Wednesday, November 30, 2005
Well, that was fast. Last month I had a post in which I suggested that interest-only ARMs would be the source of the next class action boom. Yesterday's Wall Street Journal had a story by Ruth Simon (subscription required) on what may be the first of many such class actions involving option ARMs, a similar type of mortgage that used a teaser rate to keep payments low in the first year:
In a lawsuit seeking class-action status filed in U.S. District Court in Milwaukee earlier this year, the Andrews allege that their lender, Chevy Chase Bank, violated the federal Truth-In-Lending Act by misleading borrowers into thinking they were getting rates lower than those actually charged. There are "deceptive disclosures," says Kevin Demet, an attorney representing the Andrews.
In a written response to questions about the lawsuit, Robert D. Broeksmit, president and chief executive of Chevy Chase Bank's mortgage lending unit, says the company offers option ARMs "only to affluent borrowers who use its various payment features to manage their cash flow intelligently." He says the bank makes "every effort to ensure that all of our customers understand the loan product they choose." This includes providing a "one page, large print, plain English flyer, which the borrower signs, which clearly states that the loan has a monthly adjustable interest rate," he says.
Other lawsuits are likely, particularly if interest rates rise and housing values level off or fall, says Paul F. Hancock, a partner with the Miami office of law firm Hogan & Hartson. "The most likely claim will be a consumer-protection claim ... [that borrowers] weren't properly informed or were sold a product that wasn't suited to them," he says. Mr. Hancock says the risks of option ARMs and other exotic loan products are getting more attention both from lenders and consumer advocates.
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