Assembly Bill 948, or the Fair Appraisal Act, seeks to address racial bias in the real estate appraisal process by (1) requiring certain data collection and reporting, (2) specifically prohibiting appraisers from basing their appraisal of property on protected characteristics, and (3) requiring that appraisers complete certain additional education requirements. The U.S. Department of Housing and Urban Development (HUD) and Freddie Mac have also initiated their own strategies to address bias in the industry.
Unfair Appraisals Reported in the Media
Paul Austin and Tenisha Tate-Austin (the Austins) — a Black couple — bought their Marin City home in December 2016 for $550,000 (appraised at the time for $575,000). Over the next few years, the Austins remodeled the home extensively using contracted professionals, including increasing the home’s square footage, adding a permitted accessory dwelling unit with views of the San Francisco Bay, and upgrading the kitchen and bathrooms. During that time, the Austins refinanced their mortgage twice, and the appraisals obtained in connection therewith reflected a steadily increasing valuation: $864,000 in May 2018, and $1,450,000 in March 2019.
In February 2020, the Austins applied to refinance their mortgage again and were taken aback by the appraisal, which valued the property at $995,000. They immediately ordered a second appraisal (from a different appraiser), and in preparation for this one, they “white-washed” the house — removing all family photos and art/decor that implicated their race, and putting photos of a friend’s (white) family around the house. (They also had the friend pose as the homeowner at the time of the appraiser’s inspection.) This time, the home was appraised for $1,482,500. The second inspection occurred only a few days after the Austins’ receipt of the first appraisal, and in the time between the two inspections, nothing had changed in their home or the real estate market in general.
(The above facts are taken from the Austins’ complaint filed in federal court in early December, as noted (and linked) below.)
The Austins’ story, which went viral in the mainstream media earlier this year, shocked many people because it exposed the potential for racial bias to corrupt a process that should be impartial. A property’s appraised value should be based on hard data in the form of comparable properties’ sale prices and market trends, but it is clear that there are opportunities for an appraiser’s implicit and explicit biases to come into play, mainly in the selection of comparable sales (“comps”). The Austins allege that the appraiser viewed their home as being part of a less desirable market due to their race. Thus, by choosing comps only in Marin City — a small community with very few home sales each year, a history of redlining, and a higher percentage of Black residents — and not neighboring communities such as Sausalito and Mill Valley, the appraiser purposefully appraised the home below market value. Such outlier appraisals can drive sale prices down, and then those below-market sale prices become the comps for neighboring homes’ appraisals, continuing the gap in home valuation (and wealth accumulation) for Black homeowners.
California is not the only state reporting racial discrimination in the appraisal process. See, e.g., “Black Homeowners Face Discrimination in Appraisals,” Aug. 25, 2020, The New York Times (Florida); “An Unconscious Bias? Biracial Denver Couple Says They Faced Discrimination on Home Appraisal,” Nov. 18, 2020, ABC7 Denver (Colorado); and “A Black Woman Says She Had To Hide Her Race To Get A Fair Home Appraisal,” May 21, 2021, NPR (Indiana).
California Legislature’s Response
AB 948 was introduced in the California Legislature in February 2021, and signed into law on Sept. 28, 2021. Effective Jan. 1, 2022, AB 948 makes the following changes and additions to the Business and Professions Code:
- Adds section 11310.3, which (1) states the legislative intent to “ensure that no one is discriminated against during the appraisal process of a real estate transaction,” (2) requires that the Bureau of Real Estate Appraisers (the “Bureau”) add a check box to its complaint form for complainants to indicate whether they believe their appraisal was below market value, and collect and compile demographic information regarding complainants; and (3) requires that the Bureau report its findings to the Legislature on or before July 1, 2024;
- Amends section 11340 to add subsections (e) through (g), which create a requirement that any prospective licensee complete at least one hour of instruction in “cultural competency” (defined in part as “understanding and applying cultural and ethnic data to the process of providing services”);
- Amends section 11360 to require appraisers seeking license renewal (or previously licensed but inactive appraisers seeking license restoration) to complete (1) at least two hours of elimination of bias training; and (2) at least one hour of instruction in cultural competency;
- Adds section 11424, which states that licensees shall not base their analysis or opinion of market value of a home on certain enumerated protected bases (including race or “any other basis prohibited by the federal Fair Housing Act”).
AB 948 also amends the Civil Code to add section 1102.6g, which requires that every real property purchase contract signed after July 1, 2022 contain a prescribed notice. The notice states that any appraisal of the property must be unbiased, and provides information about how to report concerns about appraisals and file complaints with the Bureau. The same notice must also be delivered by the lender in connection with its loan estimate.
Finally, AB 948 amends Government Code section 12955 to specify that it is unlawful for an appraiser (or appraisal business) to discriminate in the availability and performance of appraisal services.
Federal Agencies Follow Suit (and the Austins File Suit)
Data collection efforts are also being made at the federal level, with the intention that exposing existing racial bias in the appraisal process will allow appropriate agencies to protect against it.
- On June 1, 2021, President Biden directed HUD Secretary Marcia Fudge to create a task force to address racial discrimination in the appraisal and home buying process. In response to this directive, Secretary Fudge assembled the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE). According to President Biden, PAVE will quickly utilize “the many levers at the federal government’s disposal, including potential enforcement under fair housing laws, regulatory action, and development of standards and guidance in close partnership with industry and state and local governments” to eradicate discrimination. PAVE held its first meeting on Aug. 5, 2021, and committed to delivering a final action report by Feb. 1, 2022.
- On Sept. 20, 2021, the Federal Home Loan Mortgage Corporation (“Freddie Mac”) released a Research Note entitled “Racial and Ethnic Valuation Gaps in Home Purchase Appraisals,” which contains the results of research finding substantial “valuation gaps” (meaning the appraised price is lower than the contract price in a purchase transaction) in appraisals of homes located in minority neighborhoods, as well as valuation gaps in transactions where the homebuyer applicant identifies as Black or Latinx. The research found that the appraisal gaps were generated by a statistically significant number of appraisals.
- On Nov. 17, 2021, HUD issued Mortgagee Letter 2021-27, which “clarifies FHA’s existing requirements” for appraisers with regard to properties secured by FHA-insured mortgages. The Letter updates various sections of the Single Family Housing Policy Handbook to require appraisers to abide by fair housing laws, including adding new “Nondiscrimination Policy” and “Appraiser Conduct” sections. The guidance in the Letter is deemed effective immediately.
As for the Austins, they filed suit in a California federal court on Dec. 7, 2021 against the appraiser, her appraisal company, and the appraisal management company (that acted as the liaison between the lender and appraisal company), seeking injunctive, declaratory and monetary relief. The complaint alleges violations of federal law (the Fair Housing Act and Civil Rights Act of 1866) and California law (the Fair Employment and Housing Act, Unruh Civil Rights Act, Unfair Competition Law, and Negligent Misrepresentation) and demands a jury trial. The case is scheduled for an initial case management conference on March 4, 2022.