On February 12, 2024, the Federal Financial Institutions Examination Council (FFIEC) issued a statement of principles related to residential property appraisal and valuation practices for member entities to consider in their consumer compliance and safety and soundness examinations. The principles are intended to aid member entities in assessing whether supervised institutions’ compliance management systems and risk management practices are appropriate in identifying and mitigating risks due to discrimination or bias as well as promoting credible valuations.
The statement noted that there is consumer and institutional harm associated with valuation discrimination or bias. For example, a member who is denied access to credit or offered less than favorable terms can suffer consumer harm. Additionally, a credit union that does not maintain adequate internal controls could incur potential exam findings due to noncompliance with laws and regulations or result in unreliable collateral valuations which could undermine the institution’s credit decisions. Ultimately, these risks can lead to increased safety and soundness risks, as well as have an adverse impact on borrowers and their communities.
The statement includes the applicable regulations and separate examination principles for both consumer compliance and safety and soundness examinations. Consumer compliance examinations focus on compliance with consumer financial protection laws and regulations, while safety and soundness examinations focus on an institution’s financial condition and operations.
The compliance and consumer financial protections include the Equal Credit Opportunity Act (ECOA), its implementing regulation, Regulation B, the Fair Housing Act (FHA), Truth in Lending Act (TILA), its implementing regulation, Regulation Z, and the Federal Trade Commission Act (FTC Act). The consumer compliance principles stressed the importance of having a sound compliance management system that is tailored to a credit union’s risk profile and can identify and address risks of bias and discrimination in valuations and appraisals. The following principles were mentioned for examiners to consider when assessing the risks arising from potential valuation discrimination or bias:
- Board and senior management oversight: Evaluation of whether the board of directors and management ensure that the compliance management systems are in line with the lending risk profile, including third-party risk management.
- Consumer compliance program: Assessment of the institution’s policies and procedures, training, monitoring and/or audit practices, consumer complaint response system and the ability to resolve incidences of potential valuation discrimination.
The safety and soundness protections include Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), Uniform Standards of Professional Appraisal Practice (USPAP), the Interagency Appraisal and Evaluation Guidelines, and applicable state laws. The safety and soundness principles consider whether a credit union’s risk management identifies valuation bias and discrimination and fosters credible valuations underlying a credit decision. The following principles were mentioned as a guide for supervisory assessments that arise from protentional valuation discrimination or bias:
- Consumer Protection issues: Consideration of exam findings, including feedback from examiners.
- Risk assessment: Consideration of real estate lending in relation to the institution’s size, complexity, and risk profile.
- Governance: Assessment of the institutions policies, control systems, management information systems, and ability to identify and resolve potential valuation discrimination or bias.
- Collateral valuation program: Evaluation of the institution’s practices for overseeing independent and qualified individuals that render unbiased and credible opinions of collateral value.
- Third-party risk management: Evaluation of the institution’s oversight of valuation-related third parties and their review functions, including how the third party identifies, monitors, and manages the risks related to valuation discrimination or bias.
- Valuation review function: Assessment for identifying potentially discriminatory or biased valuation results.
- Credit risk review function: Assessment of the residential real estate loan portfolios for appropriate consideration of potentially discriminatory or biased valuations.
- Training program: Assessment of whether the program provides staff with knowledge and skills to identify and resolve valuation discrimination or bias.
Lastly, the FFIEC noted that the statement “should not be interpreted as new guidance to supervised institutions nor an increased focus on supervised institutions’ appraisal practices.” Instead, the statement “offers transparency into the examination process and supports risk-focused examination work.” However, credit unions may want to note that fair lending and valuation discrimination has been a priority of federal agencies the past couple of years and NCUA has again included consumer financial protection and fair lending in its supervisory priorities.
America’s Credit Unions continues its advocacy to FFIEC regulators, including through meetings with NCUA Chairman Harper today and CFPB Director Chopra next week, to discuss credit union priorities.
If there are any remaining questions involving the FFIEC statement, please do not hesitate to contact the America’s Credit Unions compliance team at compliance@americascreditunions.org.