CFPB and DOJ: Lenders are liable for appraisal discrimination

The Consumer Financial Protection Bureau (CFPB) and the U.S. Department of Justice (DOJ) announced Monday that they filed a statement of interest to “explain the application of the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) to lenders relying on discriminatory home appraisals.”

The statement of interest was filed in a lawsuit, Connolly, et al. v. Lanham, et al., that is currently pending in the U.S. District Court for the District of Maryland.

The lawsuit alleges that an appraiser with 20/20 Valuations lowered the valuation of a home because the owners, Nathan Connolly and Shani Motta, were Black — and were also denied the owners’ mortgage refinancing application with loanDepot based on the lower appraisal, which violated the FHA and ECOA. 

In its announcement of the filing, the CFPB said loanDepot “is fighting the case by, among other things, suggesting that it can’t be held liable for making a lending decision based on a discriminatory appraisal because the alleged discrimination was committed by a third-party appraiser.

“The Statement of Interest filed today by the CFPB and DOJ explains that, to the contrary, mortgage lenders can be liable under the FHA and ECOA for relying on discriminatory appraisals,” CFPB said.

“The law is clear that mortgage lenders cannot take race, sex, or any other prohibited bases into account when evaluating the creditworthiness of an applicant. That means lenders can’t rely on an appraisal if they knew, or should have known, that the appraisal was discriminatory.”

Statements of interest are amicus briefs filed by the government in civil cases as part of federal civil rights enforcement. In this case, the joint statement comes from an understanding that federal laws have been violated, said Assistant Attorney General Kristen Clarke of the Justice Department’s Civil Rights Division.

“Discriminatory home appraisals are unlawful, perpetuate the racial wealth gap, and deny communities of color the benefits of homeownership,” Clarke said in the DOJ’s announcement.

“When appraisers or lenders treat homebuyers or homeowners differently because of race, they violate federal law. The Justice Department is working to ensure an open and fair housing market by taking on appraisal bias, modern-day redlining, discriminatory loan pricing practices, and other forms of discrimination that may rear their ugly head at any stage of the home-buying process.”

The lawsuit, filed in May 2021 against mortgage lender loanDepot and appraisal company 20/20 Valuations, claims that Shane Lanham, president of the appraisal company, discriminated against the couple by “dramatically undervaluing their home” due to their race and the home’s location close to a Black census block — despite the home being located within Homeland, an affluent, white neighborhood in Baltimore.

Per the lawsuit, the couple sought to refinance their existing mortgage in 2021 order to take advantage of the historically-low mortgage rate environment. The couple applied for a refinance loan with loanDepot and were initially approved with a 2.25% interest rate, with a “conservative” estimated value of the house at $550,000, pending a property appraisal.

However, the couple said in the lawsuit that they were “shocked” when they were informed by loanDepot’s loan officer that Lanham, who conducted the appraisal, valued their home at only $472,000. After the appraisal, loanDepot said it would not extend the loan.

The couple then filed a lawsuit against loanDepot and 20/20 Valuations. The complaint alleges that Lanham “cherry-picked low-value homes” as comparables while ignoring sales in nearby majority-white areas that had higher values. 

Of the three comps with values ranging from $435,000 to $545,000, one was located outside of Homeland proper, in a majority-Black census block. A fourth comparable, which sold for $650,000, was not used in calculating the value of the home, according to the suit.

After being turned down by loanDepot, the couple “white-washed” their home, in which they replaced family photos with white pictures from white friends and colleagues. Instead of Connolly and Mott greeting the appraisal, a white colleague was present during the process. (Connolly is a history professor at Johns Hopkins University and is considered an expert on redlining.)

The home was appraised for $750,000, almost 60% higher than seven months ago despite not making significant improvements to the home or prices meaningfully changing, the suit claims.

Rocket Mortgage approved the couple for a refinancing in January 2022, in which they brought their rate down to 2.75%.

In January 2023, Lanham filed a counterclaim against the couple. “Falsely labeling someone a ‘racist’ and falsely accusing someone of racism are among the most damaging, hurtful, and destructive attacks in today’s society,” he wrote in the suit. Lanham said the label had a “devastating impact” on his reputation, business, livelihood and well-being.

In his counterclaim, Lanham listed technical arguments for providing a valuation of $475,000. Among them, Lanham said the property next door was listed for sale at $500,000 and had been lowered to $475,000 only 10 days after Lanham completed his appraisal. The home sold two months later for $465,000. He also argued that the second appraisal was done seven months later, didn’t include the home next door as a comp, and relied on home sales that had not even yet occurred.