Borrowers Blame National City for Negative Equity

The scheme was concocted in 2004 by Coast Bank, Construction Compliance Inc. and Jesse Battle III, the owner of the small home builder, according to a copy of the complaint provided by the plaintiffs’ attorney, Alan Tannenbaum.

Investors, who were solicited to purchase residential and home packages in Florida with no down payment, were promised big profits and told that the builder would make interest payments on the loans, the lawsuit alleges. But Construction Compliance was insolvent and unable to build the 20 to 30 homes initially contracted. By 2006, the number of homes under contract ballooned to nearly 500, even as the debt-laden home builder’s financial position worsened.

Faced with building permit delays and tired of the Coast Bank relationship, Battle pocketed construction funds from Coast Bank without performing any of the work and hooked up with National City loan officer Louis Rios, the complaint said.

“Louis Rios was aware of the financial condition of [Construction Compliance] as well as the nature of the new home market in Southwest Florida, and consequently was aware of the inherent risk associated with these deals,” the plaintiffs allege.

A National City spokesman said the company has a longstanding policy of not commenting on pending litigation.

One of the alleged victims was Daniel A. Bateman, who was named as plaintiff in one lawsuit. Bateman signed two notes for more than $600,000 and agreed to two construction loans with National City on Jan. 30, 2006.

Bateman claims he was deceived by National City, which induced a web of players — including appraisers, real estate brokers and mortgage brokers — to play along with the scheme. He blames National City for being stuck with properties valued at less than the loans.

“The acts committed by National City were part of a pattern of fraudulent conduct perpetrated upon Bateman and other investors,” the lawsuit states. “At all times material hereto, National City knew that the appraisals were overstated and that excessive fees an costs were being extracted.”

Bateman is demanding that National City rescind the loans and pay his legal costs.

Tannenbaum, Bateman’s attorney, told MortgageDaily.com that he has filed a total of 20 similar lawsuits against National City.

“Beyond these 20 in suit, there are thousands of National City borrowers on these Florida investment deals who have National City loans turned sour,” he said.

The latest litigation follows a lawsuit against Coast Bank filed on behalf of 175 borrowers. Tannenbaum was also the attorney in that case, which did not name National City.

In 2006, Coast took $21 million in allowances for loan losses on the construction loans, according to the annual report of parent Coastal Financial Holdings Inc.

Regulators issued a “cease-and-desist” order against Coast last year. The company also faced a lawsuit by shareholders. Coast President and Chief Executive Officer Brian F. Grimes was fired over the order.

Coast itself subsequently filed a lawsuit against Opteum Financial Services LLC for backing out of a deal to purchase $20 million in mortgage loans.