Borrower Sues Over 1-Month Teaser Rate

The Charlotte, N.C.-based company and World Savings Bank, the former operating subsidiary of Golden West Financial Services, are charged in a suit with “unlawful, fraudulent and unfair business acts or practices” involving their option ARM products.

The companies, the suit maintains, “engaged in a campaign of deceptive conduct and concealment aimed at maximizing the number of consumers who would accept this type of loan in order to maximize defendants’ profits, even as defendants knew their conduct would cause many of these consumers to lose their homes through foreclosure.”

The practices were a violation of the Truth in Lending Act and the Business and Professional Code’s sections pertaining to unfair, fraudulent and unlawful business practices and constituted breaches of contract and of the covenant of good faith and fair dealing, according to the lawsuit.

Class action status has yet to be certified for the suit which was filed on behalf of plaintiff Dolores Mandrigues on Aug. 30 in U. S. District Court in San Jose, Calif.

The lenders failed, in “loan documents and disclosure statements,” to “clearly and conspicuously disclose” the actual interest rate, that payments based on the initial teaser rate would result in negative amortization and that the initial interest rate was discounted and does not reflect the actual interest rate.

The borrower was allegedly led to believe that the initial teaser rate was fixed for three to five years, after which she could refinance if the interest rate increased. But that rate was only offered for the first 30 days.

“We just received the law suit,” Wachovia spokeswoman Christy Phillips Brown told MortgageDaily.com, “and are currently reviewing the complaint. However, we are confident that World Savings has clear and accurate loan disclosures for all of its mortgage products.”

Wachovia acquired World parent Golden West in October 2006.

At an investor conference earlier this year, Wachovia Chief Executive Officer Ken Thompson said the company was moving forward on an aggressive plan to boost its option-ARM originations.

“By year’s end we expect to have 1,000 (employees) selling option arm products,” he said at the time. “Even in a down market for mortgages and even in a market that has been particularly brutal for option ARMs versus fixed rate mortgages, with that added distribution in 2007 we will produce more (option arm loans) than Golden West produced in 2006.”

Last week, at another investor conference, he praised the underwriting principles established by Golden West over 40 years ago — noting the portfolio model puts companies like his “in much more competitive position than in the last two to three years.”

The loan in question in the lawsuit was an option ARM the plaintiff obtained in August 2006 from World Savings that was used to refinance her existing home loan.

The defendants’ option ARM product, according to the complaint, is “a deceptively devised financial product” that was “designed to, and did cause negative amortization to occur.” Further, because of a “stiff and onerous prepayment penalty,” borrowers “cannot easily extricate themselves from these loans.”

It was the loan payment, not the interest rate, that was fixed, the suit maintains, and the loan “as presented and designed, in fact, guaranteed negative amortization.”

The suit seeks to include in the class action all borrowers who obtained option ARMs on their primary residences through Wachovia and World Savings in the preceding four years.

Although the suit states that the plaintiff and the class members have “suffered injury in fact, and have lost money or property,” nowhere does it specify the injury that was suffered by the plaintiff so it is not known if her home was foreclosed on, and David M. Arbogast, one of her attorneys, declined to reveal to MortgageDaily.com in what way she had suffered.

A conference involving both sides has been scheduled for Dec. 12.