1.Background of the Case

In 2021, a Denver homeowner, Francesca Cheroutes, alleged that an appraisal conducted during her loan refinance grossly undervalued her property due to racial discrimination. The appraisal valued her duplex at $640,000—a substantial drop from prior appraisals of $750,000 and $860,000 despite rising market conditions and property upgrades.

HUD contends that the appraiser chose inappropriate comparables in predominantly Black neighborhoods, ignoring better-matched properties in the predominantly White area where the home is located. When Cheroutes raised concerns, Rocket Mortgage offered a legally compliant value reconsideration process (“ROV“), which she declined. The DOJ alleges that Rocket Mortgage inadequately addressed her claims and retaliated against her by canceling her loan application.

2.Regulatory Conflicts at the Center of the Case

A core issue in this lawsuit is the conflicting expectations placed on lenders under federal law:

2.1TILA and Appraiser Independence

The Truth in Lending Act (“TILA“) mandates that appraisals be conducted independently, prohibiting lenders from influencing appraiser judgment. This independence is intended to ensure fair and unbiased valuations, free from lender interference.

2.2DOJ’s Enforcement Stance

The DOJ argues that lenders should take steps to identify and correct potentially biased appraisals. However, Rocket Mortgage claims this expectation directly contradicts TILA’s independence requirement, which prohibits lenders from altering or influencing appraisal values.

3.Rocket Mortgage’s Position

Rocket Mortgage has asked the court to clarify these conflicting regulations, seeking affirmation that: (A) Lenders cannot lawfully intervene in the appraisal process to correct perceived biases; and (B) Lenders should not be held liable for the actions of independent appraisers hired through third-party appraisal management companies (“AMCs“).

This regulatory tension not only affects Rocket Mortgage but also raises broader concerns for the mortgage industry as it navigates increasing scrutiny of appraisal practices.

4.What This Means for Brokers

Brokers, like lenders, should prepare for potential claims that attempt to hold them accountable for the actions of appraisers or AMCs. Robust processes and documentation will be critical in protecting against such risks. This case serves as an important reminder for brokers to refine their processes in response to regulatory focus on appraisal practices:

4.1Understand and Communicate the Reconsideration of Value (ROV) Process

Brokers should be well-versed in guiding clients through the ROV process and ensure clients are aware of their options when disputing appraisal results.

4.2Document Every Step

Proper documentation of client interactions, ROV requests, and escalations is vital to demonstrating compliance and mitigating liability.

4.3Stay Ahead of Evolving Expectations

As regulatory scrutiny extends to brokers, understanding how to handle appraisal disputes and ensuring compliance with evolving standards are essential to mitigating liability.

5.The Impact of a New Administration

The timing of this case is particularly significant as the presidential administration transitions to Donald Trump’s leadership. Regulatory priorities and enforcement actions could shift under the new administration, potentially impacting how HUD and the DOJ approach appraisal bias claims.

Under the Trump administration, HUD and DOJ may adopt different approaches to fair housing and appraisal practices, creating potential changes in how lenders and brokers are regulated. Observing these developments will be crucial for industry professionals.

6.Conclusion

Rocket Mortgage’s legal challenge underscores the complexities of navigating appraisal compliance in an era of heightened regulatory scrutiny. For brokers and lenders, the case is a reminder to ensure strong internal processes, clear escalation protocols, and meticulous documentation when handling appraisal disputes.

As this case progresses, its outcome will likely shape how the industry balances regulatory requirements for appraisal independence with expectations to address systemic bias. Stay tuned for further updates as we continue to monitor this important matter.