Thursday, January 18, 2007     Couple wins first round in Option-ARM lawsuit

We will be seeing more and more lawsuits regarding the dreaded Option-ARM, a court ruled that Chevy-Chase bank Truth in Lending Disclosure was unclear and the loan must be rescinded:

"A federal district court judge ruled banks must rescind certain option adjustable-rate mortgages because they violate the Truth in Lending Act. A suit filed by Susan and Bryan Andrews against Chevy Chase Bank claimed they thought the 1.95% introductory rate on their option ARM was fixed for the first five years. Two months after the mortgage was originated, the interest rate increased to 4.375%.

The judge determined disclosures about the loan were “unclear and confusing,” according to the Wall Street Journal. The mortgage was also confusing because, while payments were fixed for five years, the interest rate was not. Based on the ruling, Chevy Chase will have to rescind all the loans that have similar language in the disclosure forms. An exact number of how many customers this involves was not immediately known, but Chevy Chase originated more than $7 billion in mortgages in 2006, the majority of them option ARMs. The bank plans to appeal" Combine legal liability with underperforming loan portfolios in the secondary market and you will be seeing a significant change in how lenders market and underwrite these products to the general market

LA TIMES OPTION ARM ARTICLE
http://www.latimes.com/wireless/avantgo/la-fi-loans27may27,0,2004195.story

THE CHEVY CHASE BANK CASE Opinion
http://www.law.widener.edu/faculty/hb/barros/AvC_opinion.pdf

DEMET & DEMET SC
815 North Cass Street Milwaukee, WI 53202
414-291-0800
414-291-9560 fax

CONTACT: Kevin Demet
Email address: Kdemet@Sprintmail.com

Kevin Demet is interested in class actions against lenders and will review cases for free.

THE CHEVY CHASE BANK CASE Case

Case 2:05-cv-00454-LA Filed 04/20/2005 Page 1 of 15 Document 1

6. The Plaintiffs are a class consisting of the numerous people who subject to the similar

deceptive and unlawful practices under which the claims in this action are made. The

named representative Plaintiffs are adequate and appropriate representatives of the class

of Plaintiffs similarly situated. The common interest of the class of Plaintiffs is virtually

identical. The language of the truth in lending documents, the mortgages, and the

servicing is similar; the advertising is similar; the legal issues involved with interpreting

these documents is similar; the Plaintiffs were treated similarly in the administration of

their mortgages; the documents present virtually identical facts; and, any unique

interests of any individual person and overridden by the common interests of the class of

Plaintiffs. A class action is the most appropriate way to resolve the causes of action of

the entire class of Plaintiffs. It would be impractical to bring all these people before the

court, due to time involved. It would not be economically feasible for each of the

individual class members to maintain similar individual actions against these Defendants.

Injunctive relief will benefit all plaintiffs in the form of remedying the enforcement of

mortgage terms that were other than advertised and preventing future deceptive practices.

The damages of each individual Plaintiff are similarly calculated using common

formulas. Failure to join the causes of action of each individual Plaintiff into a class

action would lead to duplicate litigation involving the same issues and facts, excessive

costs and fees, burdens and potentially inconsistent outcomes. The Plaintiffs are

appropriate and adequate class representatives.

7. Plaintiffs reallege all of the foregoing paragraphs.

8. Plaintiffs seek a remedy under the Truth in Lending Act ("TILA"), 15 U.S.C. 1601 et

seq., to obtain rescission, injunctive relief, redress, restitution, disgorgement, money

damages, attorneys’ fees and other equitable relief against Defendants for engaging in

unfair or deceptive acts or practices in violation of TILA, 15 U.S.C. 5 1601 et seq., and its

implementing Regulation Z, 12 C.F.R. Part 226.

9. Defendant sells loans with teaser rates stated in their Truth in Lending Disclosure

Statements that mislead the Class of Plaintiffs into thinking they are buying loans with

loan interest rates that are lower than the rate actually being charged on their mortgage

accounts.

10. In numerous instances, within a few days after completing loan applications for

consumers, CCB has provided consumers with documents entitled preliminary "Federal

Truth-in-Lending Disclosure Statements” that misrepresent the terms of the loans being

offered. An example of one of the false statements is a TILDS wherein it states on the

right-hand side that the loan is 1.95% fixed for a five-year period. In reality, only the

payment is fixed during the early years of the loan, the rate varies after the first month and

is substantially higher than stated.

11. On the preliminary "Federal Truth-in-Lending Disclosure Statement" that CCB has

provided to consumers, CCB has frequently failed to check a box that would disclose that

a prepayment penalty and fees will be charged if the loan is prepaid.

12. On the documents entitled "Federal Truth-in-Lending Disclosure Statement,” the

preliminary document differs substantially from the final document when there is no

change in the loan program being sold.

13. Defendant has added deceptive language to its final “Truth in Lending Disclosure

Statements” that violates the TILA requirements that added language be both “clear and

conspicuous” and that such added language not be misleading.

14. As an example, on the final “Truth In Lending Disclosure Statement” for the

Representative Plaintiff’s loan, Defendant added the following language on the top righthand

side of the form:

“WS Cashflow - 5 year Fixed Note Interest Rate: 1.950%”

15. The above additional language misled the Representative Plaintiffs into thinking that the

loan they received was a loan at a fixed interest rate of 1.95% for the first five years. In

truth, CCB has never offered such a loan. The mortgage note issued to Representative

Plaintiffs was for a mortgage that charged 1.950% interest for only one month. After one

month, the rate of interest more than doubled and has been adjusting to a much higher

interest rate each month thereafter. This has caused the loan of the Representative

Plaintiffs to negatively amortize and is causing them to pay a higher interest rate than

represented in the Truth in Lending Disclosure Statement. Similar misrepresentations

were made to the entire Class of Plaintiffs.

16. CCB put the added language "WS Cash-Flow 5-Year Fixed" in the TILDS blank provided

by Regulation Z. The added language makes it seem like the Class members are getting

a fixed rate program. CCB put the added language “Note Interest Rate 1.95%” into the

TILDS. This additional language makes it seem like the class members note interest rate

is charged at 1.95% for the first five years. There really is no other conclusion that a

borrower could make. CCB is in full control over what they put in the form. When they

put these statements into the TILDS, they failed to clarify what they were representing.

With these two additions on both the preliminary TILDS and the final TILDS, CCB

violated the requirements that the TILDS be "clear and conspicuous" and not misleading

pursuant to Regulation Z.

17. In addition, Defendant is processing applications for fixed rate loans as if they are

applications for adjustable rate loans. The Defendant knew or should have known that

proper disclosures according to Regulation Z were not being given to the Class members

at the time mortgage applications were submitted. As an example, the Representative

Plaintiffs signed an application for a fixed rate mortgage for 30 years at 1.95%. The

application misrepresents the product being sold. The Plaintiffs did not receive

appropriate variable rate disclosures. The Defendant knew or should have known that the

product being sold to the Plaintiffs was different from what they applied for and what was

represented to them in various documents, including the Truth in lending Disclosure

Statements. Similar misrepresentations were made to the entire Class of Plaintiffs.

18. Plaintiffs reallege all of the foregoing paragraphs.

19. The Truth in Lending Act requires mandatory disclosures to adjustable rate mortgage

customers subsequent to closing.

20. Among the requirements of Regulation Z is a duty of the servicing lender to notify

variable rate customers 25 days prior to making any change in the interest rate on a

variable rate loan. According to Federal Regulations, the following disclosures must be given:

* * *An adjustment to the interest rate with or without a corresponding adjustment to the

payment in a variable-rate transaction subject to

adjustment is implemented without an accompanying payment change, and at least 25,

but no more than 120, calendar days before payment at a new level is due, the following

disclosures, as applicable, must be delivered or placed in the mail:

(1) The current and prior interest rates.

(2) The index values upon which the current and prior interest rates are based.

(3) The extent to which the creditor has foregone any increase in the interest rate.

(4) The contractual effects of the adjustment, including the payment due after the

adjustment is made, and a statement of the loan balance.

(5) The payment, if different from that referred to in paragraph (c)(4) of this section, that

would be required to fully amortize the loan at the new interest rate over the remainder of

the loan term.

21. As an example of the type of violations Defendant is engaging in with respect to the class,

the Defendant sold Plaintiffs a loan wherein the Defendant apparently was charging

1.95% note interest for the month of July 2004. In the month of August 2004, Defendant

began charging a note interest rate of 4.375% without providing advance notice consistent

with the foregoing Regulation Z requirements. Even though their rate more than doubled

after the first month of the mortgage, the Defendant did not provide a Regulation Z

notice.

22. Defendant failed to make similar disclosures to each of the members of the class, thereby

collecting interest illegally on each of the loans in the loan portfolio consisting of the

class member’s mortgages.

23. Plaintiffs reallege all of the foregoing paragraphs.

24. Plaintiffs also seek a remedy for deceptive advertising and bait and switch sales of

mortgages which violate the following: Truth in Lending Act, 12 CFR 226.16 (a) (Regulation Z).

25. Under TILA, 15 U.S.C. 1601 et seq.and its implementing Regulation Z, 12 C.F.R. Part

226, persons who advertise "closed-end credit," as defined in 12 C.F.R. section

226.2(a)(10), must comply with the applicable provisions of TILA and Regulation Z,

including but not limited to, Sections 226.4, 226.22, and 226.24 of Regulation Z, 12

C.F.R. Section 226 et seq. "Credit means the right to defer payment of debt or to incur

debt and defer its payment." 12 C.F.R. section 226.2(a)(14). "Closed-end credit means

consumer credit other than open-end credit," and "open-end credit" is defined as

"consumer credit extended by a creditor under a plan in which: (i) The creditor reasonably

contemplates repeated transactions; (ii) The creditor may impose a finance charge from

time to time on an outstanding unpaid balance; and (iii) The amount of credit that may be

extended to the consumer during the term of the plan (up to any limit set by the creditor)

is generally made available to the extent that any outstanding balance is repaid." 12

C.F.R. sections 226.2(a)(10) & (20). The regulation on advertising says the following:

§ 226.24 Advertising.

(a) Actually available terms. If an advertisement for credit states specific credit terms, it

shall state only those terms that actually are or will be arranged or offered by the creditor.

(b) Advertisement of rate of finance charge. If an advertisement states a rate of

finance charge, it shall state the rate as an "annual percentage rate," using that term. If

the annual percentage rate may be increased after consummation, the advertisement

shall state that fact. The advertisement shall not state any other rate, except that a simple

annual rate or periodic rate that is applied to an unpaid balance may be stated in

conjunction with, but not more conspicuously than, the annual percentage rate.

(c) Advertisement of terms that require additional disclosures. (1) If any of the following

terms is set forth in an advertisement, the advertisement shall meet the requirements of

paragraph (c)(2) of this section:

(i) The amount or percentage of any downpayment.

(ii) The number of payments or period of repayment.

(iii) The amount of any payment.

(iv) The amount of any finance charge.

(2) An advertisement stating any of the terms in paragraph (c)(1) of this section shall

state the following terms,

as applicable:

(i) The amount or percentage of the downpayment.

(ii) The terms of repayment.

(iii) The "annual percentage rate," using that term, and, if the rate may be increased

after consummation, that fact.

(d) Catalogs and multiple-page advertisements; electronic advertisements. (1) If a

catalog or other multiple-page advertisement, or an advertisement using electronic

communication gives information in a table or schedule in sufficient detail to permit

determination of the disclosures required by paragraph (c)(2) of this section, it shall be

considered a single advertisement if:

(i) The table or schedule is clearly and conspicuously set forth; and

(ii) Any statement of terms of the credit terms in paragraph (c)(1) of this section

appearing anywhere else in the catalog or advertisement clearly refers to the page or

location where the table or schedule begins.

(2) A catalog or other multiple-page advertisement or an advertisement using

electronic communication complies with paragraph (c)(2) of this section if the table or

schedule of terms includes all appropriate disclosures for a representative scale of

amounts up to the level of the more commonly sold higher-priced property or services

offered. [Codified to 12 C.F.R. § 226.24]

[Section 226.24 amended at 66 Fed. Reg. 17338, March 30, 2001, effective March 30,2001]

26. The Defendant violated the TILA rules on advertising as published in Regulation Z.

27. Defendants have advertised closed-end credit to consumers by disseminating false

advertisements for mortgage loans, including but not limited to advertisements, marketing

brochures and other mortgage documentation for fixed payment loans and lower rate

loans than are actually being charged, stating teaser rates such as “1.95%” and that rates

are “fixed.”

28. Notwithstanding its advertisements, CCB has never offered these teaser rate loans or

“fixed” loans. Instead, a loan that CCB has falsely advertises as a 1.95% or “fixed” loan

is in fact an adjustable rate mortgage for which the interest rate varies each month and the

minimum payment amount varies. The rate adjusts each and every month that the loan is

in existence. This loan features four payment options, including an interest-only

payment option and a lower minimum payment option where unpaid interest is deferred.

The minimum payment amount for the first year of this loan has been, at different times,

the amount that would be due if the consumer had a 3.5%, 2.95%, or 1.95% 30-year loan,

but the actual interest rate charged is in fact considerably higher and varies monthly. This

minimum payment amount is subject to increase initial lock period. The minimum

payment option often results in negative amortization because each month any unpaid

interest is added to the principal of the loan, so that the principal balance increases rather

than decreases for periods during the course of the loan. This loan is not a 1.95% or a

“fixed” loan as those terms are understood by consumers. CCB has made mail

advertisements, brochures and other documents and information disseminated to class

members or helped mortgage brokers create such advertisements on its behalf. Many of

the company’s advertisements, brochures and other documents disseminated to customers

indicate a low teaser rate, without disclosing that the teaser rate is only available for the

first month of the 30-year loan and would increase after the first month, and (2) interest

would in fact accrue at a rate substantially higher than the teaser payment rate, even

during the first year.

29. In numerous instances, CCB has also completed applications on behalf of consumers and

obtained consumers' signatures on applications for loans that CCB has not offered or that

were not available to the consumers, including but not limited to a 1.95%, 2.95% or 3.5%

for a “fixed” loan. CCB requires that applications be signed at the closing so CCB is

ultimately responsible for the content of the applications and the related marketing

programs. As an example, the Representative Plaintiffs in this action signed an

application for a 30 year fixed rate mortgage at 1.95%. The application was originally

signed with a broker working on behalf of the Defendant in March 2004. The application

was signed again at the request of the Defendant at the mortgage closing in June 2004.

At no time did CCB disclose to the Plaintiffs that no such loan program was being

offered. Similar applications were taken for other members of the class.

30. The mortgage when issued differs substantially from the program advertised and

disclosed in CCB documentation and advertising.

31. In credit advertisements, Defendants have violated the requirements of TILA and

Regulation Z by:

A. advertising credit terms other than those terms that actually are or will be

arranged or offered by the creditor, in violation of Section 226.24(a) of

Regulation Z, 12 C.F.R. 5 226.24(a);

B. stating a rate of finance charge without clearly and conspicuously

disclosing the annual percentage rate, and, if the annual percentage rate

may be increased after consummation, that fact, and advertising a payment

rate without clearly and conspicuously making other required disclosures,

in violation of Sections 144(c) and 107 of TILA, 15 U.S.C.sections

1664(c) & 1606, Sections 226.24(b) and 226.22 of Regulation Z, 12

C.F.R. sections 226.24(b) & 226.22, and Section 226.24(b)-4 of the

Federal Reserve Board's Official Staff Commentary to Regulation Z, 12

C.F.R, Section 226.24(b)-4, Supp. 1; and stating the period of repayment

and/or the amount of a payment, but

C. failing to disclose clearly and conspicuously one or both of the following

items: (1) the terms of repayment and (2) the annual percentage rate, using

that term, and, if the rate may be increased after consummation, that fact,

in violation of Section 144(d) of TILA, 15 U.S.C. section l664(d), and

Section 226.24(c) of Regulation Z, 12 C.F.R. section 226.24(c).

32. Therefore, Defendant’s representations, as alleged above, were, and are, false or

misleading. Defendants' practices constitute deceptive acts or practices.

33. In the course of advertising and offering, Defendants have represented to consumers,

expressly or by implication, that monthly payment of a specified amount or at a specified

rate is the cost of obtaining a loan through CCB. In numerous instances, Defendants

have failed to disclose or to disclose adequately that (1) monthly payment of the specified

amount or at the specified rate will result in negative amortization and cause an increase

in the total debt during the course of the loan, and (2) the monthly payment amount will

increase. This additional information would have been material to consumers in deciding

whether to apply for and obtain a loan through CCB. The failure to disclose, or disclose

adequately, this information in light of the representations made was and is a deceptive

practice.

34. In the course and conduct of advertising and offering credit, Defendants have represented,

expressly or by implication, that cash savings or the potential annual savings of

refinancing and/or consolidating existing debts into a mortgage loan obtained through

CCB.

35. In truth and in fact, the cash savings have not accurately illustrated the potential annual

savings of refinancing and/or consolidating existing debts into a mortgage loan obtained

through CCB.

36. In the course of advertising its products, CCB has violated the following statutes, among

others: TILA, 15 U.S.C. 5 1601 et seq., and its implementing Regulation Z, 12 C.F.R.

Part 226.

37. Defendants' representations, as alleged in this complaint, were false or misleading.

PRAYER FOR RELIEF ON ALL COUNTS

38. Consumers have suffered substantial injury as a result of Defendants ' unlawful acts or

practices, as set forth in each of the Counts above. Absent injunctive relief by this Court,

Defendants are likely to continue to injure consumers, reap unjust enrichment, and harm

the public interest. Plaintiffs seek a remedy under the Truth in Lending Act ("TILA"), to

obtain rescission, injunctive relief, redress, restitution, disgorgement, reformation, money

damages, attorneys’ fees and other equitable relief against Defendants for engaging in

unfair or deceptive acts or practices in violation of TILA, 15 U.S.C. 5 1601 et seq., and its

implementing Regulation Z, 12 C.F.R. Part 226.

Wherefore, Plaintiffs request the following relief in this action:

Rescission, injunctive relief; redress; restitution; disgorgement; money damages;

attorneys’ fees; legislative penalties; punitive damages; costs; and other equitable relief against

Defendants.

A trial by jury of 12 is hereby demanded.

Respectfully Submitted,

DEMET & DEMET SC

Attorneys for the Plaintiffs

s/KEVIN DEMET___________

KEVIN J. DEMET

DONAL M. DEMET

DEMET & DEMET SC

815 North Cass Street

Milwaukee, WI 53202

414-291-0800

414-291-9560 fax

Kevin Demet

Email address: Kdemet@Sprintmail.com

State Bar No. 1019051

Donal Demet

Email address: Ddemet@Demetlaw.com

State Bar No. 1014816