A North Carolina trial court has ruled that a lender is not responsible for inflated appraisal values created in order to support larger loans than a property was worth. This was despite the fact that the lender allowed the subdivision developer to hand-pick the appraisers and to control the appraisal process. Letting the developer control the appraisal process was a violation of North Carolina and federal law. When the subdivision went belly-up, with incomplete streets and sewers, everyone sued everyone else.
Property owners claimed that BB&T, the lender in the lawsuit, had an obligation to check that appraisals were accurate. Borrowers also claimed that it was illegal for the bank to allow the developer to control the entire appraisal process.
The trial judge, John Jolly, ruled that there were several problems with the case. One was that, although the borrowers complained about bogus appraisals, nobody said in their lawsuit that they relied on the appraisals. This is a technical defect that can, and did, prove fatal.
You must remember, however, that even if a lawyer knows to allege in a complaint that borrowers relied on a bank appraisal, proving it is a different manner. In reality, borrowers used to care about appraisals only insofar as they supported a loan request. Nobody much cared about the REAL value of things, as long as they could get their house and their loan. If somebody really did rely on a bank appraisal as an indication of value, and a decision to go forward with a loan, they might be able to reach a jury, and let a jury decide the case.
The other problem with the BB&T lawsuit was that the plaintiffs claimed BB&T violated North Carolina law when it allowed the developer to control the appraisal process. The court said that lenders ordinarily do not owe any duty to borrowers except the duties spelled out in the loan documents. I happen to know that’s not strictly true, but that’s why we have appeals courts. I think borrowers are entitled to rely on the integrity of a system that was designed to prevent banks from making large loans on inflated property values.
As a result of his findings, the North Carolina court threw the case out and allowed BB&T to proceed with foreclosures. I’m almost certain the borrowers will appeal.
If you’d like to know more about this lawsuit, you can click HERE for the trial docket. It lists all the documents filed in the lawsuit, including the judge’s rulings. You can download and read any of them you want. While we learn much from court decisions that rule in favor of borrowers, we can also learn much from the mistakes of others. As George Santayana famously said, “Those who cannot remember the past are condemned to repeat it.” The quote has often been re-phrased as “If we can’t learn from the mistakes of history, we are doomed to repeat them.”