Regulator finds signs of racial bias in appraisal forms

The Federal Housing Finance Agency found multiple indications of bias in the “neighborhood description” section of valuation reports when it conducted research in response to a request for input on appraisals.

“From millions of appraisals submitted annually, a keyword search resulted in thousands of potential race-related flags,” Chandra Broadnax, senior examination specialist, and James Wylie, an associate director, said in a blog published Dec. 14.

Both authors work in the FHFA’s Office of Fair Lending Oversight, Division of Housing Mission and Goals, a compliance area that’s been a priority for newly nominated FHFA Director Sandra Thompson since she began leading the agency in an acting role.

Although many keywords turned out to be “false positives” for bias, several instances in which “the appraiser has clearly included race or other protected class references” turned up, they said.

“The racial and ethnic composition of the neighborhood should never be a factor that influences the value of a family’s home,” the two FHFA officials warned in the blog, noting that their findings show that this nevertheless is “still sometimes included in commentary” around valuations.

Those references ranged from information about the racial demographics of the neighborhoods surrounding appraised properties, to more indirect comments alluding to it.

One note specified a city was “82.28% white, 12.46% Black or African-American, 0.52% Native American, 0.22% Asian and, 0.52% from two or more races,” and that “0.56% of the population were Hispanic or Latino of any race.” Another report contained a reference to “one spicy neighborhood,” and another mentioned a “commercial strip featuring storefronts supplying Jewish households.” One comment described a community as “a homogenous neighborhood with good schools,” while another referred to a neighborhood as having “a Black race population above state average.”

The FHFA officials shared the comments with the aim of weeding out such practices in line with the agency’s role in an anti-appraisal-bias task force.

“Market participants must ensure that appraisals and other property valuations are compliant with fair lending principles, including in free-form text commentary,” they said.