DOJ, CFPB: Lenders that rely on discriminatory appraisals violate the FHA and ECOA

Courts CFPB DOJ Appraisal Fair Housing Act Fair Lending ECOA Discrimination Consumer Finance

On March 13, the DOJ and CFPB filed a statement of interest saying that a “lender violates both the [Fair Housing Act (FHA)] and ECOA if it relies on an appraisal that it knows or should know to be discriminatory.” (See also CFPB blog post here.) Pointing out that the case raises important legal questions regarding the issue of appraisal bias, the agencies explained that the DOJ has enforcement authority under both the FHA and ECOA, and the Bureau has authority to interpret and issue rules under ECOA and enforce the statute’s requirements.

The case, which is currently pending in the U.S. District Court for the District of Maryland, concerns whether an appraiser, a real estate appraisal company, and an online mortgage lender (collectively, “defendants”) violated federal and state law by undervaluing plaintiffs’ home on the basis of race and denying a mortgage refinancing application based on the appraisal. Plaintiffs, who are Black, claimed their home was appraised for a lower amount on the basis of race, and maintained that the lender denied their loan even after being told the appraisal was discriminatory. Additionally, plaintiffs claimed that after they replaced family photos with pictures of white people and had a white colleague meet a new appraiser, that appraiser appraised the house for $750,000—a nearly 60 percent increase despite there not being any significant improvements made to the house or meaningful appreciation in the value of comparable homes in the market.

The defendant appraiser filed a counterclaim against the plaintiffs providing technical arguments for why he valued the home at $472,000, including that the property next door was listed for $500,000, but was later reduced to $475,000, only 10 days after he completed the appraisal. He further claimed that the second appraisal failed to include that property as a comparison and relied on home sales that had not happened as of the time of the first appraisal. The lender argued that it should not be held liable because it was relying on a third-party appraiser and that “it can be liable only if it took discriminatory actions that were entirely separate from [the appraiser’s].” 

While the statement does not address the issue of vicarious liability, the DOJ and CFPB asserted that lenders can be held liable under the FHA and ECOA for relying on discriminatory appraisals. They explained that it is “well-established that a lender is liable if it relies on an appraisal that it knows or should know to be discriminatory.” The statement also provided that for disparate treatment claims under the FHA and ECOA, “plaintiffs need only plead facts that plausibly allege discriminatory intent.” The agencies also argued that a violation of Section 3617 of the FHA (which includes “a prohibition against retaliating in response to the exercise of fair housing rights”) “does not require a ‘predicate violation’ of the FHA.