Businesses today face mounting challenges due to an increasingly complex legal landscape. Large and small companies alike must now navigate not only the traditional landscape of liability risks – from employment law to consumer protection – but must also contend with overlapping and sometimes conflicting federal, state, and local rules.
While businesses strive to comply with these extensive regulatory frameworks, the reinterpretation of existing regulations or challenges to long-standing practices have in some cases made that impossible. In fact, recent federal enforcement actions have created additional uncertainty by sometimes targeting companies even when they appear to be following established rules and guidance. This evolving dynamic places businesses in a difficult position where compliance with one set of regulations or laws might still result in scrutiny or legal action under different federal interpretations or priorities.
The incoming Trump administration will likely seek to clarify the interpretation of these laws and regulations almost immediately upon taking office. But in the meantime, various industries and businesses are still exposed to the contradictory and, at times, arbitrary enforcement that has become commonplace under the current administration and could set concerning precedent into the next one if not addressed.
A new
The complaint alleges that appraiser Maksym Mykhailyna significantly undervalued a black woman's home near Denver, Colorado, while she was in the process of refinancing her mortgage. Whether the appraiser was in fact biased in his assessment of the home's value remains up for debate. After all, home appraisal is an inherently subjective business, which is exactly what makes it so hard to root out discrimination.
However, the lawsuit goes on to allege that it was not only the appraiser that exhibited bias, but also names as defendants Rocket Mortgage, the lender, and Solidifi, the appraisal management company (AMC) that serves as the bridge between the lender and the appraiser. This is concerning because the DOJ's decision to go after a lender for not doing enough to rectify the situation calls into question key passages of the Dodd-Frank Wall Street Reform and Consumer Protection Act – the cornerstone piece of legislation that came out of the 2008 financial crisis.
Before Dodd-Frank, lenders directly contracted with appraisers who sought to keep their business by producing appraisals that showed home values steadily rising. This cozy relationship allowed mortgage lenders to make bigger and more profitable loans, which in turn contributed to the market bubble that resulted in one of the biggest financial implosions in modern history.
Dodd-Frank sought to address this conflict of interest by creating a firewall between lenders and appraisers, encouraging the use of AMCs. These intermediaries receive requests for appraisals by lenders and then refer those requests to independent appraisers who they have vetted. That way the lenders have no way to select appraisers based on who they think will provide the most ideal appraisal, eliminating any potential conflicts of interest.
The problem with the recent DOJ lawsuit is that it seeks to hold Rocket Mortgage responsible for the actions of a third-party appraiser who was contracted by an AMC. As Dodd-Frank lays out, lenders are supposed to keep appraisers at arm's length, so how can the DOJ hold Rocket responsible for the actions of the independent appraiser?
According to the DOJ lawsuit, a customer service representative from Rocket instructed the homeowner that she could re-do part of the appraisal herself and select her own comparables – the homes used in the appraisal as point of comparison for the home being evaluated. This is often where alleged discrimination can make its way into the appraisal process, so allowing the homeowner to select her own comparables could have been key to addressing the issue.
However, the homeowner in this case decided not to do the work of selecting the comparables. The DOJ concurred in the complaint that this would have placed the burden of remedying the alleged discrimination on the homeowner. But Rocket's hands were tied in this situation. It went about as far as it could in helping the homeowner address her concerns, but it is ultimately prohibited by federal law from getting involved in the appraisals process.
Federal prosecutors succeeded in getting big headlines with a high-profile lawsuit against the biggest mortgage lender in the country. But now the DOJ is threatening to throw the entire regulatory regime that guides the mortgage-lending process into chaos. Instead of acting against those who are precluded by law and regulation from getting involved in the appraisal process, the DOJ should use its resources to go after those that can and should be held liable for pernicious appraisal practices.
A transition between any two Administrations brings changes to federal agencies, but given President Trump's particular focus on reining in what he believes in an overly aggressive DOJ, hopefully such examples of prosecutorial overreach will be brought to an end. The morass of regulation facing companies in the United States already makes it difficult to do business and ambitious prosecutors in the DOJ shouldn't look to score points on companies that are simply trying to follow the law.
