June 2023 OBA Legal Briefs

• Appraisal Bias, ECOA, FHA and USPAP
• Changes in UCCC amounts effective 7/1/23

Appraisal Bias, ECOA, FHA and USPAP

By Andy Zavoina

Appraisal bias is a new big thing. Well, not brand new. It has been a problem for a few years and the current thrust is to promote an understanding of the rules and the results when an appraisal is done with fairness and accuracy in mind.

I recently attended a BOL Learning Connect webinar entitled, “Building a Safe & Sound Real Estate Program” by noted speaker and appraiser Eric Collinsworth. He started a segment on appraisal bias by referring to an interagency task force and PAVE, which stands for Property Appraisal and Valuation Equity. One of the task force’s major goals is to address “the persistent mis-valuation and undervaluation of properties experienced by families and communities of color.”

This task force also relates to actions from the Biden Administration, which said early on its goals include equal opportunity. In a 42-page National Strategy on Gender Equity and Equality it was stated that, “Women face barriers in access to consumer loans and other credit products, and women business owners have less access to capital. These inequalities compound over the course of a woman’s lifetime, jeopardizing her financial security later in life and affecting the generations that follow.”

It was also noted in Feb 2022 by AmericanProgress.org that, “To increase equitable access to loans, mortgages, and other lending for home-buying and renting, HUD began the process to restore the discriminatory effects rule to protect against housing policies, such as zoning requirements, lending and property insurance policies, criminal records policies, and others that have a disparate impact by race. Also, HUD issued a letter encouraging lenders to devise special purpose credit programs to remedy racial inequities in homeownership.” This philosophy of reducing barriers to allow consumers and their families and heirs to access equity and to pass it on to future generations to build wealth is also a part of the impetus behind eliminating appraisal bias.

AmericanProgress.org also noted, “Racial discrimination and injustice have entrenched stark racial disparities in homeownership rates and home values. Homeownership rates for Black Americans amount to 44 percent, well below the rates for white Americans at 74 percent and behind the national average of 65 percent. Hispanic and Asian, Native Hawaiian, and Pacific Islander (AAPI) people also own homes at rates lower than the national average, at 48 percent and 60 percent, respectively.”

Generally speaking, a home is often the largest single purchase the average American makes. We’ve all heard that home values only go up. While this is not a rule, it is generally true over time. And this increased value and decreasing debt against a home do combine to build wealth and provide wealth to the next generation often inheriting a home. The equity in a home can be used for many things that further build wealth and provide for a higher quality of life. This is one reason so many in the industry see appraisal bias as a major factor.

Carla Duffy’s appraisals

In 2021 National Public Radio ran a segment on appraisal bias. In Indianapolis, Indiana, Carla Duffy has a three-bedroom home in a historic Black neighborhood. The home had been completely renovated and was across from an attractive and well-maintained park. She purchased the home four years prior for $100,000. Duffy felt based on the renovation, appreciation, and low interest rates it was a good time to use her equity from a refinance to help her daughter renovate and improve her home. Duffy had an appraisal done and it indicated her home was worth $125,000. This is a thorough way to ascertain a value, but Duffy was not convinced the appraisal was accurate. She decided to get a market analysis as a way to verify the value and it indicated her home was worth $187,000. The latter is not an appraisal, but a 50 percent higher value was more of what she felt the home was worth. So, believing the first appraisal was low for some reason, and wanting the credibility an appraisal brings, she had a second appraisal done just a few months later. This one came in $15,000 lower than the first.

Duffy was persistent and had a theory. She applied with a different lender for a refinance and this time she omitted her gender and racial information from the government monitoring information section of her application. And before this third appraisal was done, she “cleaned” the home of racial indicators like family photos, and had a white friend of the family, a male, at her home to meet the appraiser when he came to view the property.

The third appraisal shocked Duffy – but this time in a good way. This appraisal came back with a value of $259,000. That is 107 percent higher than the first appraisal and 135 percent higher than the second. When a borrower wants to consolidate debt, purchase a car, or start a business as three common examples of equity funds use, those are significant differences. Just for the purposes of asset valuation, such disparities are very significant and obviously contribute to the wealth gap reported between whites and minorities.

Several housing studies have shown this, and cumulatively the Brookings Institute estimates Black people have lost an estimated $156 billion dollars. The effect of a discriminatory practice impacts more than the current owner; everyone is touched by how the equity is used in the homes. In this case, Duffy said, “the thing devaluing her home, was her” and she knew this was not right. She filed a complaint with HUD against two of the lenders.

The appraiser providing Duffy’s lowest appraised value commented on the story. He said his values are data driven and he couldn’t change the value if he wanted to because he cannot change the data. He explained that he prepares every appraisal with the knowledge that he may have to defend his results to peers and others, and this was no exception.

Gwen and Lorenzo Mitchell

One may read the Duffy story and believe this is surely an isolated incident – an anomaly. But let’s move to Denver, Colorado. The Philadelphia Inquirer ran a story on January 27, 2021, about Gwen and Lorenzo Mitchell. Their three-bedroom house sits in a racially diverse area where homes typically sell for $450,000 to $550,000. The couple estimated their home would appraise for about $500,000. Values had been going up and they saw this as an opportunity to refinance because they were in a strong housing market. Lorenzo was home with their three kids when the appraiser was there. Lorenzo is Black, and the home appraisal came back at $405,000. That seemed low. The comps were all taken from north of Martin Luther King Boulevard — a dividing line, if you will, between a predominantly Black neighborhood where the comps were, even though the Mitchells’ home is south of the boulevard in a more diverse area. That was a red flag to the Mitchells. So, they ordered a second appraisal. This time, only Gwen was home during the appraisal visit, and Gwen is white. This appraisal came back with a value of $550,000. That is a $145,000 increase in value, almost 36 percent. That’s quite a discrepancy, and there were no changes to the home between appraisals; the Mitchells said they didn’t even mow the yard between appraisals, it was in the exact same condition.

And in Connecticut  …

And in a story similar to Duffy’s, let’s finally consider a Black homeowner in Connecticut who had his home appraised at $340,000. He thought that was low and decided a second appraisal was advisable, so he took down family photos and other family racial indicators and had his white neighbor stand in during the on-site appraisal. In his case there was an 18 percent increase in the value of his home to $400,000, a $60,000 increase.  If you are financing or refinancing a home, these differences are significant and may be impacted by external circumstances, but race appears to be a common denominator.

A regulator’s view

Michael Hsu, the Acting Comptroller of the Currency, delivered remarks to raise awareness about the need to reduce bias in real estate appraisals at a CFPB event in June 2021 on bias in appraisals. His comments highlighted the significant impact bias in appraisals has on minority families. A few notable nuggets from Hsu’s remarks were that “We are here at an opportune time in history where the energy to tear down barriers to fair and equal participation in our economy may finally exceed the resistance protecting the status quo.” The Biden administration sees this as a chance to facilitate change and it is my opinion that those in charge of the regulatory agencies are in agreement with the administration and share these goals. Hsu went on to cite a few reasons appraisals with a bias are problematic. “Biased appraisals can keep a family from getting approved for a loan or raise the price of a loan. They can trap “undervalued” neighborhoods by depressing property taxes, resulting in lower income to support education and infrastructure. Biased appraisals mean good loans to creditworthy customers go unmade.” He went on to say, “discrimination and bias in appraisals contribute to inequity in housing values and adversely affect a critical source of wealth accumulation for minority families. The impact is large and cannot be ignored. Studies have found that homes in Black neighborhoods are valued at roughly half the price [of] homes in neighborhoods with few or no Black residents.” The undervaluing of property snowballs, as it can impact tax revenue and then everything which develops from that, schools, emergency services, public facilities, etc.

Hsu did point out that appraisal processes are not seen as a part of the banking industry, but that there are intersections, and the OCC expects banks to ensure their vendors treat customers fairly and do not discriminate. We are seeing banks held accountable for discrimination in appraisals they use. He also noted that holding banks accountable is necessary, but the problem as a whole is bigger than just banks. That is why PAVE is forcing USPAP’s processes to improve the appraisal process.

Reg B requires a disclosure of the consumer’s ability to receive a copy of any appraisal(s) and valuation(s) prepared in connection with first-lien loans secured by a dwelling to be provided to applicants within three business days of receiving the application. This is not new — it’s been in effect since January 18, 2014.  Appraisal bias is why this disclosure is a big deal and its importance in the disclosure and compliance process was accelerated more than a year ago. As an example, regulators are working to provide more oversight over the activities of the Appraisal Foundation, which has power over the appraisal industry. The CFPB has had public meetings to discuss appraisal bias.

Lenders, take note

More recently, the CFPB and the DOJ filed a joint Statement of Interest in the case of Nathan Connolly and Shani Mott, v. Shane Lanham, 20/20 Valuations, LLC, and loanDepot.com, LLC, in the United States District Court, District of Maryland case Civil Action No. 1:22-cv-02048-SAG. These two agencies say that mortgage lenders can be liable if they rely on a discriminatory appraisal even from a third-party appraiser. This case was brought by a Black family that had an appraisal done, replaced the photos with those of a white family, had a second appraisal done, and had an immediate increase in value. The defendants maintain they should not be the ones liable for the third-party appraisal. Appraisers must have independence. But this is when the CFPB and DOJ jumped in and said both the FHA and ECOA (Reg B) require lenders NOT to rely on appraisals that are inaccurate or violate the law. It was added that TILA’s (Reg Z) rules on appraisal independence agree that there is no requirement to follow a biased appraisal.

Regulatory agencies are expected to develop and implement changes to examinations procedures for mortgage lenders. Future examinations may look for evidence that a lender’s compliance management programs are considering appraisal bias as a risk, and the examiner may collect additional information on appraisal attributes and tailor exam aides to evaluate irregularities in appraisals which are evident in the loan file.

If you are making notes of to-do items, the importance of your appraisal reviews has just gone to a higher level, based on the opinion of these two agencies and expectations of future exams. There are new classes being offered specifically to combat appraisal bias. These are being offered to appraisers according to Collinsworth, but I suspect appraiser reviewers in bank could enroll or find similar training. He also stated, “Regulatory agencies will, as needed, devise and implement changes to how examinations of mortgage lenders under their purview are conducted. For example, examinations can look for evidence that a lender’s compliance management programs are considering appraisal bias as a risk, collect additional information on appraisal attributes and tailor exam aides to evaluate irregularities in appraisals documented in the loan file.”

Reg Z prohibits banks, lenders, and any other covered party from coercing, instructing, or inducing an appraiser to cause the appraised value to be based on any factor other than the appraiser’s independent judgment. Lenders and others also cannot alter an appraised value. Banks have gone to great lengths to separate the lender on a loan from having any control over the selection or instructions to an appraiser. Although the bank can ask the appraiser to consider additional information, provide further details or an explanation for this, or correct errors in the appraisal, there is a line the bank may not cross here as to influencing that appraisal’s outcome. The Statement filed with the court by the CFPB and DOJ does indicate the bank would be protected if it asks an appraiser to reconsider a value under certain circumstances. No specific examples were provided as to what would be acceptable to do this and remain protected. For appraisers, the Conduct section of the Ethics Rule states an appraiser “must not use or rely on unsupported conclusions relating to characteristics such as race, color, religion, national origin, gender, marital status, familial status, age, receipt of public assistance income, handicap, or an unsupported conclusion that homogeneity of such characteristics is necessary to maximize value.” A violation of these may be a circumstance allowing reconsideration especially if a bank believes discrimination may be involved. That then raises another concern—would the bank have to consider reporting an appraiser for such conduct?

When an appraisal is completed, there may be situations when the bank and the borrower believe the value is lower than expected or the reasoning for the values are flawed. This would be especially so if an inappropriate bias was believed to exist. Such a belief should be supported by facts. A reviewer would require adequate training and experience to support such a conclusion, and this would be based in part on their competence to perform the review and the complexity of the transaction and type of property in question. The bank should also have a policy and procedures to both protect the parties involved and maintain appraisal independence. From the Collinsworth webinar, here are four examples regarding periods when the institution may exchange information or contact with the appraiser include:

1. A request to provide additional supporting information about the basis for the valuation
2. Requesting consideration of additional sales or information provided by the lender or borrower
3. Correct factual errors in an appraisal
4. Requesting consideration of additional information about the subject property or comparable properties.

A duty to report?

What if the bank does reject an appraisal? Collinsworth said, “If an appraisal is “rejected” for failing to comply with USPAP or applicable state laws, or if the institution suspects the appraiser performed in other unethical or unprofessional conduct, a complaint should be filed with the appropriate state appraiser regulatory officials.  Furthermore, as of April 1, 2011, an institution MUST file a complaint with the appropriate state licensing agency if it believes the appraiser has materially failed to comply with USPAP or applicable state or federal laws according to Supplement I of Part [1026] of Regulation Z – Truth in Lending.  For purposes of this deficiency, material failure to comply is one that is likely to affect the value assigned to the consumer’s principal dwelling.  An institution MUST also file a suspicious activity report (SAR) with the Financial Crimes Enforcement Network of the Department of the Treasury (FinCEN) when suspecting fraud or identifying other transactions that meet the SAR filing criteria.

It should also be noted that if an examiner finds evidence of unethical or unprofessional conduct by an appraiser, they should instruct the institution to file a complaint with the necessary state appraiser regulatory officials and to file a SAR with FinCEN when required.  If the examiner determines there is a concern with the institution’s ability or willingness to file a complaint or make a referral, the examiner should forward his or her findings and recommendations to their supervisory office for disposition and referral to the state regulatory officials and FinCEN as necessary.  In addition, penalties could be assessed to the institution and the reviewer if deficiencies are found by the examiner and not reported as mentioned above.”

What if the bank or borrower wants a second appraisal? The regulators do expect the bank to follow a policy of selecting the most credible appraisal and not specifically the one with the highest value. Documentation should be maintained in the loan file to support the decision for using the valuation selected as most appropriate.

Editor’s note: Part II of Andy’s article on Appraisal Bias will appear in our July 2023 Legal Briefs.

Changes in UCCC amounts effective 7/1/23

By Pauli D. Loeffler

Sec. 1-106 of the Oklahoma Uniform Consumer Credit Code  in Title 14A (the “U3C”) makes certain dollar limits subject to change when there are changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers, compiled by the Bureau of Labor Statistics, U.S. Department of Labor.  You can download and print the notification from the Oklahoma Department of Consumer Credit by clicking here.   It is also accessible on the OBA’s Legal Links page under Resources once you create an account through the My OBA Member Portal. You can access the Oklahoma Consumer Credit Code with regard to changes in dollar amounts for prior years on that page as well.

Increased Late Fee

The maximum late fee that may be assessed on a consumer loan is the greater of (a) five percent of the unpaid amount of the installment or (b) the dollar amount provided by rule of the Administrator for this section pursuant to § 1-106. As of July 1, 2023, the amount provided under (b) will increase by $2.00 to $31.00.

Late fees for consumer loans must be disclosed under both the UC3 and Reg Z, and the consumer must agree to the fee in writing. Any time a loan is originated, deferred, or renewed, the bank has the opportunity to obtain the borrower’s written consent to the increased late fee as set by the Administrator of the Oklahoma Department of Consumer Credit.  However, if a loan is already outstanding and is not being modified or renewed, a bank has no way to unilaterally increase the late fee amount if it states a specific amount in the loan agreement.

On the other hand, the bank may take advantage of an increase in the dollar amount for late fees if the late-fee disclosure is properly worded, such as:

“If any installment is not paid in full within ten (10) days after its scheduled due date, a late fee in an amount which is the greater of five percent (5%) of the unpaid amount of the payment or the maximum dollar amount established by rule of the Consumer Credit Administrator from time to time may be imposed.”

§ 3-508A. This section of the “U3C” sets the maximum annual percentage rate for certain loans. It provides three tiers with different rates based on unpaid principal balances that may be “blended.” It also has an alternative maximum rate that may be used rather than blending the rates. The amounts under each tier are NOT subject to annual adjustment by the Administrator of the Oklahoma Department of Consumer Credit under §1-106. However, a new subsection (4) was added allowing the lender to charge a closing fee which IS subject to adjustment under § 1-106. The closing fee, which was $167.33, has increased as follows:

(4)  In addition to the loan finance charge permitted in this section and other charges permitted in this act, a supervised lender may assess a lender closing fee not to exceed One Hundred Seventy-Eight Dollars and Eighty-Seven Cents ($178.87) upon consummation of the loan.

Note that the closing fee is NOT a finance charge under the OK U3C, and therefore not considered for purposes of usury. However, the fee IS a finance charge under Reg Z. Most banks use Reg Z disclosures. This means that it is possible that the fee under Reg Z disclosures will cause the APR to exceed the usury rate under § 3-508A. If that happens, document the file to show that the fee is excluded under the U3C in order to show the loan does not in fact violate Oklahoma’s usury provisions. Please note that the bank is NOT required to charge a closing fee at all, and banks may choose to not charge the fee at all, or charge less than the amount permitted under the statute.

You can access the § 3-508A Table https://www.oba.com/wp-content/uploads/2022/11/3-508A-ABS-Chart.pdf

§ 3-508B Loans

Some banks make small consumer loans based on a special finance-charge method that combines an initial “acquisition charge” with monthly “installment account handling charges,” rather than using the provisions of § 3-508A with regard to maximum annual percentage rate.

The permitted principal amounts for § 3-508B are adjusting from $1,740.00 to $3,450.00 for loans consummated on and after July 1, 2023.

Sec. 3-508B provides an alternative method of imposing a finance charge to that provided for Sec. 3-508A loans. Late or deferral fees and convenience fees as well as convenience fees for electronic payments under § 3-508C are permitted, but other fees cannot be imposed. No insurance charges, application fees, documentation fees, processing fees, returned check fees, credit bureau fees, nor any other kind of fee is allowed. No credit insurance, even if it is voluntary, can be sold in connection with § 3-508B loans. If a lender wants or needs to sell credit insurance or to impose other normal loan charges in connection with a loan, it will have to use § 3-508A instead.  Existing loans made under § 3-508B cannot be refinanced as or consolidated with or into § 3-508A loans, nor vice versa.

As indicated above, § 3-508B can be utilized only for loans not exceeding $3,450.00. Further, substantially equal monthly payments are required. The first scheduled payment cannot be due less than one (1) calendar month after the loan is made, and subsequent installments due at not less than 30-day intervals thereafter. The minimum term for loans is 60 days. The maximum term of any loan made under this section shall be one (1) month for each Ten Dollars ($10.00) of principal up to a maximum term of eighteen (18) months.  This would be loans not exceeding $621.00.  Loans under subparagraphs e through i of paragraph 1 of this section ($621.01 up to $2,300.00) the maximum terms shall be one (1) month for each Twenty Dollars ($20.00) of principal up to a maximum term of eighteen (18) months, and under subparagraphs j and k of paragraph 1 of this section ($2,300.01 – $3,450), the maximum terms shall be one (1) month for each Twenty Dollars ($20.00) of principal to a maximum term of twenty-four (24) months.

Lenders making § 3-508B loans should be careful and promptly change to the new dollar amount brackets, as well as the new permissible fees within each bracket for loans originated on and after July 1st. Because of peculiarities in how the bracket amounts are adjusted, using a chart with the old rates after June 30 may result in excess charges for certain small loans and violations of the U3C provisions.

Since §3-508B is “math intensive,” and the statute whether online or in a print version does NOT show updated acquisition fees and handling fees. I have inserted the current amounts effective on July 1, 2023 into the statute which you will find toward the bottom of the OBA Legal Links page under Sec. 3-508B – Effective July 1, 2023. Again, you will need to register an account with the OBA in order to access it.

The acquisition charge authorized under this statute is deemed to be earned at the time a loan is made and shall not be subject to refund. However, if the loan is prepaid in full, refinanced or consolidated within the first sixty (60) days, the acquisition charge will NOT be deemed fully earned and must be refunded pro rata at the rate of one-sixtieth (1/60) of the acquisition charge for each day from the date of the prepayment, refinancing or consolidation to the sixtieth day of the loan. The Department of Consumer Credit has published a Daily Acquisition Fee Refund Chart for prior years with links here: https://www.ok.gov/okdocc/Licenses_We_Regulate/Supervised_Lender/index.html  The Oklahoma Department had not published the Chart for 2023 at the time this article was written. Note if a loan is prepaid, the installment account handling charge shall also be subject to refund. A Monthly Refund Chart for handling charges for prior years can be accessed on the page indicated above, as well as § 3-508B Loan Rate (APR) Table.  I expect the charts and table for 2023 to be added shortly.

§3-511 Loans

I frequently get calls when lenders receive a warning from their loan origination systems that a loan may exceed the maximum interest rate. Nearly always, the banker says the interest rate does not exceed the alternative non-blended 25% rate allowed under § 3-508A according to their calculations. Usually, the cause for the red flag on the system is § 3-511. This is another section for which loan amounts may adjust annually. Here is the section with the amounts as effective for loans made on and after July 1, 2023, in bold type.

Supervised loans, not made pursuant to a revolving loan account, in which the principal loan amount is $6,200.00 or less and the rate of the loan finance charge calculated according to the actuarial method exceeds eighteen percent (18%) on the unpaid balances of the principal, shall be scheduled to be payable in substantially equal installments at equal periodic intervals except to the extent that the schedule of payments is adjusted to the seasonal or irregular income of the debtor; and

(a) over a period of not more than forty-nine (49) months if the principal is more than $1,860.00, or

(b) over a period of not more than thirty-seven (37) months if the principal is $1,860.00 or less.

The reason the warning has popped up is due to the italicized language: The small dollar loan’s APR exceeds 18%, and it is either single pay or interest-only with a balloon.

Dealer Paper “No Deficiency” Amount

If dealer paper is consumer-purpose and is secured by goods having an original cash price less than a certain dollar amount, and those goods are later repossessed or surrendered, the creditor cannot obtain a deficiency judgment if the collateral sells for less than the balance outstanding. This is covered in Section 5-103(2) of the U3C. This dollar amount was previously $5,800.00 and increases to $6,200.00 on July 1.