$85 Million Settlement-
Appraiser Whistleblower Lawsuit
by Isaac Peck, Editor
In what many see as a win for appraisers, as well as those lenders and appraisal management companies (AMCs) that do follow
the law, Fifth Third Bank has agreed to pay nearly $85 million as part of a settlement with the U.S. Department of Justice (DOJ). The case deals primarily with fraudulent appraisal practices. The lead whistleblower in the case is George Mann, Fifth Third’s
former chief appraiser.
The settlement is the latest in a string of appraiser whistleblower lawsuits that highlight unethical and fraudulent practices that violate appraiser independence and perpetuate appraisal fraud. Mann follows in the footsteps of Kyle Lagow, of Countrywide, who
received $14 million in a whistleblower case that led to a $1 billion settlement between Bank of America (BoA) and the DOJ, and Robert Madsen, who received $56 million for his part in a $16.65 billion settlement, also with BoA (Interview:
Appraiser Who Brought Down Countrywide).
Mann, and his co-claimant John Ferguson, will receive seven and one-half percent (7.5%) for their part in the Fifth Third suit as whistleblowers, which calculates to a tidy $6,368,326 before lawyers’ fees and taxes. The lawsuit was filed under the
qui tam or whistleblower provisions of the False Claims Act, which allows private parties to sue on behalf of the United States when they
believe a company has submitted false claims for government funds.
Mann declined to comment for this story. Mann’s initial complaint was filed in June 2011, meaning that it took over four years to finally reach a settlement. Throughout the struggle, Mann writes that he often listened to Tom Petty’s song “I won’t back down,”
advising appraisers to “give it a listen anytime someone wants you to compromise your ethics.”
Fraud, Pressure and Fees
Similar to other high-value whistleblower settlements, large portions of the case have been sealed by the order of a federal judge. However, Mann’s amended complaint remains public and contains many scenarios that will surely sound
familiar to appraisers.
Mann was hired in 2004 to be Chief Appraiser and Vice President of the Real Estate Valuation Group (REVG), the valuation arm of Fifth Third Bank. His tenure lasted until September 2008 when he was terminated.
While the initial suit focuses on commercial appraisals and commercial loans, it also alleges that fraudulent and misleading appraisals were used by Fifth Third to qualify for funding from the Troubled Asset Relief Fund (TARP), the Federal Deposit Insurance
Corporation (FDIC), Fannie Mae, Freddie Mac, and other federal funding and securitization programs.
The practices described in the suit reflect the worst of the industry’s abuses, echoing the same issues that appraisers continue to encounter and speak out about today: pressure to meet value, unreasonable turn times and low fees. According to the suit: “From
2004 through today, loan officers instructed, coerced, and/or intimidated staff into obtaining appraisals at below-market fees and with unrealistically short delivery times, which resulted in questionable valuations. In addition, lenders used the same methods
of intimidation to pressure REVG staff and/or appraisers into raising values so loan conditions could be met.”
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According to the suit, as part of its scheme to commit appraisal fraud, Fifth Third also allowed loan personnel to close
loans prior to the completion of an appraisal, hand-selected favored appraisers at times, and retaliated against impartial appraisers when they would not value properties high enough.
Mann began reporting Fifth Third’s violations to the Federal Reserve in 2005 and continued sending reports until 2008 when he was terminated, according to the suit. Mann and Ferguson estimated that the degree of overvaluation was at least 20 percent of the
Bank’s $20 billion commercial real estate loan portfolio, causing Fifth Third’s loan portfolio to be overvalued by $4 billion.
This overvaluation, according to the suit, means that Fifth Third misrepresented its financial position and consequently defrauded the Federal Reserve, the United States Treasury, Fannie Mae, Freddie Mac, and the Federal Housing Administration.
While most appraisers are familiar with the typical motivations that cause pressure on an appraiser to “close the deal,” this suit offers a fresh look at another reason banks are motivated to overvalue their collateral. Specifically,
the suit alleges that the misleading and overvalued appraisals were used, in part, as a mechanism for reducing Fifth Third’s reserve obligations for the Federal Reserve.
For instance, if a bank reports to the Federal Reserve that its loans are well collateralized and of low risk, the Federal Reserve then allows the bank to keep a lower amount on reserve. On the other hand, if a bank’s loans are under-collateralized and the
risk is high, the Federal Reserve requires the bank to hold more money in reserve to protect the government’s interests.
Consequently, banks that want to reduce their reserve obligations and have more cash on hand, have a motivation to actively over-report the value of their loan portfolios, as this lowers the amount that the Federal Reserve requires to be placed in reserve.
This, the suit alleges, is exactly what Fifth Third did, systematically procuring “erroneous and inflated” values which caused the Federal Reserve to underestimate the bank’s risk and allowed the bank to reduce its reserves.
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Of interest to many who read this settlement closely is the fact that John Ferguson was named as a co-claimant in the suit and received a portion of the $6.34 million whistleblower settlement, despite the fact that Ferguson never worked
at Fifth Third Bank. Ferguson is a self-described “career whistleblower” who initially filed a whistleblower lawsuit against Bank United in the early 2000s. While his whistleblower lawsuit was not successful due to Bank United declaring bankruptcy, Ferguson
learned so much about the process that he decided to become a fulltime whistleblower, helping others build cases against big banks and other organizations that have defrauded the government.
Ferguson says he brings experience to the process. “I call myself a professional whistleblower. I help put all the bits of information together so that it all fits in this kind of lawsuit. It’s a long and painful process,” says Ferguson.
The case developed from a suit primarily focused on commercial appraisals, and yet it culminated in a settlement over residential FHA loans. Ferguson says one of the reasons for this may be the complexity of the commercial loans and appraisals. “George and
I have been the only whistleblowers who filed on commercial lending. The government already understood the residential side, but I don’t think they were as familiar with the commercial side. It was a little disappointing because commercial real estate was
hit just as hard as residential,” says Ferguson.
Ultimately, the government decided to focus on residential lending, discovering that hundreds of FHA loans were too defective to qualify for FHA insurance. The $85 million settlement with Fifth Third compensates the government for over 1,400 loans that were
insured through the FHA loan program and were discovered to be defective.
Being a Whistleblower
While the prospect of million dollar settlements sounds enticing to many, the reality of being a whistleblower is not pretty. Whistleblowers frequently speak of a long and lonely struggle for justice, including being forbidden from
discussing the suit with anyone, including immediate family or friends.
Ferguson says that being a whistleblower is not for everyone. “It’s hard to sit there for four or five years sometimes, not knowing if you’re going to get anything out of it or not. A whole host of negative things can happen to a whistleblower, including getting
blackballed by the industry,” says Ferguson.
For those appraisers who are aware of lenders or other organizations that are brazenly violating the law and are interested in blowing the whistle, Ferguson points out that success depends on documentation. “Your word is not enough.
The government has to have a lot of documentation before they will get involved: people, places, and things. When did it happen, who did it, how did it happen, why is it wrong, to what extent is it wrong, and what damages might there be to the government?
Appraisers witnessing wrongdoing would be wise to save everything: appraisals, emails, phone numbers, you name it,” says Ferguson.
The fact that Mann had such detailed and quality documentation on the fraud was a critical element that helped the Fifth Third case succeed, according to Ferguson.
Lastly, Ferguson says appraisers who are interested in blowing the whistle should consult with an attorney. “There are a
lot of whistleblower attorneys who will take your call if you believe you have a case. You just need to know how to talk to them about it. I’d be happy to talk to appraisers and lead them in the right direction, maybe point them towards a lawyer,” says Ferguson.
Linda J. Stengle, one of the attorneys representing Mann and Ferguson, encourages appraisers to step forward. "The False Claims Act, and to a lesser extent, the SEC whistleblower program, can really help protect qualified appraisers who are doing their jobs
properly. Appraisers who are aware of large scale USPAP and FHA violations, for example, should investigate whether a whistleblower action will work for them."
Appraisers on Frontline
Even inside the industry, appraisers are frequently blamed for going along with the widespread fraud that contributed to the real estate bubble and crash of the early 2000s. However, the Fifth Third settlement is a reminder that
appraisers have often been on the frontlines in the fight against real estate and mortgage fraud. Like Kyle Lagow or George Mann, the rank-and-file appraiser frequently stands alone against illegal pressure and is too often the lone voice of integrity defending
the public trust. Lately, appraisers seem to be the ones blamed for the failures and fraud on the part of lenders that led to the real estate collapse.
Richard Hagar, SRA trains lenders and AMCs on policies and procedures, as well as helping residential appraisers understand their rights. Hagar believes the settlement is good for the industry because it shows that there are consequences when banks violate
the law. “Appraisers are often bullied and pushed around. The whistleblower statute, which was reinforced under Dodd-Frank, gives appraisers some muscle to stand up to bullies,” says Hagar.
Hagar continues, “Appraisers have been on the frontlines of many of the whistleblower lawsuits regarding real estate fraud that have been made public, and I can tell you that multiple whistleblower cases involving appraisers are currently ongoing. Appraisers
don’t win every case and we often only hear about the victorious ones since qui tam suits are filed under seal. Even still, fighting back against these illegal practices is the only way we can stop this,” Hagar said.
Here’s to those appraisers who refuse to compromise and “won’t back down.”
From the Appraisal Institute
The Federal Housing Finance Agency has delayed implementation of a key component of the Uniform Mortgage Data Program for the fourth time since the program was initiated three years ago, the agency announced Dec. 14.
Lenders and appraisers now have until July 23, 2012, to implement the UMDP’s Uniform Loan Delivery Dataset, according to the agency’s news release. ULDD implementation, previously scheduled to go into effect March 19, 2012, now allows
for voluntary implementation April 23, 2012.
UMDP was designed to streamline loan and appraisal data collected by government-sponsored enterprises Fannie Mae and Freddie Mac.
The ULDD will replace the current 2,000-character flat files that Fannie and Freddie require from lenders and appraisers. Loan origination system vendors have been working to update processes and functionality to meet the new requirements
for more than a year.
FHFA indicated that the revised ULDD deadline will not impact deadlines for the new Uniform Appraisal Dataset electronic data report and its associated delivery module, the Uniform Collateral Data Portal. Lenders and appraisers must
submit appraisal reports in the new format for any loans sold on or after March 19 that have application dates on or after Dec. 1.
States that rely on judicial foreclosures are taking six months longer to clear delinquent loans than non-judicial states, according to the new Mortgage
Monitor Report released Nov. 1 by data and analytics firm Lender Processing Services.
States that require judicial foreclosures are swamped with large inventories of problem homes that take 761 days to move from last payment to a foreclosure
sale. Foreclosure sales in non-judicial states take roughly 580 days. LPS’ findings reflect activity through the end of September.
The rate of new problem loans increased sharply over the last two months, with 1.6 percent of loans that were current six months ago now 60 or more days
delinquent or in foreclosure. Foreclosure timelines continued to increase across the board — almost 72 percent of loans in foreclosure have not received a payment in a year or more.
Seventy percent of the top 10 states with the highest percentage of foreclosures are judicial foreclosure states and accounted for nearly 7 percent of the
entire active loan count.
A Sept. 27 report from the inspector general for the Federal Housing Finance Agency accused Freddie Mac of missing opportunities to recover billions
in claims over defaulted mortgages, and suggested that a $1.3 billion settlement with Bank of America over bad-loan claims was inadequate, The Wall Street Journal reported.
In its report, the inspector general suggested that Freddie hadn't been aggressive enough in reviewing loans and alleged that the government-sponsored
enterprise had been lax in order to preserve business relationships with top customers like Bank of America.
In California, all appraisers are licensed, including trainees, so the stats are useful for computing changes. Stats in California were available from 1/1/07 (the peak) to 9/2/11.
Who left? Mostly new appraisers in the past 5 years who didn't get certified
The FDIC is now contending that independent contractor appraisers are the legal agents of appraisal management companies (AMCs) in both of its cases against LSI Appraisal and CoreLogic. Based on this contention, the FDIC asserts that the AMCs should be liable
for all damages attributable to the alleged negligence of their panel appraisers. The FDIC first asserted this argument in a brief filed in its case against Lender Processing Services and its AMC LSI Appraisal (see the update on that case
here). It is now making the same argument in its case against CoreLogic, parent of the AMC formerly known as eAppraiseIT. In sum,
the FDIC's contention is that an AMC "is vicariously 'responsible and liable' for the torts committed by the individual appraisers it retain[s] as a matter of black letter principal/agency law."
While this is just one of many claims by the FDIC against the AMCs, this issue would have the most wide-ranging impact on the appraisal industry, if the FDIC prevails on it.
Attorneys Jim Bordas and Jason Causey took on a large national lender, Quicken Loans,
in the matter styled Brown v. Quicken Loans, Inc., et. al. The case began when Bordas and Bordas set out to defend Lourie Jefferson and Monique Brown from foreclosure proceedings initiated
by their mortgage lender, Quicken Loans. During the course of this defense, Bordas & Bordas discovered abusive and predatory conduct on the part of Quicken Loans. Bordas & Bordas filed a twelve-count Complaint on behalf of Ms. Jefferson and Ms. Brown detailing
predatory lending practices against Quicken Loans and its appraiser in the Circuit Court of Ohio County, West Virginia.
Circuit Court Judge Arthur M. Recht of Ohio County, W.Va. concluded an 8-day trial
that spanned 17 months by awarding punitive damages, attorney fees and costs in the amount of $2.7 million to these Wheeling homeowners. This award brought the total verdict in the case against Quicken Loans, Inc. to over $3 million. Bordas & Bordas also obtained
a settlement for a confidential amount with the real estate appraiser. The case encapsulates much of what lead to the collapse of the housing market and economy as a whole. In particular, the Court found the lending practices of Quicken Loans to be unconscionable
based in part upon Quicken's utilization of a highly inflated appraisal in making the loan. The Court went on to find that Quicken Loans defrauded the homeowners by misleading them into paying excessive loan origination fees; falsely promising to favorably
refinance the loan in the near future; and concealing an enormous balloon payment from its own borrowers.
Economists, builders and mortgage analysts are predicting the weakened economy will depress home prices for years.