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| A federal judge recently ruled that a Wisconsin couple can rescind the payment option adjustable-rate mortgage they obtained from a Maryland-based bank. And, in granting class action status to the couple’s claims, the judge opened the door to potential claims from an estimated 7,000 homeowners who have obtained “option ARMs” from the bank since 2004.The court ruled that Chevy Chase Bank violated the federal Truth in Lending Act by not providing proper disclosures over the interest rate and payment schedule for an adjustable rate mortgage loan it provided to Susan and Bryan Andrews.
“The court found that Chevy Chase’s loan documents were written in a deceptive and unfair manner,” said Kevin Demet, the Milwaukee attorney who represented the homeowners in their lawsuit. “It is not appropriate to suggest to borrowers that they will receive a teaser rate that will be fixed for five years only to find out later that the teaser rate is only good for one month.” David Cynamon, the Washington, D.C. attorney for the federally-chartered bank, did not return calls for comment. The Andrews obtained a $190,000 loan from the bank in July 2004 to refinance their Cedarburg, Wisconsin home. They filed suit against Chevy Chase in 2005, accusing the bank of violating federal law after they discovered the 1.95 percent interest rate on their loan was only good for one month. The Andrews believed the payments and the interest rate were fixed for five years and then became variable, according to court documents. But only the minimum payment of $701.21 was fixed for five years. The court said the loan carried a “teaser” interest rate of 1.950 percent but that rate only applied to the first monthly payment. Thereafter, the interest rate increased each month. As the rate increased, a larger portion of the minimum monthly payment was needed to cover the interest. Indeed, the court concluded at one point that the 1.95 percent interest rate had no significant connection to the cost of the loan. TILA requires lenders to disclose certain information about the terms of the loan to prospective borrowers. TILA requires that disclosures be clear and conspicuous. In deciding against the bank, U.S. District Court for the Eastern District of Wisconsin Judge Lynn Adelman found several errors in the TIL statement the bank provided the Wisconsin homeowners. The Andrews said Chevy Chase failed to disclose the loan’s actual payment schedule. TILA requires lenders to disclose “the number, amount and due dates or period of payments scheduled to repay the total of payments.” The court said Chevy Chase properly disclosed that the Andrews had to make sixty payments of $701.21, followed by three hundred payments at an adjusted level of $983.49. However, it did not disclose that payments were due monthly, the judge wrote in the 23-page opinion. For its part, the bank argued that its disclosures satisfied TILA requirements because it had included a sentence on the disclosure statement that the loan program allowed the borrower to select the type of payment made each month in accord with other provided disclosures. The court disagreed. “An ordinary consumer would interpret the sentence’s authorization to ‘select the type of payment you make each month’ as permission to decide for herself whether to make a payment each month and in what amount. Thus, the sentence does not clearly require a borrower to pay monthly,” Judge Adelman wrote. The court also criticized the bank for printing the sentence in too fine a print and for sandwiching it between other language printed in much larger type. The court said the bank also did not adequately disclose the loan’s variable interest rate. The Andrews argued that, although the bank stated on its TIL disclosure statement that the loan had a variable interest rate feature, the bank included information on the TIL disclosure statement that implied that the feature would not take effect for five years. The bank disputed the Andrew’s argument, claiming that it had stated in other disclosures as well as the TIL disclosure statement that the loan had a variable rate feature. The court agreed with the Andrews. Adelman said Chevy Chase bank’s TIL disclosure statement explained that the term of the Andrews’ loan was a “5-year fixed” loan. “This statement was confusing because although it is true that the payments on the loan were fixed for five years, the interest rate was not,” Adelman said. Chevy Chase “could easily have indicated this by including the word “payments” after the word “fixed” on its disclosure, but it did not do so.” The court also said the class of homeowners with claims against the bank could go back to 2004. Demet said Chevy Chase provided database information indicating that it has issued between 7,000 to 8,000 five-year option ARMs since that time. |
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