valuation deficiencies.

Identify stakeholders and clearly outline each business unit’s roles and responsibilities for processing an ROV request (e.g., loan origination, processing, underwriting, collateral valuation, compliance, customer experience, or complaints).

Establish risk-based ROV systems that route the request to the appropriate business unit (e.g., requests that include concerns or inquiries that allege discrimination could be routed to the appropriate compliance, legal, and appraisal review staff that have the requisite skills and authority to research and resolve the request).

Establish standardized processes to increase the consistency of consideration of requests for ROVs:

  • Use clear, plain language in notices to consumers of how they may request the ROV.
  • Use clear, plain language in ROV policies that provide a consistent process for the consumer, appraiser, and internal stakeholders.
  • Establish guidelines for the information the financial institution may need to initiate the ROV process.
  • Establish timelines in the complaint or ROV processes for when milestones need to be achieved.
  • Establish guidelines for when a second appraisal could be ordered and who assumes the cost.
  • Establish protocols for communicating the status of the complaint or ROV and the lender’s determination to consumers.
  • Ensure relevant lending and valuation-related staff, inclusive of third parties (e.g., appraisal management companies, fee-appraisers, mortgage brokers, and mortgage servicers) are trained to identify deficiencies (including practices that may result in discrimination) through the valuation review process.

 

 

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