Courts May Begin Enforcing Truth-in-Lending Act (TILA)

This story seemed to have slipped by without much comment from anywhere else. There are potentially major ramifications for the mortgage industry, as well as any Housing bailout, depending upon the outcome of this litigation:

"A lawsuit filed by a Wisconsin couple against their mortgage lender could have major implications for banks should a U.S. appeals court agree that borrowers can cancel their loans en masse when their lenders violate a federal lending disclosure law.

The case began like hundreds of others filed since the U.S. housing boom spawned a rise in sales of adjustable rate loans. Susan and Bryan Andrews of Cedarburg, Wisconsin, claimed that lender Chevy Chase Bank FSB (CCX) had hidden the true terms of what they believed was a good deal on a low-interest loan.

In their 2005 lawsuit, the couple said the loan’s interest rate had more than doubled by their second monthly payment from the 1.95 percent rate they thought was locked in for five years. The interest rate rose well above the 5.75 percent fixed-rate loan they had refinanced to pay their children’s college tuition.

The Andrews filed the case seeking class action status; and in early 2007, U.S. District Judge Lynn Adelman ruled that the bank had violated the Truth in Lending Act, or TILA, and that thousands of other Chevy Chase borrowers could join them as plaintiffs.

The judge transformed the case from a run-of-the-mill class action to a potential nightmare for the U.S. banking industry by also finding that the borrowers could force the bank to cancel, or rescind, their loans. That decision was stayed pending an appeal to the 7th U.S. Circuit Court of Appeals, which is expected to rule any day.

The idea of canceling tainted loans to stem a tide of foreclosures has caught hold in other quarters; a lawsuit filed last week by the Illinois attorney general asks a court to rescind or reform Countrywide Financial Corp (CFC) mortgages originated under "unfair or deceptive practices."

This one is well worth watching . . .


Mortgage ruling could shock U.S. banking industry
Gina Keating
Reuters, Mon Jun 30, 2008 3:14pm EDT

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What's been said:

Discussions found on the web:
  1. bobn commented on Jul 7

    What does it mean that the bank rescinds the loan? Does the full amount become due immediately? It’s not like many of these folks are going to be able to refinance, is it?

  2. Howard Lax commented on Jul 7

    In Stutzka v. McCarville (Prestige Mortgage and Popular Financial were also defendants), the Court of Appeals reversed the lower court holding that a blind and developmentally disabled borrower who was taken advantage of by trusted friends and a mortgage broker could rescind the loan and did not have to return the loan proceeds. The Court of Appeals held that there was dispute between the closing agent and Stutzka (the borrower’s bookkeeper and representative) whether the borrowers received TILA disclosures at the closing. Upon further review of the evidence, the lower court held that the borrowers received all disclosures except an ARM disclosure. The lower court held that ARM disclosures did not impact the borrower’s decision to accept the loan and, therefore, the borrower suffered no actual damages. The lower court awarded only $200 in statutory damages for failing to provide the ARM disclosure, and only $3000 of the $103,000 in attorneys fees requested by the borrower’s attorney. See the Court of Appeals decision at .

  3. Steve Barry commented on Jul 7

    Two words…Fannie and Freddie…wake up people…the excrement is now hitting the airflow machine. Protect your assets immediately.

  4. C. Dohr commented on Jul 7

    If it sounds too good to be true, then it must be. How is it that consumers fall for such trickery? And when will banks ever learn?
    I suppose the bank knew the risk of that tactic and felt that any problems that would pop-up they would be able intimidate the individual consumer with a hoard of lawyers.
    I hope the courts also heap on punitive damages.
    Maybe its time such deceit is rewarded with jail time?

  5. Steve Barry commented on Jul 7

    Every financial and homebuilding stock I track, except ABK (dead cat) is seriously in the red today…Fannie and Freddie continuing their freefall. This is about to hit a point of no return…yet CNBC all happy because oil is down and Dow is up.

  6. Steve Medina commented on Jul 7

    The only sensible way to recend a loan is to credit back to the borrower all fees and points, convert the loan to a fixed loan at the most attractive rate reasonably available at the time of origination, and calculate how much would have been paid under the new terms.

    However, I don’t know that the borrower who was getting the benefit of low teaser rates would come out ahead on that calculation.

    What borrowers really want is the low teaser rates for as long as possible and then to refinance with no penalty when the rate goes up; but that hardly seems reasonable.

    I suspect most of these borrowers knew full well what they were buying. The plan was obvious: Buy far more house than you can afford. Keep the payments low by getting one of these back-loaded loans. Before the rates go up, flip the house for a ton of money and pay any loan penalty from the profits on the house. It’s only when houses stopped going up in value that this somehow became fraud on the part of the bank.

  7. johnnyvee commented on Jul 7

    FYI. California’s Attorney General filed a similar lawsuit to that filed in Illinois 2-weeks ago. Also, rescind means that the lender return all payments made by the borrower..ALL!!! For example a $2,500 monthly payment for 4-years on a $500k loan would mean that that the lender would have to return the $120k, plus any fees charged at closing, to to the borrower. The Borrower could then pay down the loan by that amount to $380k and refinace.

    I have often said that if the lenders or gov’t don’t figure out a way to keep people in their homes, the attorneys will.

  8. Sabbadoo32 commented on Jul 7

    Great post. Did a little digging, because I was interested in whether the plaintiffs were simply trying to “confusion” as a way out of their mortgage. I found the class action blog. It has the legal decisions, including this little tidbit from the plaintiff’s response:

    “The District Court found
    that Chevy Chase’s mortgage borrowers were misled in at least three respects, any one of which is grounds for TILA relief. (See: Doc. #81) Chevy Chase’s disclosures misrepresent the loan.
    Chevy Chase offers a teaser rate “option ARM” loan that is a monthly adjustable rate
    mortgage. The rate of interest charged to the customer is the LIBOR rate plus a margin of 2.9%. Currently, that rate is more than 8%. A customer is permitted to make a minimum payment based on a phony (non-contractual) amortization schedule which suggests interest will be

    Page 2 of 20
    charged at a teaser rate during the first 5 years. After the 1st month, interest charges exceed the disclosed payment schedule for the loan. The loan also contains a 3% prepayment penalty.

    In selling this loan, Chevy Chase publishes uniformly deceptive truth in lending
    disclosure statements (“TILDS”). These TILDS are inconsistent with the underlying loan contract document, the Adjustable Rate Note (“ARN”). The TILDS discloses a loan that is “5-Year Fixed” at “Note Interest Rate: 1.95%” and a payment schedule that does not state the intervals at which payments are due, or the amount the borrower is charged each month. On p. 2 of the TILDS, the teaser note interest rate is misrepresented as the “same as” the APR. Virtually every document in the transaction contains a teaser rate misrepresentation (“1.95%” or a similar teaser rate) and a misrepresentation that the rate is “5 year fixed.” Even the Note and the Mortgage Rider contain teaser language, such as: “I will pay interest at the yearly rate of 1.95%”; and, “5 Year Fixed.” As the District Court found, Chevy fails to honestly disclose that the teaser rate is a discounted rate and will increase in the second month of the note, even through there is no corresponding change in the underlying LIBOR index.

    In its TILDS and loan documents, Chevy Chase makes several confusing statements and
    misrepresentations concerning the interest rate, payment schedule, and monthly variable rate nature of the loan product. This case is not a close call. The documents are unscrupulous, deceptive and fraudulent. Chevy Chase knows full well that these documents are loaded with teasers.

    Here’s the link:

  9. None commented on Jul 7

    If they broke the law, punish them. End of story.

  10. Brian M. Dubuc commented on Jul 7

    Has anyone remembered the prohibition against ex post facto laws and the constitutional proscription against the states passing laws impairing contract obligations?

    Pic a payment loans are horrible debt instruments and a bad choice for almost all borrowers, but the fact of the matter is that there is nothing inherently illegal about them.

    As for rescinding the loans, how are our hapless borrowers going to give back the loan amount less interest payments and closing costs? While it sounds like a calamity, TILA does not stand for the proposition that a borrower entitled to rescission for a TILA violation gets to keep the benefits of the bargain. I would be shocked if the 7th Circuit upheld this decision – but then these are strange times in which we live.

  11. ron commented on Jul 7

    Doubt if anything comes of this within the next 20 years given our court system and ability of the mighty to continue to push this around until they find a high enough court to their liking.

  12. Lori commented on Jul 7

    What sometimes happens in a recission case is under TILA the lender is required to release their security instrument within 20 days along with refunding all payments. This leaves them with an unsecured loan on the remainder. The borrower then files bankruptcy and since the loan on their home is now unsecured it is treated as any other unsecured creditor in the bankruptcy.

  13. Simon commented on Jul 7

    My dad is alternative world view kind of ex-hippy New Age conspiracy theory type person. He gets a magazine called Nexus. Published in the US I think. Weirdly, although almost nothing else in the magazine resonates with me, the financial commentary seems very reasonable. Sensationalist but reason given current circumstances.

    Nexus published an article spot lighting this case, must be a couple of months ago at least. I read it then and thought it must be rubbish given it had not popped up anywhere else. My opinion of Nexus magazine just improved a bit.

  14. Brian commented on Jul 7

    I had this exact type of loan for myself and refied several clients into this also from Chevy Chase. The details of the loan are in the documents. Did these people really think they were borrowing money at 1.95%? I guess all self responsibility is gone. Now, if the there was a broker that misled them, that is possible. But, I had many clients at closing that would read these closing docs line by line. This was a great loan for certain situations only. Not trying to defend the banks.

  15. wunsacon commented on Jul 7

    >> Now, if the there was a broker that misled them, that is possible.

    This is why I want ALL these cases to go to court (and not end up in the taxpayer’s inbox). Let people prove to a jury of their peers “who disclosed what”.

    These issues should be adjudicated in our 3rd branch of government, because the facts may vary from one lender to the next, one broker to the next, one flipper to the next, one legit home buyer to the next. The outcomes should be *fact-sensitive*, to provide justice to those who deserve it and not to those who don’t. The latter outcome minimizes moral hazard, too.

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