A mortgage group and an appraisal company faced allegations of violating the Truth in Lending Act (TILA) in the U.S. District Court in the Southern District of West Virginia.

The plaintiff filed a class action suit over how the companies handled the appraisal and subsequent refinancing of her marital home, alleging the mortgage company improperly interfered with a neutral appraisal.

The case is Mikayla Gregory, v. Toler Appraisal Group, LLC and Gateway Mortgage Group, LLP, No. 5:22-CV-00330, 2023 WL 2581995 (S.D.W. Va. Mar. 20, 2023).

The facts

Mikayla and Roger Gregory Jr. refinanced their marital home in Raleigh County, W. Va., in 2018. Mikayla used her credentials as an active-duty member of the military to obtain a beneficial loan through the Department of Veterans Affairs (VA) and sought to obtain a loan from Gateway Mortgage Group, LLP.

In the process of originating the loan, Gateway contacted Toler Appraisal Group to perform the appraisal. It sent Toler an appraisal request form labeled “VA Request for Determination of Reasonable Value” and stated Gregory was seeking a loan of $250,000 under a line titled “refinancing amount of the proposed loan.”

According to the complaint, Gateway’s inclusion of the proposed loan amount on the appraisal request interfered with what was to be an independent, neutral valuation of the property. As a result of this action, the value of the property and the principal of the loan were artificially inflated. Gateway never informed Gregory “of its efforts to influence the appraisal by passing on loan amounts,” and this was not discovered until April 2021, when Mikayla asked for the appraisal request form as part of discovery.

Toler appraised the property at $225,000 and a promissory note with a principal balance of $230,400 was executed in favor of Gateway. It was not until the Gregorys were legally separating that the allegedly inflated appraisal value was noticed.

During the separation proceedings, Roger stated the marital home was not on the land owned by the parties and described the property as unimproved land with a value of $5,000. A prior survey did confirm the home is within the boundaries, but indicated the property was 1.8 acres, materially less than what was reflected in the appraisal.

Pursuant to the separation agreement executed on Dec. 2, 2019, Mikayla was required to vacate the home and her ex-husband was awarded exclusive ownership and possession of the home. The loan at issue is unmodified, and Mikayla remains obligated to repay Gateway despite having no ownership interest or possession of the property.

Mikayla claimed if the property is materially smaller than what the appraisal stated, the loan exceeded the property’s fair market value, which she stated was closer to $198,000 at the time of the loan. She alleges the appraisal was not bona fide and failed to adhere to uniform standards of professional appraisal practice.

She also claimed Toler failed to confirm the home described in the appraisal was located within the boundaries of the subject property; materially overstated the amount of acreage of the subject property; conducted a faulty sales comparison; and made other errors in its report.

The first complaint was filed on April 21, 2020. There were a series of amendments, culminating in a third amended class action complaint approved by the court on July 22, 2022. Gateway moved to dismiss a state law cause of action and the TILA count of the complaint for failure to state a claim upon which relief can be granted.

The ruling

The state count Gateway sought to dismiss was for an illegal loan in excess of fair market value or residential property in violation of West Virginia Code §31-17-8(m)(9), which prohibits securing a primary or subordinate mortgage loan on a residential property in excess of the fair market value. Gateway asserted the claim failed because Gateway can utilize the government exception within the statute and it relied on a bona fide appraisal of an independent third party and therefore not subject to the provision. Gregory responded by stating the mortgage company read the government exception too broadly and Gateway cannot meet the elements of the statute’s affirmative defense at this stage of the proceedings.

According to the statute, it does not apply to any mortgage modification or refinancing loan made in participation and in compliance with the federal Making Homes Affordable program, or any other mortgage modification or refinancing loan eligible under any government sponsored enterprise (GSE) requirements or funded through any federal or state program or litigation settlement. Gateway argued this exception applied because Gregory’s cash-out loan was sponsored by the VA.

To find its holding on this matter, the court turned to how the statute treats GSE. It does not define the term, but when drawing from the context clues of the regulation in which it is used, the court stated it was in relation to residential mortgages. In that sense, a GSE is a private corporation chartered by Congress to provide stability in the mortgage market, assist in the provision of affordable housing, and increase liquidity of mortgage investments. These include Fannie Mae, Freddie Mac, and Ginnie Mae.

Because the VA is a department of the U.S. government, it cannot be considered a private corporation providing stability in the housing market. Therefore, the exception does not apply here, and Gateway’s argument failed.

Gateway subsequently asserted it can avoid liability under the statute because the loan was “funded through” a federal or state program. Gregory responded the VA did not fund her loan, only guaranteed or insured part of the loan proceeds. Again, the court turned to statutory definitions, stating the illegal loans provision did not otherwise define the terms “funded” or “funded through,” meaning the common definition is accepted as the legislature’s intent.

“The complaint does not allege that the VA provided the funds for the subject loan,” the court stated. “Rather, it is Ms. Gregory who pays for the mortgage, and the VA merely guarantees the loan. The verb ‘guarantee’ means ‘to undertake to answer for the debt, default, or miscarriage of.’ There is nothing in the complaint or otherwise to suggest that the VA’s program guarantee provides any funds to pay for the mortgage…. To read the definition of ‘funded through’ as Gateway urges would leave homeowners without protection merely because a government program assisted them in securing the mortgage, even though it never paid a cent of the loan.”

The court further stated the provision at hand is a remedial statute, meant to protect borrowers from certain lending practices. This, as well as all the mentioned factors above, determined Gateway was not eligible for the government exception to the state law.

Gateway also was unsuccessful in establishing it relied on a bona fide written proposal as an affirmative defense. The defense requires the lender show it relied “upon a bona fide written appraisal of the property made by an independent third-party appraiser, duly licensed or certified by the West Virginia Real Estate Appraiser Licensing and Certification Board and prepared in compliance with the uniform standards of professional appraisal practice.”

The complaint does not establish this, the court held. Rather, the complaint stated the opposite, as Gregory cast doubt on whether the appraisal was conducted in good faith, independently, or in compliance with uniform standards. Because the facts do not support this defense at this time, Gateway’s argument failed. The state claim survived the motion to dismiss.

The court then turned its analysis to the TILA allegations. The plaintiff asserted Gateway violated TILA by disclosing the proposed loan amount to the appraiser, as the statute makes it unlawful to engage in any act or practice that violated appraisal independence. An act or practice seeking to influence an appraiser or otherwise encourage a targeted value in order to facilitate the making or pricing of the transaction is a violation of appraisal independence.

Gateway claimed the TILA cause of action could not stand because it exceeds the regulation’s one-year statute of limitations; TILA does not prohibit the disclosure of a proposed loan amount; and disclosure is not a TILA violation because it was required by the VA. Gregory countered her action was not time-barred because of the discovery rule or equitable tolling, surrounding industry practices and history shows this type of disclosure is a violation, and disclosure was not mandated by the VA and even if it was, it does not supersede statutory obligations.

While the court held the discovery rule, which normally prevents the statute of limitations from beginning to run until the plaintiff in fact knows or reasonably should know of the wrong, does not apply to TILA (as other courts have established), the theory of equitable tolling preserved the claim for Gregory. She asserted the statute of limitations period was equitably tolled because of Gateway’s fraudulent concealment of the potential violation. Gateway argued she had not sufficiently pleaded the elements for the tolling doctrine, but the court disagreed.

“While the discovery rule prevents a claim from accruing and prevents the limitations period from beginning to run, equitable tolling extends the limitations period itself,” the court stated. “Usually, the ‘fraudulent concealment tolling doctrine is to be read into every federal statute of limitation.’ However, ‘[w]hen Congress makes a limitations period a jurisdictional prerequisite, then courts may not toll the limitations period on any equitable grounds.’ Thus, the question becomes whether TILA’s statute of limitations is a jurisdictional prerequisite.”

The court’s review found the provision does not express or imply the limitations period is a jurisdictional prerequisite. Therefore, the limitations provision was non-jurisdictional, and equitable tolling could be used to extend the limitations period. The next consideration was whether Gregory satisfactorily alleged enough elements to allow for equitable tolling.

To toll the statute of limitations due to fraudulent concealment, a plaintiff must establish the defendant fraudulently concealed facts that are the basis of the plaintiff’s claim and the plaintiff failed to discover those facts within the statutory period, despite the exercise of due diligence. Fraudulent concealment usually requires an affirmative act of concealment, and it is the plaintiff’s burden to allege these facts.

Gregory’s complaint provided sufficient allegations to permit equitable tolling, the court held. Specifically, her allegations that Gateway did not inform borrowers of its practice of providing appraisers with proposed loan amounts, and it was not until discovery in the underlying state claim did the plaintiff learn about the alleged improper appraisal report, were sufficient to establish a fraudulent act of concealment.

“The alleged violation and ‘trick’ of concealment amount to the following: Gateway would have a borrower pay for a third-party appraisal that was represented as independent and fair,” the court determined. “However, when communicating with the appraiser, Gateway would encourage the appraiser to reach a higher appraised value. The borrower was told the appraiser was independent and was not privy to the communications between Gateway and the appraiser, therefore allowing Gateway to eliminate suspicion that it was executing loans greater than the true market value.”

The court stated Gateway’s issue of whether Gregory exercised sufficient due diligence, was improper at this stage, as it is typically a jury issue “not amenable to resolution on the pleadings or at summary judgment.”

Gateway’s final argument, that the disclosure did not violate the statute because it was required by the VA and Gateway was only completing a required form, also failed. The court held this also to be a fact-specific determination that could not be determined at the pleading stages. The allegations stated in the complaint were sufficient for the case to proceed.