Black borrower takes appraisal racial bias claims to HUD, CFPB

A Black borrower is accusing appraisers and a lender of racial bias, claiming in complaints to housing regulators the firms refused to fix mistakes in an appraisal last year, derailing his refinance bid.

Cincinnati homeowner Terry Horton ultimately missed out on competitive interest rates early last year because of the companies' stonewalling, according to filings last week to the Department of Housing and Urban Development and the Consumer Financial Protection Bureau. An erroneous appraisal of Horton's rental property, which had black tenants who qualify for Section 8 housing, delivered a value hundreds of thousands of dollars below subsequent reviews, he said.

"Discrimination denied me the ability to refinance in the way that other homeowners were able to at that time, and more importantly, it robbed me of the opportunity to invest in new projects that would have brought more safe and affordable housing to my community," said Horton in a press release Monday by the National Community Reinvestment Coalition, a co-complainant. 

The filings name investor lender Stratton Equities, appraisal management company Appraisal Nation and appraiser Martin Appraisal Company as respondents responsible for the alleged discrimination. None of the respondents returned messages seeking comment. 

Katz Banks Kumin, the law firm representing Horton and the NCRC, will consider legal options as HUD and the CFPB review the complaint, a spokesperson said Monday. 

The accusations are yet another case of Black borrowers challenging alleged racial bias in appraisals, an issue that led the White House to form a task force of top regulators last year to address it. A Black couple sued loanDepot last summer after an undervalued appraisal led the lender to reject their refinance application, and that case remains pending in a Maryland federal court.

Horton sought to take advantage of rates sitting around 3.55% in early February 2022, and pull out cash to support a proposed venture with a local development agency to build more affordable housing, the complaints said.

His current mortgage on the multifamily property, originated in 2012, had an unpaid principal balance of $190,671.01 and an interest rate of 3.25%, a monthly principal and interest rate of $1,068.31 and a monthly escrow payment of $757.79. A mortgage broker connected Horton with Stratton, he said, and a loan officer sent him a good faith estimate with an estimated sales price of $500,000 for the  property with a total loan amount of $375,000 and a fixed interest rate of 5.235% for 30 years.

Stratton tapped Appraisal Nation to arrange a review of Horton's property, and Brent Martin, a white man, of Cincinnati-based Martin Appraisal Company conducted the appraisal last February without Horton present due to a medical issue. Martin returned with a valuation of the property at $359,000 based on several mistakes, Horton contends. 

The appraisal allegedly misstated Horton's monthly rental income $472 below the actual $4,679 figure; mistakenly placed the square footage at 5,091 versus the actual 5,626 SF; and reported the two-unit building as a three-bedroom rather than a five-bedroom property. Horton also disputed the appraisal's comparison properties with mismatched sizes, values and conditions.

"Mr. Horton expressed his concern that the appraiser had 'gone out of his way to devalue the subject property by ignoring comparable sales that indicate higher values and reconciling the low end of the value range,' the HUD filing said. "Mr. Horton noted that 'this could be unconscious bias' at work, and asked that his complaint be escalated or another appraisal be done."

The report set off a back-and-forth between Horton and Stratton, in which Horton contested the appraisal and Stratton held firm, leading Horton to arrange two subsequent reviews which valued his property at $560,000 and $450,000. Meanwhile, Appraisal Nation in late March submitted a rebuttal to Horton's appraisal dispute in which it did not address the errors in the initial report, he said. 

Stratton offered Horton a refi in mid-May based on the $450,000 appraisal, a 30-year fixed-rate loan with an interest rate of 7.43% and loan-to-value of 60%, a $270,000 sum which resulted in a $2,700 per month payment after taxes and insurance. By then, interest rates began their steep climb, and by June 1 Horton decided refinancing would be too expensive to make sense. 

Horton then reached out to the NCRC which has assisted him since. The organization retained a Cincinnati-based appraisal expert which concluded "some degree of bias" in Martin's negligent review, the complaint said. 

"We hope that our complaint will result in prompt and bold corrective action by HUD, not only for the benefit of Mr. Horton and NCRC, but also for the many other individuals who have suffered similar acts of discrimination," said Sharon McGowan, partner at KBK, in a press release.

Regulators have taken steps in the new year to address racial bias in appraisals, including HUD's proposal to update the Federal Housing Administration's reconsideration of value process to allow borrowers to request another appraisal in instances of illegal bias. The Department of Veterans Affairs last month also introduced measures aimed at the issue including removing an appraiser from the VA's home loan program if bias is confirmed.