A Fight Over the Fine Print

Banking regulators have only recently begun offering new information to borrowers about these loans and warning lenders to explain them more carefully. In the meantime, the loans have proliferated. In the Washington area, for example, nontraditional mortgages accounted for almost half of the purchase and refinance loans made last year.

"Some percentage of borrowers don't understand the terms of these loans, and it is to be expected that there would be some issues emerging," Costello said.

Chevy Chase says it has done nothing wrong. The bank complied with the truth-in-lending law, said Thomas H. McCormick, the bank's general counsel.

In its court filings, Chevy Chase lawyers said the Andrewses' loan was appropriate for them because it gave them more "flexibility" by letting them choose what level of payment they would make each month, and that if the family has a grievance, it should be taking it to the mortgage broker, First Mortgage, which arranged the loan.

"Simply put, to the extent that Plaintiffs have a legitimate grievance, they have sued the wrong party," Chevy Chase's lawyers wrote. First Mortgage, which was not sued, did not return calls seeking comment.

At the core of the dispute are some words that appeared on the top right corner of a document the lender must provide under the Truth in Lending Act. One line read: "WS Cashflow 5-year fixed," and the line under it said "Note Interest Rate: 1.950%."

The Andrewses said those words led them to believe the loan was a fixed-rate mortgage for five years, at 1.95 percent interest, and that they were reassured of its meaning by the broker at First Mortgage who handled the loan on behalf of Chevy Chase. In fact, the 1.95 percent offer was a teaser rate that lasted one month, and the interest charged on the loan started rising the next month. And the "fixed" feature had nothing to do with the interest rate. Rather, it meant the lowest possible payment stayed the same -- $701 a month -- over five years, although the interest rate rose, with the additional expense deferred to the end of the loan.

"This statement was confusing because although it is true that the payments on the loans were fixed for five years, the interest rate was not," the judge wrote.

Chevy Chase argued that there were many other places in the loan documents that signaled the loan was not a traditional fixed-rate product, noting that one section had a bold-faced title: ADJUSTABLE RATE NOTE and that another section was titled "Calculation of interest rate changes."

In addition, the same federal disclosure form cited by Bryan and Susan Andrews included another box, labeled ANNUAL PERCENTAGE RATE, which noted that the interest rate was 4.047 percent, and said below that the loan had variable-rate features.

According to Chevy Chase's McCormick, the WS Cashflow reference and the 1.95 percent notation were loan identifiers used by Chevy Chase "for internal purposes," to identify the kind of loan and that the full phrase that was supposed to be on the document was "WS Cashflow 5-year fixed pay," but that the last word sometimes got lopped off when the documents were being photocopied.

"The inadvertently truncated language was found by the court to create the possibility of confusion," McCormick said.

The Andrewses should have reviewed the documents more thoroughly, according to McCormick and other bank lawyers. The couple showed "consistent and stunning lack of interest in reading the documents they signed," Chevy Chase lawyers said. The bank also quoted Susan Andrews as saying in a deposition that she trusted the broker and did not think she needed to "read every tiny word."

Kevin Demet, the couple's lawyer, said Chevy Chase was trying to dodge responsibility. "Chevy Chase's attitude was to blame the broker," Demet said.

McCormick said the banking industry doesn't think the Andrews case will set a precedent. Last week the 1st Circuit Court of Appeals in Boston ruled in a similar case that a lower court "lacked the authority" to give these lending claims class-action status. In that case, according to the judges who issued the ruling in favor of the lender, First Horizon Home Loan, the bank's exposure could have been $200 million.

The ultimate cost to Chevy Chase if it loses its appeal is uncertain; so is the number of loans that could be affected. McCormick declined to say how many loans would be involved, except that it would be much fewer than the 7,000 the judge estimated.