Monday, April 29, 2013

Sixth Circuit Revives 2010 RICO Suit

The National Law Journal this past week reported that the U.S. Sixth Circuit Court of Appeals reversed a trial judge's July 2010 grant of summary judgment to the defendants on two Racketeer Influenced and Corrupt Organizations Act claims, reviving the borrower's civil racketeering claims against a lender, mortgage broker and two principal brokerage employees for allegedly inflating his home appraisal to push him unto a costlier mortgage.

The case, Wallace v. Midwest Financial & Mortgage Services Inc. concerned homeowner Harold Wallace's 2006 $425,000 refinancing through MortgageIT to pay for home improvements, the article said. "Broker Midwest hired an appraiser who valued Wallace's house at $500,000, nearly twice what he paid just two years earlier, and, as a result, he alleged, he ended up with a high-cost, adjustable-rate mortgage. Wallace claimed that MortgageIT paid Midwest a premium to steer borrowers into larger, higher interest loans."

Sixth Circuit Judge R. Guy Cole Jr. wrote that the question was whether a fraudulent scheme furthered by the appraisal proximately caused Wallace's financial injuries, and that "Once we accept that Wallace was an intended target of the defendants' alleged scheme to induce borrowers to agree to loans with high interest rates and other unfavorable terms—as we must at this stage in the litigation—the link between the scheme and the type of injury Wallace suffered is plain to see."

The article also said that Cole however also added that “the record offered essentially no support for Wallace's contention that MortgageIT manifested an agreement to commit an unlawful act," on which point the court sustained Eastern District of Kentucky Judge David Bunning. “[the district court],” the Sixth Circuit here explained, “did not rely on its faulty proximate-cause analysis to reach this conclusion. Instead, the court correctly noted that ‘yield spread premiums are not illegal per se under’ federal law, and found nothing in the record that suggested MortgageIT conspired to provide a specifically illegal yield spread premium in this case. More generally, MortgageIT had no obvious relationship or communications with Midwest Financial outside of the formal application process and payment of such premiums—certainly nothing on the order of an illicit agreement. At most, it might be said that MortgageIT knew of the appraisal based scheme given its review of the application materials and then agreed to the overarching objective by paying yield spread premiums. (Eastern District’s decision)

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