ALBANY — The New York State Court of Appeals on Tuesday cleared the Attorney General’s Office to pursue allegations that First American Corp. and its former subsidiary eAppraiseIT, inflated property appraisals under pressure from client Washington Mutual.
Then-Attorney General Andrew Cuomo brought the 2007 civil suit alleging the practice contributed to the national subprime mortgage crisis. Washington Mutual collapsed in 2008 and became the nation’s largest bank failure ever.
The Court of Appeals concluded federal law and regulations do not pre-empt the state claims alleging fraud and violations of real estate appraisal rules. Six top court judges ruled that Congress envisioned “a robust partnership with the states” in aiming to prevent real estate appraisal abuse.
The 1989 Financial Institutions Reform, Recovery and Enforcement Act, which followed the federal savings and loan crisis, “sanctions the establishment and use of state agencies dedicated to certifying and licensing appraisers and delineates requirements for using these appraisers in federally related transactions,” Judge Carmen Beauchamp Ciparick wrote.
Chief Judge Jonathan Lippman and Judges Eugene Pigott Jr., Victoria Graffeo, Theodore Jones Jr. and Robert Smith agreed.
In a dissent, Judge Susan Read said the suit challenges a bank’s federally regulated mortgage practices. The complaint outlines a shift from a business model where banks held loans repaid by borrowers to one where they sold security interests in aggregated mortgages in the financial markets and coerced or conspired with appraisal management firms to maximize profits, she wrote.
“The suit is pre-empted because, in substance, and particularly on the allegations before us, it challenges a thrift’s lending practices,” Read concluded.
Ciparick noted that Washington Mutual, then the largest nationwide savings and loan institution, retained eAppraiseIT to do independent appraisals and soon became its largest client, providing close to 30 percent of its business in New York. Citing the attorney general’s complaint, she said eAppraiseIT’s management initially resisted the bank’s coercion to adjust appraisals upward without justification, and the bank later allegedly directed the company to employ appraisers from a group previously selected by its own loan origination staff.
The company sought to have the state complaint dismissed, arguing that Congress passed laws intending to occupy the entire field of home lending.
Alyson Austin, spokeswoman for CoreLogic, said it split from First American in 2010 and operates eAppraiseIT as a service. The court Tuesday ruled only on the issue of jurisdiction, not the merits of the attorney general’s claims, she said.
“We look forward to being fully vindicated when the case is ultimately tried,” Austin said. “We also note that after four years of investigation, the attorney general recently dropped all damage claims against eAppraiseIT and First American CoreLogic.”
Danny Kanner, spokesman for Attorney General Eric Schneiderman, said the ruling was an important recognition of the state role in protecting New Yorkers from fraud and abusive practices in the appraisal industry.