A federal court says the answer is “yes” in a decision reached earlier this month.

In the case, two residential mortgage borrowers are suing Tennessee Valley Federal Credit Union (“TVFCU”), as well as an appraisal firm and its two appraisers. The case involves a “recycled” appraisal of a home in Chattanooga, Tennessee. The defendant appraisers are alleged to have re-used a prior appraisal of the same property for a different lender, after changing the names and dates.

More particularly: the appraisers are alleged to have appraised the property for a bank for a loan to the property seller in September 2022. The proceeds of the loan were used by the seller to renovate the home. The value opinion was $415,000. Just a month later in October 2022, after completing the renovations, the owner of the property agreed to sell the property to the plaintiff borrowers for $441,000. The would-be purchasers applied for a loan with TVFCU. For the appraisal for the purchase loan, the credit union happened to retain the same appraisers who had appraised the property a month earlier for the bank.

The defendant appraisers then recycled their prior appraisal, allegedly changing only the names and dates and adding a new comparable sale. According to the complaint, while the appraisers’ new report indicated they had personally inspected the property on October 24, 2022, they “had not set on the Property since September 21, 2022” in connection with the prior appraisal for the bank. The defendant appraisers used the same photos as in their prior appraisal – accordingly, the “new” appraisal didn’t reflect the completed renovations. It concluded to the same $415,000 value. The defendant appraisers also allegedly stated in the 2nd report they had not appraised the property in the past three years.

Well, unfortunately for the defendant appraisers, the borrowers had seen the prior appraisal and quickly realized its re-use. They alerted TVCFU of the issues. One of the appraisers then reached out to the borrowers and allegedly admitted to them that he had not re-inspected the property for the “new” appraisal and offered to perform another appraisal. The credit union, however, allegedly directed the appraiser defendants to just change the effective date on the appraisal to the date of the appraisers’ actual inspection for the bank’s appraisal in September. The credit union then chose to use that appraisal – and denied the prospective loan based on “insufficient collateral” and property type. TVCFU told the borrowers “just accept the decision and move on.”

The borrowers did move on – they applied for a loan with a different lender who obtained an appraisal from different appraisers. This appraisal came in with a value of $445,000. The plaintiff borrowers allege in their lawsuit against TVCFU and the first appraisers that they incurred damages as a result of additional costs and fees and a higher interest rate on the new loan. Their claims include alleged violations by TVCFU of the appraisal independence requirements (“AIR”) in the Truth and Lending Act (“TILA”) (15 U.S.C. § 1639e) – while the plaintiffs have other claims in the case against both the credit union and the defendant appraisers, my focus here is on the alleged AIR violations.

The plaintiff borrowers allege that TVFCU violated the appraisal independence requirements in TILA in two ways: (1) by asking the appraisers to change the effective date of the appraisal; and (2) by failing to report the appraisers’ violations of USPAP to the state appraiser board. With respect to that second alleged violation, the appraisal independence requirements state:

“[a]ny mortgage lender . . . who has a reasonable basis to believe an appraiser is failing to comply with the Uniform Standards of Professional Appraisal Practice, is violating applicable laws, or is otherwise engaging in unethical or unprofessional conduct, shall refer the matter to the applicable State appraiser certifying and licensing agency.” 15 U.S.C. § 1639e(e).

TVCFU moved to dismiss these claims on the basis that the facts alleged by plaintiffs did not amount to AIR violations. In its decision, the court first noted that TILA, in general, provides for a “private cause of action” and also provides for statuary damages of “not less than $400 or greater than $4,000” per violation.

How did the court rule on the credit union’s motion to dismiss the AIR claims? On the claim that the credit union violated AIR by asking the appraisers to change the effective date, the court rationalized that this was not an AIR violation because it was not a request directed at the value and further that it was a permitted request to “correct errors.” (I certainly recognize that there are a lot more issues with what the appraisers allegedly did.) However, with regard to the credit union’s failure to report the appraisers’ alleged violations of USPAP to the state appraiser board, the court resolved that issue in favor of the borrowers (for purposes of the motion to dismiss). The court noted that while it’s difficult to see any actual monetary damages to the borrowers stemming from the credit union’s failure to report the appraisers, the plaintiff borrowers are still entitled to recover statutory damages for AIR violations. Here’s what the court said:

Plaintiffs have adequately alleged that TVFCU violated TILA by failing to report Appraiser Defendants for violating USPAP standards and may be entitled to statutory damages.

That ruling may come as a surprise to lenders and AMCs about compliance with the AIR requirement for mandatory reporting to state appraiser boards. Lenders and AMCs might want to take a closer look.

The case is worth reading for its other rulings with regard to ECOA and consumer fraud allegations – which were dismissed. The complete decision is available here: Edwards v. Tenn. Valley Fed. Credit Union, Memorandum Opinion, June 13, 2024.

Categories: Lender claims

Peter Christensen

I am an attorney. The matters that I handle and the clients whom I serve are focused on valuation services. My work ranges from the regulatory and structural details of providing valuation services to professional liability and disciplinary issues.