Rocket’s Counterpunch: HUD and the DOJ calling
In October, the Department of Justice (DOJ) made headlines when they sued Rocket Mortgage for housing discrimination in the form of alleged bias in appraisal. Linking the nation’s largest housing lender to the actions of an independent appraiser may have been an effective way to gain national attention, but it raises many concerns.
Broader questions have now been raised about possible new legal obligations that companies in the mortgage sector could be subject to simply for following the letter of the law. In many ways, by including Rocket in the lawsuit, the Biden administration’s DOJ is also minimizing the real problem of review bias, which is missing from all the headlines and even from the DOJs. press release was a focus on those actually responsible for the alleged wrongdoings. All this despite the fact that the lawsuit, which stems from a 2021 incident, presents a compelling case against the third-party appraiser.
There were several mistakes – big and small – that are difficult to defend. The most significant was the use of comparable home sales (comps) from a predominantly black neighborhood outside the recommended radius to determine the home’s appraisal, rather than from the home’s mostly white neighborhood — reportedly because the homeowner requesting the appraisal asked himself to be black. But since lenders no longer hire appraisers directly, but instead contract with Appraisal Management Companies (AMCs) – in this case Solidifi – and then source a licensed appraiser, there is no legal justification for including Rocket in the lawsuit.
In fact, the housing market reforms implemented in the wake of the 2008 housing crisis clearly removed lenders like Rocket from the appraisal process. The financial crisis was exacerbated by the influence that lenders and real estate agents exerted on property valuations – often even sharing a valuation target that pushed up home valuations. Establishing the doctrine of review independence and enshrining it in law is one of the more valuable achievements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Yet the DOJ has inexplicably insisted that Rocket bear ultimate responsibility for correcting this case of review bias and risk undermining this crucial firewall in the process.
Although Rocket does not have the authority to intervene directly in the process, the law does outline an avenue of appeal in cases where errors or bias are suspected; it’s called reconsideration of value (ROV). But according to federal guidelines, the ROV process must be initiated by the homebuyer, not the lender.
Bill Emerson, president of Rocket Companies, noted that on two separate occasions, employees encouraged the customer to begin the ROV process. However, each time she refused to participate in the trial. In his CNBC interview with Becky Quick, Emerson shared a surprising insight There is no mention in the history of the case about how the Department of Housing and Urban Development (HUD): “… got involved and HUD actually took a look at our process and what we were doing and the team members who communicated with the client and they found no fault of any of our team members. And so, you know, I think it’s strange that we’re in this case.
Only earlier this year did HUD attempt to shift responsibility for appraisal bias to lenders through an industry bulletin, without recognizing how this change violates the legal principle of appraisal independence. This policy was adopted without the industry having an opportunity to comment, and HUD has declined to formally provide any clarification.
In light of these facts, Rocket Mortgage has responded to the DOJ’s action with two significant legal filings: a motion to dismiss the DOJ’s complaint against the DOJ and a countersuit against HUD for its attribution of fault in connection with the claims of bias in assessment. The hope is that this will resolve the conflict that has arisen where compliance with one set of regulations or laws could still result in scrutiny or legal action under different federal interpretations or priorities.
When federal agencies circumvent the law to advance a political agenda, it harms honest actors – like Rocket – and also threatens all consumers. It is a counterproductive bureaucracy like this that newly elected President Donald Trump’s Department of Government Efficiency (DOGE) should (and undoubtedly will) seek to dismantle. Thoroughly overhauling the haphazard regulation through enforcement that has become a basic DOJ strategy should be the starting point for DOGE’s assessment of government waste, but comprehensive HUD reform should be a close second.
In one recently Former HUD Assistant Secretary Brian Montgomery of the Wall Street Journal has offered HUD as an efficiency model for Musk and Ramaswamy to build on. As Scott Turner, President Trump’s nominee to lead HUD, takes the helm, the lessons from these setbacks with Rocket should be a guide. If increasing homeownership and affordability is HUD’s goal, breaking through appraisal independence protections and returning to the mistakes that caused the 2008 housing crisis is not the way forward.
Montgomery wraps up with some advice that Turner should take to heart. He notes that HUD shows that federal agencies can be efficient “through smart management and strong partnerships with the private sector.” Rocket’s lawsuit shows that the credit industry demands such a partnership, but it will not remain silent when it is unfairly targeted for complying with the law. Come January 20thea quick resolution of this problem should be a top priority.
Chuck Meyer is the principal of the law firm of Chuck Meyer PLLC.
This column does not necessarily reflect the opinion of HousingWire’s editorial staff and its owners.
To contact the editor responsible for this piece: zeb@hwmedia.com.
