Mortgage Lenders Concerned By Nearing Federal Appeals Court Decision On Homeowner Class Actions In "Truth In Lending" Cases

(original post 2-28-08)
The Washington Post reports:

• A federal appeals court is nearing a decision on a battle between Chevy Chase Bank and a Wisconsin couple that could for the first time enable homeowners across the country to band together in class-action lawsuits against mortgage firms and get their loans canceled. The case is alarming Wall Street's biggest banks, which could bear the hefty cost of reimbursing all mortgage interest, closing costs and broker fees to groups of homeowners who uncover even minor mistakes in their loan documents.

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• [B]y allowing plaintiffs to file class-action suits, the ruling would make it much easier and more affordable for groups of homeowners to get that relief, several lawyers and mortgage analysts said. Dozens of class-action homeowner lawsuits have been filed in California and elsewhere against the nation's largest banks. The success of these claims could turn on the decision in the Chevy Chase case.

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• The law states that even a minuscule violation by a lender can lead to a mortgage cancellation, or rescission. For example, if the annual percentage rate calculation is off by one-eighth of a percent between preliminary and final loan documents or if a monthly payment schedule does not conform precisely to federal guidelines, some borrowers could get a refund for all they have paid to live in their homes for years. They would have to pay back the entire amount of the loan, but they could then seek a new mortgage on better terms.

• According to the inspector general for the Federal Deposit Insurance Corp., 83 percent of federally supervised banks that issued loans at the height of the housing boom in 2005 have been cited for "significant compliance violations." Lending abuses were more frequent among the tens of thousands of state-regulated banks and thrifts, such as the now-bankrupt New Century Financial, industry analysts said.

• But few homeowners have been successful in getting their loans canceled. Most people are unaware they have this right, consumer advocates said. Others have found the process too arduous and expensive, often requiring long legal battles. Chevy Chase said it negotiated two mortgage cancellations all of last year. That could change if the U.S. Court of Appeals for the 7th Circuit rules in favor of allowing homeowners to join class-action suits. Plaintiff attorneys also would have far greater financial incentive to take up such cases.

• "It's preposterous to think an individual can fight the bank on a loan," said [attorney Kevin] Demet, the lawyer for the Wisconsin plaintiffs. "And any attorney who's worth his salt does not want to pursue individual action. You could spend $50,000 to $70,000 on a case where you are going up against huge law firms that want to delay and hassle you for several years."

For more, see Door Could Open To Class Actions (When Borrowers Fight Back: Banks watch closely to see if a couple's legal struggle with their lender will launch a new front in the battle over troubled mortgages).

For stories on the Chevy Chase, option ARM class action lawsuit, see:

• The Washington Post: A Fight Over the Fine Print (Chevy Chase Bank Faces Suit Over Adjustable-Rate Mortgages),
• Milwaukee Journal Sentinel: Mortgage lawsuit may have big effect (Couple's low interest rate lasted a month).

For other posts on homeowners using Federal & state consumer protection statutes to try and undo bad mortgage loans, Go Here, and Go Here. undo mortgage loans TILA alpha