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Mortgage Lending: 7.5.3.1 Overview

A variety of parties may be involved in property flipping schemes. Generally, it is a good idea to cast a wide net in naming defendants in a property flipping complaint. Including as many scam participants as possible may facilitate discovery from all parties, add deep pockets to the case, provide more parties to contribute to a settlement, and help present the complex and unfair scheme in the proper light to the judge or jury.

Mortgage Lending: 7.5.3.2 Lenders

While sellers are obvious defendants in property flipping schemes,563 a lender willing to participate in the fraud564 or one with sloppy underwriting565 is vital to all forms of property flipping.

Mortgage Lending: 7.5.3.4 Title Companies and Closing Agents

Title companies, closing agents, and attorneys have also been implicated in flipping scams.578 As one court found, property flipping “requires the assistance of an attorney who is aware of the fraud, chooses to look the other way, or who fails to supervise non-lawyer assistants engaging in the unauthorized practice of law.”579 Almost always, closing agents are acting as the lender’s agents, pursuant to the closing instructions prepared for them by the lender.

Mortgage Lending: 7.5.4 Possible Claims in Property Flipping Cases

Aggressive litigation and advocacy can usually preserve homeownership, or alternatively, force a discharge of the debt and payment of sufficient damages to allow the homeowner to move on. Practitioners should always explore what the homeowner wants (whether to keep the home or to move), the actual condition of the house, and the cost of repairs.

Mortgage Lending: 7.5.5 Damages in Property Flipping Cases

Actual damages in property flipping cases can be significant, even without punitive damages.598 When recoverable, a claim for emotional distress damages should be developed.599 Borrowers are not necessarily limited to rescission; courts have allowed rescission and the return of interest paid and other foreseeable costs associated with the fraud.600 These schemes will often support the award of punitive damages against one or more parties.

Mortgage Lending: 7.5.6 FHA Anti-Flipping Regulation

In an attempt to curb the use of FHA insurance in property flipping schemes, the FHA adopted guidelines designed to identify and exclude flipping transactions. Among other restrictions, the guidelines seek to hold lenders accountable for the quality of appraisals on properties secured by FHA-insured mortgages.607

Mortgage Lending: 7.6.2.2 Broker Price Opinions

A broker price opinion (BPO) is a determination of property value typically based on a drive-by exterior examination, public data sources, and recent comparable sales. Broker price opinions can be produced by real estate brokers, sales agents, or sales persons who are not qualified appraisers. They typically cost less than an appraisal and are used to determine the probable selling price of a property, often in the context of a defaulted mortgage or in the context of loan servicing and modifications.629

Mortgage Lending: 7.6.2.3 Automated Valuation Models

Automated valuation models (AVM) are computer programs that analyze data including comparable property and sales data to assign a value or range of values to a property.634 AVMs have been used as a backup to check the values shown in traditional appraisals and to conduct prequalification screening, loan underwriting, portfolio review, and loss-mitigation reviews. But they are increasingly being used as substitutes for appraisals where an appraisal is not strictly required.

Mortgage Lending: 7.6.2.4 Evaluations

In contrast to an appraisal, the person conducting an evaluation need not be licensed or have any formal training,643 although states may impose some requirements.644 An evaluation need not comply with the USPAP standards for appraisers and no particular format is mandated.

Mortgage Lending: 7.6.3.2 Appraisal Discrimination

It is not much of an exaggeration to say that racial discrimination is the original sin of the real estate appraisal industry. The Home Owners Loan Corporation’s color coded maps—marking communities of color in red and grading them “hazardous”—remain the most visible evidence.681 But racial bias permeated the appraisal practices of the day and continued to do so until after the 1968 Fair Housing Act. Valuation treatises and professional materials emphasized that appraisers should consider race when analyzing properties.

Mortgage Lending: 7.6.4.2 FIRREA

The first federal law regulating real estate appraisals was Title XI of the Financial Institutions, Recovery, Reform, and Enforcement Act of 1989 (FIRREA), entitled “Real Estate Appraisal Reform Amendments.”691 Title XI prohibits financial institutions692 and the GSEs (Fannie Mae and Freddie Mac) from purchasing an appraisal from anyone except a state-licensed or certified appraiser.693 (Certified appraisers have additional training.) The Act

Mortgage Lending: 7.6.4.3 Uniform Standards of Appraisal Practice (USPAP)

As explained in § 7.6.4.2, supra, Congress has designated “The Appraisal Foundation” as the official standard-setting body for appraisals in the United States. The Foundation’s Appraisal Standards Board issues those standards in a volume called the Uniform Standards of Professional Appraisal Practice (USPAP). The Board also issues advisory opinions interpreting the standards.

Truth in Lending: 11.7.3.5 Special Statutory Damages for Violation of Dodd-Frank Property Appraisal Requirements

The Dodd-Frank Act added new requirements for appraisals when a creditor extends credit in the form of a “higher-risk mortgage.”862 The statute includes a special statutory damage award for violations:

In addition to any other liability to any person under this title, a creditor found to have willfully failed to obtain an appraisal as required in this section shall be liable to the applicant or borrower for the sum of $2,000.863

Truth in Lending: 9.5.2 Annual Percentage Rate Trigger for Higher-Priced Loan Protections

A first-lien loan secured by the consumer’s principal dwelling meets the APR trigger for HPMLs if its APR exceeds the average prime offer rate for a comparable transaction by 1.5 or more percentage points.488 For “jumbo loans,” loans (those with a principal amount exceeding the maximum loan size authorized for Fannie Mae and Freddie Mac), the rate trigger is 2.5 percentage points.489 The APR on a subordinate-lien loan must exceed the average prime offer rate for a comparable transaction by 3

Truth in Lending: 9.5.4.1 Overview

Regulation Z imposes four restrictions on loans meeting the APR trigger for higher-priced mortgages:

  • • Ability-to-repay restrictions;
  • • Limits on prepayment penalties;
  • • Escrow requirements; and
  • • A prohibition on evading these restrictions by structuring the loan as open-end credit.

Truth in Lending: 9.5.4.6.1 General

TILA, as amended by Dodd-Frank, prohibits creditors from making “higher-risk mortgages” without obtaining a written appraisal that meets certain requirements.529 When the CFPB and other federal banking regulators adopted a regulation implementing this requirement, they decided to use the existing term “higher-priced mortgage loan,” rather than creating a separate definition for “higher-risk mortgages.”530 The appraisal rule requires creditors to use a licensed or certified appraiser who prep

Mortgage Lending: 7.6.4.5 Appraisal Review, Supervision, and Independence

FIRREA has the express purposes of ensuring that:

Federal financial and public policy interests in real estate related transactions will be protected by requiring that real estate appraisals utilized in connection with federally related transactions are performed . . . by individuals whose competency has been demonstrated and whose professional conduct will be subject to effective supervision.716

Mortgage Lending: 7.6.4.6 Reconsideration of Value

When there is a problem with an appraisal that affects the valuation of the property, the one who ordered the appraisal may ask the appraiser to take a second look. This process is called requesting a “reconsideration of value” (ROV). Because the prospective lender is most often the one who orders an appraisal, homeowners or borrowers who disagree with a valuation must direct their request to the lender. Upon receiving a request for a reconsideration of value, the lender will evaluate it and decide whether to forward it to the appraiser.

Mortgage Lending: 7.6.5.1 Background

The rules for when an appraisal is required are an overlapping mix of each lender’s own policies, banking regulations, secondary market requirements, and agency guarantor rules. Nevertheless, despite repeated evidence that valuation problems pose a threat to borrowers and the financial system, the threshold for requiring an appraisal has steadily been weakened from when Title XI of FIRREA was enacted.

Mortgage Lending: 7.6.5.2 Current Standards for When an Appraisal Is Required

The current standards for when an appraisal is required vary widely depending on the value and location of the property, who regulates the lender, and who will purchase, insure, or guarantee the loan. And even then, the lender itself may require an appraisal where no other requirement would.

In 2018, Congress amended FIRREA to add an exemption for certain loans in rural areas.754 Federally regulated lenders are not required to obtain an appraisal under the following conditions:

Mortgage Lending: 7.6.6.1 What to Look For

Inflated values are typically achieved by misrepresenting the condition of the property, by using false comparables, such as sales of other flipped properties, or omitting key information about the sales transactions, such as a sale of the property within the previous year. Appraisers may overstate how many square feet are within a building, attach pictures of a different house, or provide a false or misleading floor plan. Appraisers may also falsely describe the neighborhood as one that is stable or has high home values, when in fact home values are low and falling in the neighborhood.

Mortgage Lending: 7.6.6.2 Getting the Original Appraisal

For loans with application dates after January 18, 2014, the Equal Credit Opportunity Act requires that borrowers be provided with a copy of the appraisal, at no cost.774 Borrowers are entitled to a copy of any appraisal done, even if their application for credit is ultimately withdrawn,775 so it may be worth exploring with a borrower whether there were prior applications for which an appraisal might have been done.