By Ryan Endsley and Craig Capilla
On December 2, 2021, a federal lawsuit was filed in the United States District Court for the Northern District of California, alleging that an appraiser and appraisal management company showed racial bias in an appraisal of a Marin County property owned by a black couple seeking a mortgage refinance. The complaint alleges violations of the Fair Housing Act, Civil Rights Act of 1866, and California statutes and common law. The homeowners and the Fair Housing Advocates of Northern California filed the complaint against a California appraiser and Utah-based AMC.
While the basic outlines of these allegations are increasingly familiar to appraisers, this one features a twist. After receiving an initial valuation of just under $1M, the black homeowners “whitewashed” their home, removing any black-themed art and family photos and had a white friend pose as the homeowner before a second appraisal. The new appraisal had a valuation of around $1.5M, a nearly $500,000 and 50% difference. The dispute centers around the selected closed comparable sales (“comps”), as the defendant appraiser utilized more comps in unincorporated “Marin City,” where the property was located and that has a larger black population. The complaint asserts that the appraiser should have considered more sales from the nearby cities of Sausalito and Mill Valley, which have higher median property values and whiter populations. In effect, the lawsuit questions the overall use of the sales comparison approach in predominantly black neighborhoods, claiming the practice devalues those properties on the basis of race.
While this appears to be the first federal lawsuit claiming racial bias by appraisers, and has already generated reports in a number of news outlets including the Washington Post and CNN, racial bias complaints against appraisers have been ramping up in a number of venues. State license boards have been receiving licensing complaints alleging bias and discrimination with greater frequency. Additionally, HUD investigations into appraiser bias are already on the rise across the country. Unlike the more common license board complaints that focus on an appraiser’s use of commonly acceptable methods and techniques, as well as his or her analysis of the data utilized and the reporting of those conclusions for a particular appraisal, HUD investigations tend to seek boarder patterns into the general practice of the appraiser in question. Now, this lawsuit has the potential to put the entire valuation practice on trial as it calls into question one of the three commonly accepted approaches to determining property value. A finding of wrongdoing or an admission of liability would also almost certainly result in further licensing disciplinary action upon conclusion of the civil suit.
Appraisers facing allegations of racial bias are put into an uncomfortable position. “Location, location, location” is and will continue to be a central component in the valuation process. In relying on the location of the subject property and determining the appropriateness of the recent closed sales analyzed, the appraiser is best situated to find the most similar properties to the subject being appraised, with the most similar characteristics, and most similarly exposed to market forces which drive property values. If the impact to value of the subject’s location, due to the racial characteristics of the neighborhood or municipality, is depressed due to bias in the market itself, an appraiser is still bound to utilize the most relevant available data. Where an appraiser might ignore nearby sales due to concerns that racial makeup of the market area may be artificially depressing home values, the appraiser would then risk being accused of considering race, color, or other characteristics which is expressly prohibited by the Ethics Rule of the Uniform Standards of Professional Appraisal Practice (“USPAP”), the nationwide standard to which all appraisers are held. When defending against allegations of considering race, color, or other protected classification influencing his or her opinion of value, an appraiser is essentially required to try and prove a negative, that their work was free of bias. Mounting such a defense can be difficult as those considerations are unlikely to be documented but rather would go to the state of mind of the appraiser while performing the assignment.
It should be clear by now to appraisers that bias complaints are not going away. If anything, they are likely to increase in frequency as greater national attention and agency focus is generated by the subject. While we are aware of no present complaints regarding gender, sexual orientation, religion, or gender identity, it would not be surprising to see those issues arise as well. Appraisers should take steps to protect themselves, including reviewing their insurance coverage to ensure they have adequate protection in the case of an investigation or litigation.