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Sixth Circuit Partly Reinstates Appraisal Fraud Predatory Lending Lawsuit - Wallace v. Midwest Fin. & Mort. Svcs.

April 30, 2013

Vincent Howard and our Riverside County predatory lending attorneys were pleased to see a partial victory for a former homeowner who alleged he was the victim of a bait-and-switch loan and an inflated appraisal. The Sixth U.S. Circuit Court of Appeals ruled in Wallace v. Midwest Financial & Mortgage Services that Harold Wallace of Kentucky had adequately shown that the appraisal fraud caused his extensive financial problems. Wallace refinanced his home in 2006 to do some improvements, but did not realize he was getting an option adjustable-rate mortgage with very high interest. The appraiser for his lender also set the value of the home too high and likely didn't visit. After declaring bankruptcy and surrendering the home, Wallace sued, alleging racketeering, state-law conspiracy and more.

Wallace's second refinance, the loan at issue, was to consolidate his first two loans and build out the basement. He sought a refinance loan of around $422,500 from Midwest, a loan broker. Midwest retained Accupraise, a now-defunct company run by a de-licensed appraiser named Andrew Brock, a party to the litigation. A former employee testified that Midwest told Brock how much it would like the appraisal to come to, and Brock would appraise it for that amount, forging the signature of a licensed appraiser and rarely visiting the properties. This appraisal came to $500,000, but Wallace didn't want to borrow more than he needed, so they agreed to $425,000, in a conversation Wallace alleges misrepresented the payment schedule. He later learned the true value of the home at the time was closer to $375,000.

At closing, Wallace claims, he unwittingly signed papers for an option ARM that permitted him to skip the principal payment for a time, creating huge minimum payments later. Midwest received a $14,000 "yield-spread premium" payment from MortgageIT, the lender, for selling Wallace a more expensive loan than he could have qualified for. Wallace received negative home equity and snowballing financial problems, lost the home and declared bankruptcy. In 2007, he sued, alleging Midwest, Accupraise and others conspired to inflate appraisals in order to sell expensive loans to victims, which MortgageIT then sold as securities to avoid the risk of default. The district court granted summary judgment on some of Wallace's claims and ordered mediation on the rest, which gave Wallace a victory only on his RESPA claim.

Wallace's appeal challenged summary judgment on his state-law conspiracy, RICO conspiracy and RICO claims. Summary judgment by the district court rested on the court's belief that the unfavorable loan terms, rather than the inflated appraisal, were the reason for Wallace's financial problems. The Sixth Circuit disagreed. The appraisal, if false, created a belief that Wallace had more home equity than he really did, the court said. This permitted Midwest to convince Wallace to take out a large loan that got him into financial trouble. From the record, the Sixth said, it's clear that the inflated appraisal was important in Wallace's decision; he told Midwest he needed to know if he had enough equity to borrow. Indeed, the court said, an honest appraisal would have prevented him from taking out any loan because he had no equity. This is adequate to survive summary judgment on the RICO claims and part of his state-law conspiracy claim, the Sixth said, although it agreed that the state conspiracy claims against MortgageIT were not adequate.

Vincent Howard and our Santa Ana predatory lending lawyers are glad that Wallace will get a day in court on these claims, because they allege a type of serious wrongdoing that took place in many states during the mortgage bubble. Home equity was rising so fast that high appraisals didn't raise many eyebrows--even when they should have--and some people saw opportunities to make more money by deceiving borrowers. This case was not about the Truth in Lending Act, but people who got an unexpectedly expensive loan, as Wallace did, frequently find there were TILA violations because they were promised a different loan orally and in writing than the one they were presented with at closing. That's one law Vincent Howard and our Ontario predatory lending attorneys use to fight predatory lending, along with RESPA and a variety of state laws.

If you were deceived in any way when you took out a loan, you should talk to Howard Law, P.C., about whether you're a victim of predatory lending. You can call us toll-free at 1-800-872-5925 or send us an email.

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