• Key insight: A long-time Illinois banker has been banned from the industry for approving mortgages based on faulty appraisals.
• Expert quote: Burns "ignored inconsistencies and irregularities in the appraisals that should have called into question their accuracy." —Federal Reserve enforcement action.
• Forward look: The prohibition order against Burns is indefinite and can only be lifted by a vote of the Federal Reserve Board.

A former Illinois banker has been banned from the banking industry for approving mortgages based on phony appraisals.The Federal Reserve Board prohibited James Burns, the former chief lending officer of Heritage State Bank in Lawrenceville, Illinois, from the industry this month for signing off on dozens of inflated mortgages between 2016 and 2020.

In a public enforcement action released Thursday, the Fed stated that Burns signed off on at least four mortgages for which the supporting property appraisal had been modified from what was originally submitted by the bank's appraiser. The changes all increased the assessed value, enabling the bank to issue a larger loan.

On at least 25 other occasions, Burns relied on valuation reports from appraisers that were not licensed in the state of Illinois, according to the action. He also "ignored inconsistencies and irregularities in the appraisals that should have called into question their accuracy."

Federal law requires banks to commission appraisals on residential real estate transactions of $400,000 or more. The purpose of these reports is to ensure that banks have sufficient collateral to insulate themselves against potential losses should the borrower default.

The irregularities in Burns' mortgage approvals came to light after Heritage merged with the First National Bank of Carmi in Carmi, Illinois. Following the merger, FNBC had all of the properties reappraised. This led the bank to foreclose on some of the inflated loans and incur losses. 

In its public enforcement action, the Fed states that Burns' actions constituted "violations of law or regulation, breaches of fiduciary duty, or unsafe or unsound banking practices, and involved his personal dishonesty or demonstrated his willful or continuing disregard for the Bank's safety and soundness."

Burns, who worked at Heritage from 1999 until the merger on Dec. 1, 2020, agreed to the industry ban. He also committed to cooperate with any future investigations involving the bank, including providing information, testimony, documents, records and other evidence. 

The ban from banking, which went into effect on July 9, will remain in place indefinitely.