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Until Appraisal Bias Is Conquered, the Racial Wealth Gap Will Persist

As posted to American Banker:

Growing up in Indiana, I often listened to the music of my fellow Hoosier, John Mellencamp. His classic 1980s ballad, "Pink Houses," remains one of my favorites. At the time, the teenage me thought this upbeat song was just a rocking good tune about America. Today, however, that song's perceptive lyrics resonate very differently with me.

The song's first verse describes a Black man on his front porch in a Black neighborhood thinking "he's got it so good" with an interstate running through his front yard. The wiser, more experienced adult in me now more clearly understands how the song portrays the very different fortunes and expectations for communities of color — along with too many others left behind — in their pursuit of the American dream.

And, I clearly see that appraisal bias is a common injustice for many people of color who buy, sell, or refinance their homes. After all, achieving the American dream and building intergenerational wealth through homeownership is only possible if property values are assessed fairly and accurately for all.

That's why last summer, the National Credit Union Administration joined 12 other federal agencies to begin righting a longstanding wrong. At President Biden's direction, the Property Appraisal and Valuation Equity Task Force, PAVE for short, was charged with confronting a skeleton in the closet: the undervaluing of properties due to racial or ethnic bias.

This discriminatory practice has limited the ability of many families of color to benefit fully from the financial returns of homeownership. For example, a 2021 Freddie Mac study of 12 million appraisals found that homes in Black and Latino neighborhoods were valued lower than similar properties within white communities.

Multiple media investigations have also shown blatant appraisal bias against people of color. In one recent news story, a home that had been "whitewashed" by removing any trace of its Black owners was appraised for hundreds of thousands of dollars more than the original estimate. Such injustice must come to an end.

More than a decade ago, in the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress enacted reforms to address problems in the appraisal industry. As a congressional staffer, I contributed to the provisions in that law addressing appraisal bias. Among other things, these reforms strengthened the powers of the Appraisal Subcommittee, the federal agency that supervises state appraisal regulatory programs. Those fixes addressed appraisal independence and appraisal inflation.

However, as the Freddie Mac study, other reports, and recent news coverage demonstrate, we continue to see breakdowns in the appraisal system, particularly bias based on race. Technology offers us one solution to the problem of human prejudice. That's why the NCUA is working with other agencies on joint rules to establish quality control standards for automated valuation models. In doing so, we must ensure algorithms do not result in bias in their results and violate fair-lending laws.

Ultimately, systemic appraisal bias is perpetuated by several factors, so we must adopt a multipronged approach to fix the problem. In addition to the recently released recommendations in the PAVE Action Plan, existing statutes like the Fair Housing Act and the Equal Credit Opportunity Act must be leveraged to right this wrong.

As our work continues, the NCUA will do its part to advance economic equity and justice, a goal that fully aligns with the credit union system's statutory mission of meeting the credit and savings needs of members, especially those consumers of modest means. And the NCUA will continue to study the causes of the disparities in appraisal and valuation services to inform our future policymaking.

Moreover, through the Federal Financial Institutions Examination Council, the NCUA is committed to working with its counterparts at federal and state banking agencies in combating any form of discrimination in appraisals by ensuring that government oversight and industry practices advance equity in real estate valuations. To do so, the council must raise awareness about appraisal and valuation bias through consumer education and practitioner training, provide high-quality data to measure results, support efforts to diversify the appraisal industry and create comprehensive guidelines to prevent appraisal and valuation bias through compliance and enforcement.

To be clear, the work of the council and the PAVE Task Force will never make up for the years of discrimination. Nevertheless, it is a step in the right direction in holding the appraisal industry to higher standards that ensure all Americans have equal opportunity to build wealth through homeownership.

At the end of "Pink Houses" is the line, "there's winners and there's losers." Our job is to ensure that appraisal bias does not decide those winners and losers in homeownership, so that people of color are dealt a fair and equitable hand when it comes to home valuation. Only then can we finally begin to close the racial wealth gap. It is important work and long overdue.

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