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HUD Discrimination Complaints Skyrocket
by Isaac Peck, Publisher

There is a growing liability threat from HUD that appraisers need to be aware of.

Definitive numbers are difficult to come by since the Department of Housing and Urban Development (HUD) has failed to respond to public record requests on this question. However, Working RE’s “off-the-record” conversations with HUD officials, plus our own experience at OREP Insurance serving over 10,000 appraisers with E&O insurance every year, has given us an inside look into what has otherwise been an obfuscated prosecutorial process for appraisers.

OREP and Working RE estimate that over 300 complaints alleging appraisal discrimination have been filed against appraisers with HUD—just in the last three years.

The vast majority of complaints (but not all) stem from an appraisal that comes in below the contract price or the targeted refinance “number” where the homeowner, or even the buyer, identifies as part of a minority racial or ethnic group. Unlike state boards, generally HUD is not pre-screening the complaints for validity before opening a file, starting an investigation, and sending an appraiser a letter demanding a response within ten days.

This issue isn’t new. Since Joe Biden issued a Housing Plan that took aim at “racial bias” in appraisals in early 2020—it’s been a whirlwind. Discrimination-based lawsuits, HUD complaints, and even complaints with the Consumer Financial Protection Bureau (CFPB) against both lenders and appraisers have skyrocketed.

Here’s an inside look into the increasing liability and risk that appraisers are facing from lawsuits and HUD discrimination complaints.

Slow Process
Since the White House itself has taken such a keen interest in this issue, HUD appears to be handling appraisal discrimination investigations differently from regular fair housing complaints.

Craig Capilla, Partner at Franklin, Greenswag, Channon & Capilla, LLC and an attorney on the frontlines of defending appraisers, reports that he is personally handling over 20 HUD appraisal discrimination complaints that are all still open, pending matters. “After the initial interviews and document requests, there has been no action whatsoever. None have been dismissed and no determination has been made in favor or against any of my clients. Unlike a typical fair housing violation, such as rental discrimination, which can normally be vetted and addressed at the regional level, valuation-related complaints appear to be being handled differently. It feels like regional offices don’t have the authority or the discretion to make determinations. All the valuation complaints are being sent to the Washington D.C. office. The D.C. office is taking the lead on these,” advises Capilla.

The delay is uncharacteristic of HUD because their own internal policy is to resolve discrimination complaints within 100 days of receipt. “On every file I have, I’ve received a letter from HUD that they will exceed that deadline because they need more time to ‘conduct more investigations and analysis.’ The letter then provides an updated projected date for completion with the caveat that the date is also subject to change. I received one such letter in November 2021. The matter is still open and their last estimate on when they would conclude their investigation was May 2022. When I reach out to HUD it is common that the case has been handed to a different investigator or they simply do not have an update,” Capilla reports.

Not unlike many state appraisal board investigators, the majority of HUD investigators have not received any training in valuation or appraisal methodology. “It is difficult for them to read an appraisal report and decide if the appraiser was performing the appraisal with malice. Months ago, I heard that HUD was planning to hire experienced appraisers for their D.C. office so they could have an independent review of the material, but I haven’t seen that occur on any of the cases I am handling,” Capilla reports.

The result is a painstakingly slow process where appraisers have had a HUD discrimination complaint hanging over their heads for years. Some appraisers have faced onerous requests to furnish hundreds of appraisals to HUD, including demands to provide every appraisal an appraiser has completed in certain neighborhoods for the last few years. Capilla says there is no magic bullet to speed up the process or bring these matters to a timely conclusion.

Visit OREP.org/HUDcomplaint for the appraisal discrimination template that HUD is sending to hundreds of appraisers across the country.

Settlements
HUD’s resistance to dismissing any cases means that very few HUD investigations have been dismissed to date. In lieu of a dismissal, the goal for HUD is to force a settlement between the appraiser and the complainant.

Given the prolonged nature of some of these cases, some appraisers (and their legal counsel) have decided to settle with HUD rather than face another year or two of legal limbo and the corresponding legal fees. So far, these settlements have been in the $10,000 to $15,000 range. One of the challenges for appraisers, even when settling with HUD, is that unless the appraiser specifically negotiates a confidentiality provision, the Consent Order that the appraiser signs with HUD will be public and potentially have a long-lasting impact on that appraiser’s career.

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Nightmare Experience
John Smith (name changed for privacy), an appraiser in Texas who received a HUD complaint in 2022, says that the experience of being accused of racism has been a nightmare for him. “It has been incredibly stressful and frustrating to have these accusations hanging over my head for nearly a year with no end in sight. The entire complaint is baseless and was just filed because the borrower didn’t get the value he wanted on his refinance. Now, when I fill out applications with my clients, I am forced to disclose the complaint and I believe it is damaging my ability to get work,” Smith says.

In Smith’s case, the HUD investigator didn’t appear to know much about appraisal methods. “It was clear from the interviews that the investigator lacked general appraisal knowledge and had little to no experience in real estate. The process is horrible. The investigator continually vilified me and repeatedly insinuated that I had done something wrong. I am just doing my job! I have spoken to a few lawyers about filing a countersuit against the complainant for defamation but I haven’t found an attorney willing to take the case,” says Smith.

Words Matter
In an environment where hundreds of discrimination complaints are being filed against appraisers, what can an appraiser do to protect themselves? Capilla advises that the single most important preventative measure an appraiser can take is to go back and read their reports and the narratives they are using in their appraisals on a regular basis. “Take some time and read your reports and read through your addendum. Consider the words that you’re using to describe the appraisal process, the neighborhood, the properties, and your conclusions. The explanations that the appraiser gives are going to be most scrutinized when and if a discrimination complaint is filed. The use of subjective terms like ‘inferior,’ ‘superior,’ and ‘well-maintained’ are all turning into red flags for lenders and the GSEs,” Capilla says.

The solution for appraisers is to focus on the words that are being used in their reports. “Words matter and it’s highly advisable for appraisers to start reporting the objective facts instead of using subjective descriptions. Terms like ‘well-maintained’ or ‘well-kept’ are now being flagged for having undertones of racial bias. In many cases, appraisers were trained to use subjective language across the board. Appraisers now need to stick to just the facts. As an example, instead of saying ‘within walking distance,’ appraisers can specify the exact distance. The use of subjective adjectives and descriptions is a red flag for Fannie Mae and Freddie Mac, and will be a hurdle for any appraiser who is facing a discrimination complaint. The more objective you can be, the better,” says Capilla.

Another recommendation from Capilla is for appraisers to spend more time on the construction of their workfiles. “Now is a good time for appraisers to build stronger workfiles. One weakness I see in workfiles a lot is that appraisers often preserve the sales they included in the appraiser report, but they don’t save the comparables that they considered but didn’t use. You should be keeping a full list of all sales considered and analyzed, even if you didn’t use them in your report. At a certain point in these HUD investigations, there will be a question as to why you used this sale. Why didn’t you use that sale? Including information that you considered but DIDN’T use is as important or more important as including the information you did use. That way, you can explain your rationale years later,” Capilla advises.

Fannie Complaints En Masse
Beyond HUD complaints, Capilla also reports that a new round of Fannie Mae complaints being sent to state licensing boards are all discrimination and bias specific. “Fannie Mae is now reporting appraisers enmasse to their state licensing boards for using words like ‘gentrification’ to describe the neighborhood—the suggestion being that the word has racial undertones and that it warrants an investigation of possible bias. We’ve seen these complaints filed in multiple states with state boards,” reports Capilla.

You Need a Team
What should you do if you are on the receiving end of a HUD appraisal discrimination complaint, or even a state board complaint involving discrimination? First and foremost, Capilla says you should reach out to your E&O carrier. “Regardless of whether discrimination claims are excluded or not, there is an obligation of the insured to notify the carrier that the claim has arisen. Then you want to assemble your team. Too many appraisers have gotten to me too late in the process. Sometimes they’ve already made a bunch of statements, given an interview, sent three written responses, and tendered a bunch of documents to HUD. Rather than just charging in and trying to answer the questions immediately or participate in the interview, it pays to get professional advice,” says Capilla.

Having a seasoned attorney who has been through the process before and knows what to expect can make all the difference—whether you are responding in writing or you’re doing an interview with the investigator. “The interview is with the appraiser. As the attorney, I don’t get to feed the answers or respond on behalf of the appraiser. However, I can still help lead the conversation. Oftentimes the appraiser doesn’t know much about fair housing complaints and the investigator doesn’t know much (if anything) about the appraisal process, so they can talk themselves into something that’s problematic. It’s helpful for both sides to have somebody else in the room in the conversation that can bridge that gap,” says Capilla.

Lastly, be respectful. “Investigators at HUD are not there to find somebody guilty. Many appraisers are loath to acknowledge that. Maybe people in particular political circles or higher up the food chain have certain motivations, but field level investigators are there to investigate. Where possible, we should help them do their job. If the appraiser is evasive, combative or stonewalling, that’s going to get written up in their investigation report. Alternatively, if the appraiser is polite and cordial and responsive, that also gets written into the report. Character matters. Be kind, be cordial, and be responsive. Put yourself in the best position to succeed,” recommends Capilla.

Capilla is the preferred defense attorney for the 10,000 appraisers insured with OREP Insurance. OREP Members enjoy a free one-hour consultation with Capilla when facing a HUD discrimination complaint or a state board investigation. (To learn more, visit OREP.org/appraiserdefense.)

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Commercial Too?
While commercial appraisers have, for the most part, avoided the flurry of HUD complaints and lawsuits alleging appraisal discrimination—that might be changing soon. Leading civil rights firm Katz Banks Kumin LLP on behalf of the NCRC and Terry Horton, a Black property-owner in Cincinnati, Ohio, recently filed a complaint alleging appraisal discrimination with both HUD and the CFPB. The HUD complaint names the appraiser, the AMC, and the lender. According to the complaint, Horton is Black and the owner of a multifamily property in Ohio that is fully occupied by Black tenants who are on Section 8. When trying to do a cash-out refinance of his multifamily property in 2022, Horton did not get the value he was looking for.

Horton and the NCRC allege that the appraiser made a series of egregious errors, including misstating the square footage of the property, misreporting the rents, misreporting the number of bedrooms, and selecting inferior comparables. The NCRC hired a Cincinnati appraiser to review the original appraisal and who issued a report stating: “It is our opinion that some degree of bias is apparent in the reconciliation of values, which fall squarely on the very low end of the value spectrum,” and concluding that “the appraiser was negligent and violated the competency requirement in USPAP.”

Capilla says we can expect to see more of these types of complaints. “Discrimination in lending on the basis of protected classes is illegal. It doesn’t matter what type of lending we’re talking about. We’re going to see these claims in the commercial space. I further anticipate we’ll see this in rural and agricultural lending as well. Whether it is farming and crops or livestock and herding, anywhere there is the potential for a certain segment of borrowers to have negative outcomes more commonly than other borrowers, the potential for these claims exists,” Capilla advises.

Discrimination Lawsuits
In addition to the hundreds of HUD discrimination complaints filed against appraisers, a number of lawsuits have been filed as well.
These lawsuits include:

• Tate-Austin v. Janette Miller and AMC Links, LLC, et al. Both Miller and AMC Links have settled with the Tate-Austin’s out of court. The amount of the settlement remains confidential.

• Washington v. Accurate Appraisal Services and Wells Fargo et al. Wells Fargo settled with the Washingtons outside of court. The amount of the settlement remains confidential.

• Connolly & Mott v. Shane Lanham et al. This case is still ongoing. Lanham has countersued Connolly and Mott for defamation and for ruining his business by going on national television and calling him a racist.

• Janifer v. Appraiser. This is a local case in Maryland wherein a homebuyer made offers, and entered into contracts on two properties. The same appraiser was hired on both contracts and did not appraise the properties to the contract price in both cases. The homebuyer was not able to purchase a home and is suing the appraiser for discrimination.

• Class Action Complaint vs. Wells Fargo. This is a class action complaint against Wells Fargo Bank alleging widespread discrimination relating to the bank’s approval rates for Black and minority borrowers, including appraisal discrimination. The lawsuit cites Andre Perry and the Brooking Institution’s studies in its amended complaint.

In the majority of the lawsuits listed above, the United States Department of Justice (DOJ) has filed a Position of Interest brief with the court, reiterating that fair housing laws grant plaintiffs a private right of action to sue the offender.

Defense?
As appraisers grapple with the newfound risk of being sued or facing down a federal regulator over claims of discrimination, it raises the question: Who is defending appraisers? Many appraisers are learning that their insurance policies do not provide any coverage for claims and complaints alleging discrimination. In the same way that fraud is excluded in almost every professional insurance policy, the majority of professional liability (E&O) policies exclude discrimination.

This is a massive problem for appraisers given the sheer volume of HUD discrimination complaints and claims their profession is seeing. Facing a discrimination claim in open court or being called to the carpet by HUD without insurance is a very costly business. While some E&O policies simply exclude discrimination, others offer a significantly reduced sublimit, such as only providing $50,000 for “Discrimination Claims.” (A sublimit is a limit within the policy that reduces or limits coverage associated with particular claims.)

OREP, a leading provider of E&O insurance for appraisers, has stepped up and worked with its primary carrier to provide an individual appraiser policy with $200,000 of discrimination claim coverage and firm policy (two or more appraisers) with up to $500,000 for those appraisers that want to ensure they are properly covered. (Ask your OREP agent for details).

Do you have questions about how you can limit your liability and ensure you are properly covered in today’s litigious environment? Feel free to email me with questions at isaac@orep.org. Stay safe out there!

>> “BAD” WORDS: The list of words that appraisers are being instructed not to use continues to grow with some lenders sending appraisers lists of over 50 words they are now required to avoid. Click here to see the list.

About the Author

Isaac Peck is the Publisher of Working RE magazine and the President of OREP, a leading provider of E&O insurance for real estate professionals. OREP serves over 10,000 appraisers with comprehensive E&O coverage, competitive rates, and 14 hours of free CE for OREP Members (CE not approved in IL, MN, GA). Visit OREP.org to learn more. Reach Isaac at isaac@orep.org or (888) 347-5273. CA License #4116465.

OREP Insurance Services, LLC. Calif. License #0K99465