Compliance Journal February 2024
Special Focus Agencies Release Examination Principles Related to Valuation Discrimination and Bias in Residential Lending The Federal Financial Institutions Examination Council (FFIEC), on behalf of the Bureau of Consumer Financial Protection (CFPB), Board of Governors of the Federal Reserve System (FRB), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), National Credit Union Administration (NCUA), and the State Liaison Committee, released principles for the examination of supervised institutions’ (institutions) residential property appraisal and evaluation (collectively, valuation) practices. The examination principles are meant to help mitigate risks that may arise due to potential discrimination or bias in valuation practices and to promote creditable valuations. In the context of consumer compliance, “discrimination” is used to refer to prohibited discrimination based on protected characteristics in the residential property valuation process. “Bias” is considered to mean 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 agencies are concerned over discrimination and bias in valuation practices given how critical an underwriting component real estate valuations are in residential real estate (RRE) lending, both from a consumer compliance and safety and soundness perspective. As a result, the agencies have set forth examination principles for both consumer compliance examinations and for safety and soundness examinations. Consumer Compliance Examination Principles Under a consumer compliance examination, examiners are to consider whether the institution’s risk management practices for RRE valuations are appropriate to identify and address valuation discrimination. In particular, examiners are to consider board and senior management oversight and the institution’s consumer compliance program. Regarding board and senior management oversight, examiners are to evaluate whether the board of directors and management ensure that the institution has implemented and maintains a compliance management system, including third-party oversight, which is commensurate with the institution’s RRE lending risk profile. When evaluating an institution’s third-party risk management, examiners are to evaluate the institution’s oversight of RRE valuation of thirdparties’ consumer compliance-related policies, procedures, internal controls, and training. Examiners will also evaluate an institution’s due diligence and ongoing monitoring of third parties, including persons or entities that prepare valuation reports, third-party appraisers, and appraisal management companies, to assess compliance with consumer protection laws and regulations, including anti-discrimination laws. Regarding an institution’s consumer compliance program, examiners will: (a) assess an institution’s policies and procedures to determine if its collateral valuation review function includes identifying potential discriminatory valuation practices or results; (b) assess whether its training program appropriately addresses identification of potential discrimination in RRE lending and collateral valuation programs, whether internally identified or from consumer inquiries or complaints; (c) assess whether the institution adheres to policies and procedures designed to identify and address potential discriminations; and (d) evaluate the institution’s systems or processes for reviewing, documenting, tracking, addressing, monitoring, and managing collateral valuation complaints—including complaints that allege potential