Monday, September 26, 2011

TCF National Bank Sues AMC Over "Evaluations"


Appraisal management companies (AMCs) -- and individual appraisers  themselves -- have avoided the brunt of mortgage-related litigation and  losses stemming from the lending crisis.  Both AMCs and appraisers have not been forced to defend against 98%+ of the potential  liability claims that lenders might have tried to press about allegedly faulty appraisal work performed during the mortgage boom years.  There are organizational, practical and legal reasons for this.

However, although late, and perhaps too late with regard to certain stale claims, the AMC liability train made a stop last week at another large AMC.  On September 21, 2011, TCF National Bank filed a complaint in federal court in Minnesota against Market Intelligence, Inc. The bank also sued LSI Appraisal, LLC, Lender Processing Services, Inc. and Fidelity National Information Services, Inc. as alleged successors in interest to the company.  Coincidentally, I was in St. Paul, Minnesota on that same day, teaching a few appraisers how to prevent liability.

The lawsuit filed by TCF National Bank is not about "appraisals" in the USPAP sense but rather
about the slippery subject of "evaluations" which are often performed by real estate agents and brokers, not necessarily appraisers.  In this case, the evaluations were a product supplied by Market Intelligence, and now supplied by LSI Appraisal, called Field Asset Verifications (or FAVs).  The contract between Market Intelligence and TCF National Bank described this "evaluation" product as:



LSI Appraisal continues to offer the FAV as one of its current alternative appraisal products.

Market Intelligence delivered the Field Asset Verifications at issue to TCF National Bank in 2002-2005 for 2,989 mortgage loans (primarily HELOCs) with a principal balance of approximately $300 million.  TCF National Bank stopped ordering them in August 2005.  It alleges that it more recently discovered that many of the Field Asset Verifications "grossly overestimated the value of properties" that are now in default or foreclosure.  These are TCF National Bank's basic allegations about the allegedly faulty nature of these evaluations:



Based on those allegations, TCF National Bank has asserted legal claims against Market Intelligence for, among other things: negligent appraisal, gross negligence and fraud.  TCF National Bank seeks compensatory damages of more than $3 million, as well as other unspecified relief.  A full copy of the complaint can be found here on appraiserlaw.com.

It seems that TCF National Bank's filing of this lawsuit at this time may have been prompted partly by the FDIC's lawsuit against LSI Appraisal and Lender Processing Services filed in May.  It's clear that TCF National Bank sat on its hands for years before filing this case.  Even based on what is alleged in the complaint, the bank has known about the problems with these loans and the "evaluations" for 4-5 years.  The bank also alleges that it made a formal demand for damages to Market Intelligence over three years ago in August 2008 and that it supplied information about its losses to Market Intelligence at that time (and that Market Intelligence never responded).  There will be statute of limitations issues to be argued by Market Intelligence, LSI Appraisal and Lender Processing Services to be sure.

This case touches on a number of issues that appraisers and regulators have been paying attention to lately.  One such issue is whether the evaluations at issue were appraisals within the meaning of various states' laws and FIRREA.  TCF National Bank is asserting that the evaluations were appraisals under Minnesota law and is suing the defendants as if there is no distinction between an evaluation and an appraisal.  This is not the first time that this issue has come up regarding alternative appraisal products for the defendants -- Market Intelligence litigated this issue in relation to certain AVM products with the Oregon ACLB about 10 years ago.  As a separate matter, filing this case is not without risk to TCF National Bank itself -- the bank may be exposing itself to liability to third parties for extending loans based on evaluations it now says were flawed and of lower accuracy than "full appraisals."