By Jonathan Stempel
(Reuters) - New York's highest court allowed the state to pursue a lawsuit that accused First American Corp and its eAppraiseIT unit of colluding with the former Washington Mutual Inc to fraudulently inflate home values.
The Court of Appeals on Tuesday said federal law did not preclude New York State Attorney General Eric Schneiderman from pursuing claims alleging fraud and violations of rules meant to ensure independent real estate appraisals. It upheld a June 2010 ruling by an intermediate state appeals court.
The eAppraiseIT unit is now part of CoreLogic Inc, which was created when First American split last year into that company and First American Financial Corp.
Andrew Cuomo, Schneiderman's predecessor and now New York's governor, accused First American and eAppraiseIT in a November 2007 lawsuit of caving to pressure from Washington Mutual to use appraisers who provided inflated appraisals, to win more business.
Lenders that use inflated appraisals can sometimes make larger loans, including to borrowers who cannot afford them, and as a result collect higher fees.
First American and eAppraiseIT argued that only federal law applied to the appraisals, and that state regulators had improperly impeded Washington Mutual, the largest U.S. savings and loan prior to its 2008 failure, from funding home loans.
Writing for a 6-1 Court of Appeals majority, however, Judge Carmen Ciparick said the attorney general's authority to pursue state law claims would at most only "incidentally affect" the lending operations of a federal savings association. Thus, she said federal law should not pre-empt the state law claims.
Alyson Austin, a CoreLogic spokeswoman, said the Santa Ana, California-based company is disappointed by the decision, and "looks forward to being fully vindicated when this case is ultimately tried."
Danny Kanner, a spokesman for Schneiderman, said the decision recognized the importance of the state's role in preventing "fraud and abusive practices" in appraisals.
Washington Mutual failed in September 2008 amid heavy losses from tens of billions of dollars of risky home loans that it had made and kept on its balance sheet. JPMorgan Chase & Co bought the thrift's main banking operations.
In afternoon trading, CoreLogic shares were down 1 cent at $12.29, and First American Financial shares were up 31 cents at $11.47.
The case is Cuomo v. First American Corp et al, New York State Court of Appeals, No. 184.
(Reporting by Jonathan Stempel in New York; Editing by Gerald E. McCormick, Maureen Bavdek and Steve Orlofsky)