REGular Blog: FFIEC Issues Statement on Exam Principles Related to Real Estate Valuation Discrimination and Bias

Happy Friday! Below is a summary of the recently released FFIEC statement on residential property valuations, courtesy of the team at Infosight. One quick note - the FFIEC's statement discusses elements into two categories: consumer compliance exam and safety and soundness exam. This is how banking exams are separated. In footnote 5 of the statement, the FFIEC acknowledges that while the NCUA has a singular exam for both consumer compliance and safety and soundness, they have incorporated the principles of the Uniform Interagency Consumer Compliance Rating System into the agency's Compliance Risk Indicators.

Just this week (Feb. 12, 2024), the Federal Financial Examination Council (FFIEC) issued a statement to communicate principles for the examination of residential property appraisal and evaluation (valuation) practices to mitigate risks that may arise due to potential discrimination or bias in those practices; and to promote credible valuations.

Within the article, examiners are instructed to assess financial institutions’ compliance management systems and risk management practices for identifying and mitigating potential discrimination or bias in residential property valuation practices.

To promote compliance with statutory and regulatory requirements, the guidance instructs credit unions to establish a formal valuation review program. A review program could help address any identified deficiencies due to potential valuation discrimination or bias before making a credit decision.

When it comes time for your exam, whether it is a safety and soundness exam or a specific consumer compliance exam, expect a review of risk management processes for residential lending activity. Below are more details to help your credit union prepare!

Consumer Compliance Exam

Examiners will look to see if the credit union's compliance management system is inclusive of processes to consider whether the risk management practices for residential real estate valuations are appropriate to identify and address valuation discrimination.

Board and Management Oversight. Examiners will look to ensure that the credit union implements and maintains compliance management systems, including third-party oversight based on the risk profile for residential lending. They will also look to ensure information is being provided to the Board to communicate the strength of the consumer compliance program.

Third-party risk management. Examiners will evaluate the credit unions’ oversight of residential real estate valuation third parties’ consumer compliance-related policies, procedures, internal controls, and training. Also, the evaluation of the credit unions’ due diligence and ongoing monitoring of those third parties, including those entities/persons preparing valuation reports, appraisals, and appraisal management companies.

Consumer Compliance Program. Examiners will review policies, procedures, training, monitoring, and audit practices all with the focus on ensuring the credit union is identifying potentially discriminatory valuation practices or results. The credit union's complaint response system and processes will also be reviewed, along with the ability of the credit union to identify and resolve incidences of potential valuation discrimination.

Safety and Soundness Exam

Examiners will review credit unions’ residential real estate collateral valuation programs, including consideration of whether risk management practices for valuations are appropriate to identify and address valuation discrimination or bias and promote credible valuations. This will include a review of consumer protection issues, risk assessments, governance, collateral valuation program, third-party risk management, valuation review function, credit risk review function, and the credit union’s training program.