It started as one case filed in 2005 by Wisconsin couple against their mortgage lender. Now, it could have serious implications on the banking industry. It comes down to if an appeals court agrees that a borrower can cancel their mortgage when the lender has violated a federal lending disclosure law.
It started out like any other of the hundreds of lawsuits filed since the U.S. housing boom had a rise in sales of adjustable rate loans. The couple in Wisconsin claimed their lender, Chevy Chase Bank FSB, hide the real terms of the low-interest rate loan when they were refinancing to pay off their children’s college tuition. The couple thought they were locked into a rate for 5 years but in reality by the 2nd payment the rate had more then doubled.
When the couple filed the case, they did so seeking class action status. In early 2007, US District Judge Lynn Alderman ruled that Chevy Chase had the violated Truth In Lending Act and that thousands of other customers of Chevy Chase could join as plaintiffs.
When the judge ruled that the borrowers could force the bank to cancel or rescind their loans, she turned a normal class action lawsuit into a nightmare for the banking industry. Luckily the decision was stayed pending an appeal to the 7th U.S. Circuit Court of Appeals but they are expected to rule on this any day.
According to attorney Christine Scheuneman (whose firm represents Chevy Chase), the Federal appeals court disagrees over whether class-wide rescission under TILA is available. “If class treatment is found to be available for rescission…given the current crisis not predicted in 2005, the result all over the country could be massive class suits,” said Scheuneman.
Be prepared for confusion and market disruption if the 7th U.S. Circuit Court of Appeals agrees with Judge Adelman. The banking industry will curtail lending as a response. Ultimately, both sides feel that a decision in the case will be decided by the U.S. Supreme Court. But in the mean time, all of us in the mortgage industry/real estate industry need to be prepared that lending could get tougher for a period of time.
By Shelli Crysler