$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
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
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.”
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
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
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.
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
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
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,”
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
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."
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.
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.
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.