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FFIEC statement on exam principles related to valuation bias

The Federal Financial Institutions Examination Council has issued, on behalf of its members—the Federal Reserve Board, FDIC, OCC, CFPB, NCUA, and the State Liaison Committee—a Statement on Examination Principles Related to Valuation Discrimination and Bias in Residential Lending. The statement's purpose is to (i) mitigate risks that may arise due to potential discrimination or bias in those practices, and (ii) promote credible valuations.

Because real estate valuations are a critical underwriting component in residential real estate lending, both from a consumer compliance and safety and soundness perspective, examiners assess institutions’ compliance management systems and risk management practices for identifying and mitigating potential discrimination or bias in residential property valuation practices.

Institutions rely on real estate valuations when assessing the level of collateral support in residential credit decisions. Deficiencies in real estate valuations, including those due to valuation discrimination or bias, can lead to increased safety and soundness risks, as well as consumer harm and have an adverse impact on borrowers and their communities. Examples of such harm are consumers being denied access to credit for which they may be otherwise qualified, offered credit at less favorable terms, or steered to a narrower class of loan products.

For an institution, the failure of internal controls to identify, monitor, and control valuation discrimination or bias could negatively affect credit decisions, potentially exposing an institution to legal and compliance risks or affecting an institution’s financial condition and operations. Furthermore, material findings and concerns related to noncompliance with laws and regulations generally negatively affect the supervisory assessment of an institution’s management in a safety and soundness examination.

To promote compliance with statutory and regulatory requirements, institutions may establish a formal valuation review program. Effective review programs can enable institutions to identify noncompliance with appraisal regulations or USPAP, inaccuracies, or poorly supported valuations. These review programs can also provide the opportunity for institutions to address deficiencies due to potential valuation discrimination or bias before making a credit decision. The Interagency Appraisal and Evaluation Guidelines [see 75 FR 77450, December 10, 2010] provide additional information on the valuation review process and identify elements of an effective real estate valuation program.

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.

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