The opinion of the court was delivered by: Charles Edward Ramos, J.
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the printed Official Reports.
Defendants First American Corporation (First American) and First American eAppraiseit (EAI) (together, Defendants)*fn1 move to dismiss the complaint on the grounds that it is preempted by federal banking law and regulations, and for failure to state a cause of action (CPLR 3211 [a] , ).
This motion raises the issue of the preemptive effect of federal banking regulations on state law claims that seek to enforce standards of real estate appraiser independence and for fraudulent business practices arising out of the violation of those standards.
Plaintiff, The People of the State of New York, by Attorney General Andrew Cuomo (AG), instituted this action on the basis of Executive Law § 63 (12), General Business Law § 349 and the common law against First American and EAI. First American provides real estate appraisal services to savings and loans institutions, banks, and other lenders through its wholly-owned subsidiary, EAI.
Non-party Washington Mutual, Inc. (Wamu) is the country's largest savings and loan. According to the complaint, Wamu is EAI's largest client, providing nearly 30 percent of its New York customers.
The AG alleges that, in the course of its relationship with Wamu, Defendants permitted EAI's appraisers to be pressured into changing appraisal values that were too low in order to allow certain loans to proceed to closing. This conduct compromised EAI's independence in providing unbiased valuations, to the detriment of consumers, and amount to deceptive business practices under New York and federal law.
The AG points out that, in an unprecedented era of foreclosures and economic distress, the independence and integrity of the real estate appraisers who determine the value of loan collateral, the home, is of utmost importance. Undoubtedly, appraisal independence insures that a mortgage or home-equity loan is not under-collateralized, and protects borrowers from being over-extended financially and lenders from loss of value in a foreclosure proceeding.
Further, the AG highlights that mortgage brokers and lenders' loan staff are paid on commission, the amount of which typically depend on the number of loans closed and on the size of the loan, a reality that permits an environment where appraisers are incentivized and pressured to value a home at the maximum possible amount, regardless or whether the appraisal accurately reflect the home's value.
In this environment, the AG alleges that Defendants' independence, required under federal and state regulations, was unlawfully compromised.
According to the complaint, in the spring of 2006, Wamu retained two appraisal management companies- EAI and its top competitor, Lender's Services, Inc. (LSI).
EAI employed both in-house and third-party fee appraisers, including a number of "preferred appraisers" identified by Wamu, to conduct appraisals on Wamu loan applications. Additionally, EAI allegedly hired approximately 50 former Wamu appraisers as staff appraisers, and gave them the authority to override and revise the values set by its in-house and third-party appraisers. In total, one-third of EAI's staff appraisers are former Wamu employees.
Pursuant to contractual arrangements between Wamu and EAI, Wamu could challenge an appraiser's conclusions by requesting a "reconsideration of value" (ROV), when Wamu disagreed with an appraised home value set forth in an EAI appraisal report.
Shortly after Wamu retained EAI, its loan production staff allegedly began complaining that the appraisal values provided by EAI appraisers were too low in value to permit the loans to close. EAI's president told Wamu executives that "We need to address the ROV issue ... The Wamu internal staff we are speaking with admonish us to be certain we solve the ROV issue quickly or we will all be in for some pretty rough seas" (Complaint ¶ 30).
The following week, EAI's executive vice president explained to its president that Wamu's loan officers routinely pressured EAI appraisers, specifying the exact value that they needed or asking for several ROVs on the same property. He indicated that it amounted to "direct pressure on the appraiser for a higher value without any additional information" (Complaint, ¶ 31).
During the latter part of 2006, Defendants frequently discussed this growing pressure from Wamu. Wamu allegedly indicated that it would be interested in expanding its business relationship with Defendants "if the appraisal issues are resolved" (Complaint, ¶ 34).
In a December 2006 e-mail, one EAI executive told his colleagues that growing criticism from Wamu stemmed from the fact that "values are coming in lower with EAI" than with its top competitor (Complaint, ¶ 36).
In February 2007, Wamu allegedly directed EAI to stop using panels of staff and fee appraisers to perform Wamu appraisals, and instead demanded that EAI use appraisers selected by Wamu's loan origination staff. EAI explained to First American Wamu's motives for demanding the change: "Performance ratings to retain position as a Wamu proven appraiser will be based on how many come in on value, negating a need for an ROV" (Complaint, ¶ 38).Ultimately, EAI capitulated to the pressure, in violation of appraisal independence standards. In a February 2007 e-mail, EAI indicated to First American that "we have agreed to roll over and just do it" (Complaint, ¶ 41). In an e-mail from EAI president to Wamu executives, he allegedly indicated that "Wamu proven appraisers bring the value in a greater majority of the time... I am fine with that, of course, and will happily assign Wamu orders to Wamu proven appraisers instead of eAppraiseit's approved panel appraiser whenever possible" (Complaint, ¶ 42).
Internally, EAI allegedly began to consider the legal implications of its compromise of appraiser independence standards. An EAI executive vice president warned that "it may be that the OTS [Office of Thrift Supervision] is OK with WAMU's current way (maybe) but the new way seems to be quite a stretch" (Complaint, ¶ 45). In an April 2007 e-mail, an EAI executive vice president explained that "we as an AMC need to retain our independence from the lender or it will look like collusion ...