A Montgomery County district judge has ordered the Potomac Savings Bank in Silver Spring to refund $700 to a would-be borrower whose mortgage loan application was suddenly rejected two days before its scheduled closing.

The ruling, handed down last week by Judge Edwin Collier in a small claims court hearing, is considered a victory, albeit a small one, for consumers whose lenders have refused to honor mortgage rates promised to them at the time of a loan application.

In the past two years, when rates have taken a roller-coaster ride, tens of thousands of borrowers in the Washington area and nationwide have had their lenders renege on the interest rate that was locked in during the loan-processing period. The higher rates have translated into higher mortgage payments for consumers.

"It felt great to prove a point," said Jeffrey Cohen of his successful suit against Potomac Savings. The money awarded to Cohen, who represented himself in court, covers the expenses that he paid for services required by the bank for processing his application, including an appraisal, title search and land survey.

"I felt very wronged. I felt they were just trying to weasel out of a commitment just to save themselves some money," said Cohen, who owns an athletic-shoe store in Columbia, Md. "If I ever treated any of my customers the way they treated me, I'd be out of business very quickly."

A Potomac Savings official criticized Collier's ruling that the institution mishandled Cohen's loan application. "We do not feel justice was done," said Michael Cohen, house counsel for the lender. "We rejected his loan based on insufficient income for the loan amount requested."

The lawyer said the bank is considering appealing last week's ruling.

Cohen was seeking to refinance the 11 1/2 percent mortgage on his seven-year-old home in Silver Spring. Cohen said he believes that Potomac Savings rejected his loan because it did not want to honor his locked-in 8 1/2 percent rate, which at the time of his scheduled closing date was about two percentage points lower than the overall market rate.

Such charges have been voiced by many angry home buyers and homeowners attempting to refinance their mortgages.

In cases where loans have not been rejected, some lenders have taken longer to process mortgage requests than the commitment periods they had offered to would-be borrowers. Such teaser commitment periods, or lock-ins, normally extend for 60 days from the time of an application. In many of the instances where loan delays surface, borrowers have found themselves contending with a lender that refuses to honor the locked-in rate, thereby forcing the consumer to settle at a higher rate.

Some borrowers have contended that the lenders' delays have been intentional, while the lending institutions counter that they are at the mercy of financial markets and that delays are a part of the busy home-buying periods that have occurred since rates fell last year to their lowest levels since 1978.

In the ensuing frenzy, at least six states have passed or are considering legislation to deal with the lock-in situation. In addition, a bill is awaiting action in Congress that would put more of a burden on lenders in handling loan applications.

Cohen's problem began last Feb. 25 when he applied for an $85,000 refinancing package on his home, which he said the bank later appraised at $195,000. The bank gave him the 8 1/2 percent lock-in rate, which it guaranteed for 60 days. At the time of his application, Cohen said his request was given initial approval from a Potomac Savings loan officer.

Cohen said he kept in contact with the lender throughout the 60-day processing period, and was reassured repeatedly that everything was going smoothly.

In the meantime, however, mortgage interest rates surged upward, repeating a scene played out a year earlier. From February, when Cohen applied for the loan, until his scheduled closing in late April, interest levels rose about two percentage points.

"I started to sweat because market rates had risen dramatically," said Cohen, who added that he was aware of what was happening to other would-be borrowers and their lost loan commitments. "But they {Potomac Savings officials} kept saying it was no problem."

A few days before the loan lock-in was to expire, Cohen's loan officer called to set up a settlement date. Cohen said he believed everything was fine.

The next day, however, the same official called to tell him his loan had been rejected because of insufficient income -- an explanation Cohen called ridiculous. In court, an attorney representing the bank said Cohen had fraudulently prepared his loan application. But Cohen maintained that a Potomac Savings official changed the information on his loan application.

"They used some kind of subjective test to determine my income because I own my own business ... which didn't make sense to the judge or to me," Cohen said.

But Potomac Savings' Cohen said such "subjective tests" for self-employed borrowers "are permitted under federal guidelines." He said the fact that the borrower's loan package was rejected only two days before the scheduled closing was not unusual, since financial information for a mortgage application comes into the bank up until the last minute. He said Cohen's loan package was delayed, in part, because the borrower furnished the bank with the wrong address for his former employer.

But the Silver Spring homeowner refused to let the issue rest after his loan was rejected. He began calling various county, state and federal agencies for help, but he said help was slow in coming. Because Potomac Savings is federally chartered, county and state officials said they could not get involved. So he went to the Federal Home Loan Bank Board, which looked into the matter but said there was "no indication" that the loan was denied improperly.

At that point, going to court was the only solution. But hiring a lawyer -- as many other borrowers have discovered -- did not make economic sense for the amount he was trying to recover. So Cohen, who had only been to court previously for jury duty and traffic cases, decided to represent himself in the suit he filed against Potomac Savings.

"I was convinced that I had been unreasonably denied," he said. "I was very adamant that I was going to make my case in court."

The day before his case was to be heard, Cohen sat in on several civil court cases before the same judge to get a feel for the legal procedures.

During his own 40-minute hearing, Cohen said he "felt good to be up there before the judge. He was consumer-oriented, and he recognized my nonlegal background."

In the end, Cohen got a measure of satisfaction. But he said he is still upset because his otherwise healthy credit rating has been blemished by the loan denial. In addition, Cohen said he will now have to refinance his mortgage at current rates, which this week averaged above 10 percent at most area lenders.

Nonetheless, Cohen said his fight was worth the effort. "I don't think consumers should be afraid of banks," he said.