Lender’s “Take Another Look” Practice Deemed Unconscionable

A divided federal appellate court held that a mortgage lender’s practice of providing appraisers with estimated home values to inflate appraisal values, without the homeowners’ knowledge, was “unconscionable behavior.” In part, the appellate court upheld the district court’s class certification and summary judgment based on a statutory claim brought under state law, which prohibits “unconscionable conduct” in the formation of a consumer loan agreement. ABA Litigation Section leaders believe this decision may guide the type of protection borrowers will receive in the future.

What Is a Home Really Worth?

The dispute in Alig v. Quicken Loans Inc. began when the named plaintiffs sought to refinance their mortgage with a loan and estimated that their home was worth $129,000. The lender sent this information to the appraiser, who estimated the home to be worth $122,500. The lender then requested the appraiser to “revisit” the appraisal estimate to increase it to $125,500 and the appraiser complied. The plaintiffs obtained a loan for approximately $113,000. Two experts later appraised the plaintiffs’ home to be worth either $99,500 or $105,000. The lender refinanced mortgages for thousands of homes in West Virginia without the borrowers’ knowledge of this practice.

A class of plaintiffs sued the lender, the appraisal company, and several appraisers, alleging claims for civil conspiracy and unconscionable inducement to contract in violation of state law. The U.S. District Court for the Northern District of West Virginia conditionally certified the class, granted summary judgment to the plaintiffs, and awarded damages. The defendants appealed to the U.S. Court of Appeals for the Fourth Circuit, challenged the class certification, and argued that the unconscionability and breach of contracts claims required individual decisions.

Is “Another Look” Unconscionable?

On appeal, a majority of the Fourth Circuit upheld the district court’s class certification, the summary judgment on the conspiracy and unconscionable inducement claims, and the award of statutory damages. However, the appellate court vacated the summary judgment order on the breach-of-contract claims and damages and remanded this claim to the district court.

In so holding, the majority examined the defendants’ “take another look” practice, where the lender aimed to increase appraisal values by providing the appraisers with the borrowers’ estimates and pressured to the appraisers to match the estimates. The appellate court determined that the lender’s pressure on the appraisers tainted the appraisal process and the defendants’ “scheme to inflate appraisals was unconscionable behavior that contributed to [the] plaintiffs’ decisions to enter into the loans.” It explained that during the class period the lender’s behavior was a common yet questionable industry practice and quickly became “explicitly forbidden—and viewed as unethical by [the lender] itself.”

In support, the majority stated that the lender halted the practice of providing appraisers with the borrowers’ home estimates in at least one state “where lenders faced mounting legal pressure against the practice.” The defendants ended the practice in 2009 when the industry’s code of conduct became effective and prohibited lenders from providing estimates to appraisers in refinancing transactions. By 2011, the lender had recognized that the practice was “illegal and unethical.”

By contrast, the dissent explained that it would have reversed and remanded the matter with instructions to enter judgment for defendants because the defendants’ behavior was an industry-wide practice during the class period. The dissent determined that “there is no factual or legal basis to call the challenged practice ‘unconscionable,’” or in other words fraudulent, “nor is there any evidence that the borrowers we ‘induced by’ the practice to enter into the loan transactions.”

The “Take Another Look” Practice Gets Another Look

The lender filed a petition for a writ of certiorari with the U.S. Supreme Court requesting review of the Fourth Circuit’s split opinion in light of TransUnion LLC v. Ramirez, where the high court held that plaintiffs must be “concretely harmed” by a defendant’s statutory violation to have standing to seek damages in federal court. In a summary disposition, the Court granted the petition, vacated the Fourth Circuit’s judgment, and remanded the case “for further consideration in light of TransUnion LLC v. Ramirez” without additional explanation. The case is currently being reconsidered by the Fourth Circuit.

Complying with Current Industry Standards Is Key

Litigation Section leaders agree that review of the “take another look” approach should include a fact-based analysis. “Whether [the lender’s] practice of asking appraisers to take another look at appraisals that fell short of the homeowners’ estimation of value is ‘unconscionable’ should depend upon the particular circumstances of each appraisal,” notes Ian H. Fisher, Chicago, IL, cochair of the Section’s Class Actions & Derivative Suits Committee. “For example, one can imagine a situation where an appraiser made a mistake in the appraisal or missed an important property feature, such that a request for another look would be entirely appropriate and not unconscionable,” continues Fisher.

Here, however, “[t]he lender exerted its influence over the appraiser to obtain a higher appraised value in order to make the loan. By doing so, the borrower received no legitimate independent valuation of the property, and thus received no value for the fee paid for the appraisal,” states Mark A. Romance, vice-chair of the Section’s Commercial & Business Litigation Committee. “The fact that the borrower received the benefits of the loan does not make the acts of the lender less unconscionable in light of the statute enacted by the state legislature.”