A Fight Over the Fine Print
Tuesday, February 6, 2007
With college costs looming for their four children, Bryan and Susan Andrews were looking for a way to cut their monthly expenses.
The sales pitch that came in the mail seemed perfect: A mortgage at 1.95 percent, fixed for five years.
"It sounded like a really good program," Susan Andrews recalled recently.
But after the deal closed, in 2004, the couple realized to their horror that the $191,000 loan they got from Bethesda-based Chevy Chase Bank was an adjustable-rate mortgage. The rate has climbed to 8.3 percent and, because of the way the mortgage is structured, the couple now owe more than they did when they signed for the loan.
They went to court, saying they were deceived. A federal judge has sided with the couple and is allowing a class-action suit involving up to 7,000 borrowers against Chevy Chase.
The bank is appealing, and on Friday, an appeals court granted its motion for an expedited appeal. The bank says the terms were clearly stated in the contract and that if the family has a grievance, it should be taken to the mortgage broker who sent the original sales flier and acted as an intermediary between them and the bank.
Bryan Andrews, 49, a carpenter, and Susan, 51, a nurse, previously had a 5.75 percent fixed-rate mortgage. The couple, who live in Cedarburg, Wis., say they didn't realize what they had done until they got their first payment coupon for the new loan in the mail. They considered refinancing into a different loan but couldn't do so without a $5,700 prepayment penalty. They sued two years ago.
Last month, U.S. District Court Judge Lynn Adelman, a federal judge in Milwaukee, ruled that Chevy Chase had violated the 1968 Truth in Lending Act, which requires lenders to clearly explain loan terms to borrowers. Chevy Chase's disclosures to consumers showed a "lack of forthrightness" and "would both confuse and mislead an ordinary consumer about the cost of the loan," the judge wrote.
Adelman ruled that while the borrowers were not eligible for damages, they could be permitted to turn back or "rescind" their mortgages. Recision would permit borrowers to be released from the loans, receive reimbursement of any interest they paid to Chevy Chase and get back their closing costs, too.
In other words, the ruling may give some borrowers a refund of everything they have paid to live in their houses for years.
The case worries the lending industry because of the potential for hefty losses if other borrowers are allowed to rescind mortgages they claim were misleading.
The Chevy Chase case underscores the rising uncertainty surrounding the kinds of loans that have emerged in the past five years, said Glenn Costello, managing director of Fitch Ratings Residential Mortgage Backed Securities Group. These loans include such variations as interest-only loans and what are known as option ARMs, which allow people the choice of paying less each month than the interest would be. In many of these loans, the amount owed is deferred to keep monthly payments down. The downside is that at some point payments can rise sharply. The amount owed can rise, too.