A Fight Over the Fine Print

Chevy Chase Bank Faces Suit Over Adjustable-Rate Mortgages

Bryan and Susan Andrews of Cedarburg, Wis., sued Chevy Chase Bank,
                                    saying the lender misled them into taking a high-interest mortgage.
Bryan and Susan Andrews of Cedarburg, Wis., sued Chevy Chase Bank, saying the lender misled them into taking a high-interest mortgage. (By Darren Hauck For The Washington Post)
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By Kirstin Downey
Washington Post Staff Writer
Tuesday, February 6, 2007

With college costs looming for their four children, Bryan and Susan Andrews were looking for a way to cut their monthly expenses.

The sales pitch that came in the mail seemed perfect: A mortgage at 1.95 percent, fixed for five years.

"It sounded like a really good program," Susan Andrews recalled recently.

But after the deal closed, in 2004, the couple realized to their horror that the $191,000 loan they got from Bethesda-based Chevy Chase Bank was an adjustable-rate mortgage. The rate has 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.

They went to court, saying they were deceived. A federal judge has sided with the couple and is allowing a class-action suit involving up to 7,000 borrowers against Chevy Chase.

The bank is appealing, and on Friday, an appeals court granted its motion for an expedited appeal. The bank says the terms were clearly stated in the contract and that if the family has a grievance, it should be taken to the mortgage broker who sent the original sales flier and acted as an intermediary between them and the bank.

Bryan Andrews, 49, a carpenter, and Susan, 51, a nurse, previously had a 5.75 percent fixed-rate mortgage. The couple, who live in Cedarburg, Wis., say they didn't realize what they had done until they got their first payment coupon for the new loan in the mail. They considered refinancing into a different loan but couldn't do so without a $5,700 prepayment penalty. They sued two years ago.

Last month, U.S. District Court Judge Lynn Adelman, a federal judge in Milwaukee, ruled that Chevy Chase had violated the 1968 Truth in Lending Act, which requires lenders to clearly explain loan terms to borrowers. Chevy Chase's disclosures to consumers showed a "lack of forthrightness" and "would both confuse and mislead an ordinary consumer about the cost of the loan," the judge wrote.

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

In other words, the ruling may give some borrowers a refund of everything they have paid to live in their houses for years.

The case worries the lending industry because of the potential for hefty losses if other borrowers are allowed to rescind mortgages they claim were misleading.

The Chevy Chase case underscores the rising uncertainty surrounding the kinds of loans that have emerged in the past five years, said Glenn Costello, managing director of Fitch Ratings Residential Mortgage Backed Securities Group. These loans include such variations as interest-only loans and what are known as option ARMs, which allow people the choice of paying less each month than the interest would be. In many of these loans, the amount owed is deferred to keep monthly payments down. The downside is that at some point payments can rise sharply. The amount owed can rise, too.

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.


Court tells Bethesda bank to rescind option ARMs

Bloomberg News

Originally published January 19, 2007

NEW YORK // A federal judge in Wisconsin ordered Chevy Chase Bank to rescind loans made to some borrowers who took out so-called option adjustable-rate mortgages, The Wall Street Journal reported yesterday.

The ruling was in a case against the Maryland-based bank brought by Susan and Bryan Andrews, who took out an option ARM in the belief that a 1.95 percent introductory rate was fixed for five years. Two months later, they received a statement showing the rate had risen to 4.375 percent, the newspaper said.



U.S. District Judge Lynn Adelman ruled that the disclosure statement about the loan terms was confusing. The words "five-year fixed" in the statement referred to minimum payments but not to the interest rate, the Journal reported.

Borrowers affected by the decision will get back any payments to the bank, including closing costs and lawyers' fees, the newspaper said, citing Kevin Demet, the attorney who filed the case.

Chevy Chase's general counsel, Thomas McCormick, told the Journal that the Bethesda-based bank will appeal the judge's ruling.

Calls to McCormick and the bank's investor relations department by Bloomberg News before business hours yesterday weren't immediately returned.

Option ARMs usually carry a low introductory interest rate and give borrowers a range of payment options. In recent years, they've proved attractive for borrowers who want to buy properties they couldn't otherwise afford, the Journal added.






Bank loses lawsuit

Loan terms fooled Cedarburg couple


Posted: Jan. 16, 2007

A federal judge in Milwaukee ruled Tuesday that a Cedarburg couple can rescind their adjustable-rate mortgage with Chevy Chase Bank because the bank failed to clearly explain how the loans would work.

U.S. District Judge Lynn Adelman also certified the case as a class-action lawsuit, creating the possibility that others with similar "option ARM" loans from the Bethesda, Md.-based bank can get out of their mortgages.

People who took out the loans will be able to get back closing costs and the payments they made to the bank, said Milwaukee attorney Kevin J. Demet, who represented homeowners Susan and Bryan Andrews of Cedarburg in the case.

"The significance of the ruling, of course, is that all of their documents became invalid because they didn't make the proper disclosures," Demet said.

David Cynamon, a Washington, D.C., attorney representing Chevy Chase Bank, said he couldn't comment Tuesday afternoon because he had just received a copy of the decision.

According to Adelman's decision and order document:

When the Andrewses took out a refinance loan of about $190,000 with Chevy Chase Bank in 2004, they believed the interest rate of 1.95% was fixed for five years, as was the $701 minimum monthly payment. However, that rate turned out to be a "teaser" rate that applied only to the first month, and the rate then increased every month. As a result, an "ever-increasing" portion of the minimum monthly payment was needed to cover interest, and the payment itself soon became insufficient to cover interest that accrued.

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