Judges Say Banks Must Refund Mortgage Payments On Misleading Loans
 

Federal Judges say If you were misled by one of the "creative lending" schemes of the past decade you could be due almost everything you've paid on your mortgage since the loan was issued.

February 12, 2009

Bryan and Susan Andrews were looking for a way to cut their monthly expenses when an ad arrived in the mail that promised to do just that. The ad promised a fixed rate mortgage at 1.95 percent for five years.

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The couple was previously paying 5.75 percent for their existing fixed-rate mortgage. They decided the offer was too good to pass up and accepted the bank's offer in 2004.

When the payment book arrived, the Cedarburg, Wisconsin couple realized to their horror that the $191,000 loan they got from Bethesda-based Chevy Chase Bank was an adjustable-rate mortgage. They considered refinancing into a different loan but couldn't do so without a $5,700 prepayment penalty.

Documents provided by the bank at closing seemed to verify the original offer as it had appeared in the advertisement. The top right corner of one document the lender must provide under the Truth in Lending Act. read: "WS Cashflow 5-year fixed," and the line under it said "Note Interest Rate: 1.950%."

The Andrews’ said those words led them to believe the loan was indeed 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.

The rate quickly 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.

Two years later, Bryan Andrews, 49, a carpenter, and Susan, 51, a nurse, went to court, saying they were deceived. In January 2007, a federal judge sided with the couple and allowed a class-action suit involving up to 7,000 borrowers against Chevy Chase.

U.S. District Court Judge Lynn Adelman, wrote, the banks disclosures to consumers showed a "lack of forthrightness" and "would both confuse and mislead an ordinary consumer about the cost of the loan."

Judge Adelman ruled that while the borrowers were not eligible for damages, they could be permitted to turn back or "rescind" their mortgages. Rescission would permit borrowers to be released from the loans, receive reimbursement of any interest they paid to the bank and get back their closing costs, too.

The bank appealed and won a partial victory when the 7th Circuit U.S. Court of Appeals in Chicago in a 2-1 decision reversed the part of Judge Adelman's ruling that granted the suit class-action status. The Appellate court left standing Adelman’s ruling that the bank violated the Truth-in-Lending Act by not clearly disclosing the terms of the adjustable rate mortgage it wrote to the Andrews' in 2004.

According to the court, homeowners like the Andrews can seek a rescission of their mortgage — having their loan revoked and all of their fees and interest payments returned. Other borrowers who feel their loans are deceptive will need to file independent legal actions as opposed to the class action originally sought.

 

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