Lender Sued Over Inflated Appraisal

Bren Pomponio, a lawyer with Mountain State Justice, a nonprofit public interest firm that concentrates on predatory lending, said Herrod’s woes began when a local mortgage broker set her up with Michigan-based Washtenaw Mortgage Co. Pomponio said the broker and an appraiser had a “secret agreement to cook up appraisals” to justify predatory loans. The brokers would send over “detailed schemes” for the loans they wanted approved including suggested appraisal figures to appraisers.

Herrod and her daughter, Jennifer, agreed to the loan after an appraiser hired by the lender said their home was worth $118,000. He said the Herrods were surprised by the appraisal but thought that improvements they had made increased the home’s value. They signed up for a $94,000 home equity loan on a house later valued at $72,000. Pomponio said the Herrods soon faced foreclosure after she lost her job in a pharmacy. Herrod wanted to sell the house but was told by a real estate broker that the house had been overvalued.

When the case went to court, the lower court judge refused to let the jury consider Herrod’s evidence that the loan was based on an inflated appraisal. Herrod wanted to tell the jury that the appraiser involved had entered into a consent order with state regulators for his role in the transaction after the state board sent out a couple of appraisers who did not appraise the property at anywhere near the same amount, Pomponio said. He explained that the figure found by the appraiser was the same as that on the requested appraisal form from the broker.

Pomponio said the important fact of the decision is that it says that Herrod has a right to put on her evidence and that a federal court has recently reached a similar conclusion. He explained that Washtenaw’s defense was that it didn’t hire the appraisers and, as a result, had no control over them. The company said its role was only to enforce the loan. However, according to Pomponio, the court said that if the evidence shows you were controlling the transaction, then you are responsible and could face liability.

Pomponio said the case brings together almost all of the elements of predatory lending — broker bait and switch, inflated appraisals and an abusive yield spread premium. Yield spread premium is a fee from the lender to the broker for persuading borrowers to agree to a higher interest rate. It has a legitimate use in instances where a borrower does not want to pay the broker’s fees upfront and agrees to pay a higher interest rate. However, in this case the yield spread premium was for $3300 plus fees of over $6000. Pomponio said that under federal law Herrod’s loan qualified as a high-cost loan because the fees were so high. In fact, he said that fees were so exploitative that Herrod testified before the Senate Banking Committee in 2002 regarding abusive yield spread premiums.

Pomponio said that Washtenaw’s recent announcement it was closing its mortgage unit would not affect Herrod’s case because if the loan is sold to another company, her defenses to the enforcement of the loan remain in place.

Washtenaw’s attorney did not return calls for comment.

Lisa D. Burden is a legal analyst for MortgageDaily.com and holds a law degree from the University of Maryland. She is currently a freelance journalist who previously wrote for Institutional Investor publications and the Baltimore Daily Record.

e-mail Lisa at: burdenlisa@yahoo.com