An appraiser uses a zip-code “demographic score” in place of race to lower values in a particular area. Under USPAP, this is:
Correct Answer
B) Prohibited, because a proxy may not conceal a protected trait
USPAP prohibits using or relying on another characteristic as a pretext to conceal the use of race or other protected characteristics. This applies whether or not a specific antidiscrimination law applies, and a third-party source does not cure it.
Why This Is the Correct Answer
Option B is correct because USPAP states that an appraiser must not use or rely upon another characteristic as a pretext to conceal the use of or reliance upon race or other listed characteristics. Using a demographic score as a stand-in for race to lower values is that kind of pretext. The prohibition applies whether or not a specific antidiscrimination law applies.
Why the Other Options Are Wrong
Option A: Permitted, because zip codes are not a protected characteristic
Option A says the practice is permitted because zip codes are not a protected characteristic. The issue is not the zip code itself but its use as a pretext to conceal reliance on race, which USPAP prohibits.
Option C: Permitted, if the score comes from a third-party data vendor
Option C says the practice is permitted if the score comes from a third-party data vendor. A third-party source does not cure the use of a proxy to conceal reliance on a protected characteristic.
Option D: Prohibited only if the assignment involves a federally insured loan
Option D says the practice is prohibited only for federally insured loans. USPAP's pretext prohibition applies to the appraiser's assignment regardless of the loan type.
A proxy is still the trait
If a data point is used in place of race, USPAP treats it as using race. Changing the label or the source does not change the substance.
How to use: Use this when an option suggests a substitute variable makes a practice acceptable.
Exam Tip
Options that make discrimination acceptable based on data source or loan type are suspect; focus on whether the characteristic is used as a pretext.
Common Mistakes to Avoid
- -Believing a non-protected data label makes its use acceptable
- -Trusting third-party data without checking what it measures
- -Thinking USPAP nondiscrimination applies only to federal loans
Concept Deep Dive
Analysis
This question tests USPAP's prohibition on using a proxy characteristic to conceal reliance on race or another protected characteristic. A zip-code demographic score used in place of race to lower values is a pretext for considering race. The prohibition does not depend on the data source or the type of loan.
Background Knowledge
USPAP's Ethics Rule includes nondiscrimination provisions that prohibit using protected characteristics in ways that violate law and that prohibit using another characteristic as a pretext to conceal such use. Location data can be legitimate when based on supported market evidence. The concern arises when such data stand in for a protected characteristic.
Real-World Application
A reviewer notices an appraiser applied a negative location adjustment based on a vendor's neighborhood demographic score with no sales evidence. The reviewer flags it as a possible pretext for race and requests market support for any location adjustment.
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