The Federal Financial Institutions Examination Council (FFIEC) recently issued a statement of principles related to valuation discrimination and bias for member entities to consider in their consumer compliance and safety and soundness examinations. The member entities of the FFIEC are the Comptroller of the Currency, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, Federal Reserve Board, National Credit Union Administration and the FFIEC State Liaison Committee.

In the press release announcing the statement of principles, the FFIEC advises that:

“The statement of principles should not be interpreted as new guidance to supervised institutions nor an increased focus on supervised institutions’ appraisal practices. Instead, the statement of principles offers transparency into the examination process and supports risk-focused examination work.”

The introductory portion of the statement addresses the risks to consumers and financial institutions related to deficiencies in real estate valuations, including those due to valuation discrimination or bias. We have previously reported on the federal government’s focus on valuation or appraisal bias, which can be viewed here, here, here and here.

The introductory portion of the statement also identifies applicable statutes, regulations and guidance. Of particular interest, the introductory statement includes the following as an applicable law:

“In addition, section 5 of the Federal Trade Commission Act (FTC Act) prohibits unfair or deceptive acts or practices, and the Dodd-Frank Wall Street Reform and Consumer Protection Act prohibits covered persons (e.g., financial institutions) or service providers of covered persons from engaging in unfair, deceptive, or abusive acts or practices.” (Footnotes omitted.)

As previously reported, in March 2022 the CFPB issued a revised version of its UDAAP examination manual to provide that under the unfair prong of UDAAP it can target discriminatory conduct, even when the conduct may not be subject to any fair lending law. In September 2023 a federal district court vacated the changes to the examination manual, and the CFPB subsequently issued a revised version of the examination manual that removed the March 2022 changes. The CFPB appealed the ruling to the U.S. Court of Appeals for the Fifth Circuit, which stayed further proceedings pending a ruling by the U.S. Supreme Court in Community Financial Services Association of America Ltd. v. CFPB regarding the constitutionality of the CFPB’s funding structure. Any continued efforts of the federal government to assert that it can use the unfair prong of UDAAP to challenge alleged discriminatory activity not covered by existing federal fair lending or similar statutes likely will face further challenges in court.

With regard to the actual examination principles, there are two appendices to the statement of principles, one addressing consumer compliance examination principles and one addressing safety and soundness examination principles. The consumer compliance examination principles address the following elements:

• Board and senior management oversight of the institution, including third-party risk management.
• Consumer compliance program, including policies and procedures, training program, monitoring and/or audit, and consumer complaint process.

The safety and soundness principles address the following elements:

• Consideration of consumer compliance examination findings.
• Consideration of the materiality of residential real estate lending in relation to the institution’s overall lending activities, size, complexity, and risk profile.
• Assessment of the institution’s policies, processes, staff organization and resources, control systems, and management information systems for residential real estate collateral valuations, as well as the institution’s ability to identify and resolve incidences of potential valuation discrimination or bias.
• Evaluation of the institution’s practices for selecting, retaining, and overseeing independent, qualified, and competent individuals (and applicable valuation models) that have the ability to render unbiased and credible opinions of collateral value.
• Evaluation of the institution’s oversight of valuation-related third-parties and their review functions, including the institution’s understanding of how these third parties identify, monitor, and manage the risks related to valuation discrimination or bias.
• Assessment of the institution’s valuation review function for identifying potentially discriminatory or biased valuation results.
• Assessment of the institution’s credit risk review function for residential real estate loan portfolios for appropriate consideration of potentially discriminatory or biased valuations.
• Assessment of the institution’s training program intended to provide staff with the knowledge and skills to identify and resolve valuation discrimination or bias.

It appears that federal regulators will continue to focus on appraisal and valuation bias going forward.

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