Borrower Can’t Blindly Rely on Lender’s Appraisal, Court Rules

Bradley Arant Boult Cummings LLP

A June 19, 2018, decision by the North Carolina Court of Appeals will likely make it more difficult for borrowers in the Tar Heel State to sue on the claim that their mortgage originator misled them as to their home’s value. In Cordaro v. Harrington Bank, FSB, the Court of Appeals underscored the need for borrowers to show they reasonably relied on the lender’s appraisal as a predicate for claims based on an allegedly inflated valuation. To demonstrate such reliance, the court held, the borrower must either show that he made an independent inquiry as to the value of the home or that he was prevented from doing so.

The plaintiff in Cordaro alleged various tort and contract claims against the lender based on a 2012 appraisal that substantially overvalued the plaintiff’s property: the appraiser selected by the lender valued the home at $1.15 million, but a valuation four years later found the home’s value was only $765,000. The court found that each of the borrower’s tort claims required evidence of the plaintiff’s justifiable reliance on the appraisal.  Although past decisions by the Court of Appeals and North Carolina Supreme Court rejected suits with insufficientallegations of reliance on an inflated appraisal, the Cordaro court acknowledged that the plaintiff’s suit was factually distinguishable. Here, the plaintiff alleged he had a verbal agreement with his builder to cancel a contract to build the home if it did not appraise for the value of the lot plus the cost of construction, and the plaintiff told the bank’s loan officer that he would not go forward with the loan if the house did not appraise for a sufficient value. Nevertheless, the court affirmed the trial court’s dismissal of the plaintiff’s complaint, holding that such reliance could not be justifiable unless the plaintiff were to allege “either that he undertook his own independent inquiry regarding the validity of the Construction Appraisal or that he was somehow prevented from doing so.” The plaintiff could not blindly rely on an appraisal conducted by the bank for its own underwriting purposes.

Cordaro suggests that the circumstances in which a lender can be sued for an allegedly faulty appraisal are quite narrow. The decision would bar virtually all claims for borrowers who do not obtain an independent appraisal of their property. At the same time, it is unlikely that a borrower who obtains her own independent valuation would thereafter rely on the lender’s appraisal. Assuming the decision withstands any further challenge, it should provide an effective argument for lenders seeking dismissal of similar suits at the pleading stage.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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