In Wallace v. Midwest Fin. & Mortg. Serv., No. 12-5208, 2013 WL 1729587 (6th Cir. April 23, 2013), Harold Wallace, a subprime mortgage borrower, brought suit against, among others, the lender (MortgageIT) and the broker (Midwest Financial), claiming that the defendants fraudulently appraised the value of his home to force him into a high-cost, adjustable rate mortgage. The district court granted summary judgment to the defendants, finding that Wallace had not shown that the fraudulent appraisal proximately caused his injuries.
Wallace was interested in building out his basement in a project that would cost approximately $42,500. In order to obtain the funds, Wallace intended to do a cash-out refinancing, which would cover the amount of the current mortgage he had on the home, as well as the additional funds, totaling approximately $422,500. Wallace approached Midwest Financial about securing these finances. Part of the assessment required an appraisal of Wallace’s home. Midwest chose to use a company, which allegedly often rubberstamped the appraisal amount that Midwest desired. In this instance, the appraisal of Wallace’s home came to $500,000 – about $125,000 more than its true value. As a result, Wallace accepted what he believed to be favorable terms on a $425,000 loan. In reality he was agreeing to an adjustable rate mortgage, the payments of which would eventually become too large and force him into bankruptcy.
Subsequently, Wallace brought RICO claims under the theory that mail fraud was committed when the inflated appraisal was delivered through the mail, giving Wallace the illusion that he had equity in the home against which he could borrow the amount needed to fund his project. Federal RICO claims require that the alleged criminal act proximately cause the plaintiff’s injuries. The district court found that Wallace’s injuries were not proximately caused by the inflated appraisal, but rather the terms of the adjustable rate mortgage. As the alleged criminal act did not proximately cause the plaintiff’s injuries, Wallace’s claims were dismissed.
On appeal, the Sixth Circuit reversed. It first outlined the proximate cause standard, which considers how directly the defendant’s actions led to the plaintiff’s injuries. The court noted that this inquiry often gets muddled with cases involving mail and wire fraud, but that, ultimately, the question was not whether Wallace actually relied on the allegedly inflated appraisal, but whether the scheme furthered by the fraudulent appraisal caused the injury.
The Sixth Circuit determined that under the directness standard, such a causal connection was plain to see. It noted that Wallace’s confidence in his ability to afford a larger mortgage might have led him to agree to terms unfavorable to him, and that at such an early stage of litigation, a question of fact had been raised as to whether the scheme was enhanced by the fraudulent appraisal leading to Wallace’s injury. Finally, the Sixth Circuit held that the district court did not give sufficient weight to the importance of the appraisal in the refinancing context, and further chastised the lenders for being as “cavalier” as they had been during the mortgage crisis, leading to situations such as the one involved in this case.