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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.
To see the original story,
click here.
By David Cho
Washington Post Staff Writer
Wednesday, February 27, 2008; D01
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.
After a federal judge in Milwaukee ruled last year that the
Wisconsin couple had been deceived and other borrowers could
join their suit, Chevy Chase Bank appealed to the circuit court
in Chicago. Kevin Demet, the lawyer for the plaintiffs, said a
decision by the appeals court is imminent, though others
involved in the case said it could be a matter of weeks.
"It's one of the most important cases for the mortgage industry
right now," said Louis Pizante, chief executive of Mavent, which
provides consumer protection law services to major lenders. "The
case was somewhat interesting a couple years ago when it
started, but its ramifications and impact have completely
changed given the current environment."
In recent years, home lending has boomed. But standards loosened
at many mortgage firms and led to a rise of abuses, in
particular predatory practices. Now, record numbers of people
are finding themselves with loans that are more than they can
afford and many want out.
Estimates vary widely on the number of homeowners who could
benefit from the case. Those who have refinanced or hold a home
equity loan are already eligible for a refund, while others can
get monetary damages. The court's ruling won't change this. But
by 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.
In its court filings, Chevy Chase said it would be "irreparably
harmed" if the class-action lawsuits are allowed. About 7,000
borrowers have received loans from the bank similar to that of
the Wisconsin plaintiffs.
"It's critical for the industry because if you allow class
actions . . . in theory you could have thousands of people in a
class and you could have enormous amounts of damages for the
industry," said Thomas H. McCormick, vice president and general
counsel for Chevy Chase.
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 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."
In previous cases, courts have been divided over whether
plaintiffs can file class-action suits to have their mortgages
rescinded. In general, lower courts have sided with homeowners,
while federal courts have favored the banks. Attorneys on both
sides of the Chevy Chase case think the U.S. Supreme Court will
have to settle the matter.
The case began when Bryan and Susan Andrews, a carpenter and a
nurse from Cedarburg, Wis., got a tantalizing ad in the mail in
2004.
"Cashflow 5-Year Fixed; Note Interest Rate: 1.950%," the mailer
advertised in boldface. The loan appeared far better than the
fixed-rate mortgage they had at the time, which was charging
5.75 percent interest. With college costs rising for his four
children, Bryan Andrews said he thought the mailer was a
godsend.
But the loan was actually an unorthodox mortgage that allowed
the interest rate to rise. The advertised 1.95 percent rate
lasted only one month. It quickly soared to above 8 percent.
"The bank kind of trapped us into it," Bryan Andrews said. "We
were thinking we were set at 1.95, that it was black and white,
but it was not to be. It was pretty stressful the first few
months."
Chevy Chase argued that it had disclosed the actual rate and
definition of the loan in closing documents, but the district
court judge in Wisconsin found those forms were confusing.
A year ago, McCormick said in an interview with The Washington
Post that Chevy Chase was not worried about the long-term
ramifications of the lawsuit. But times have changed since then,
and he acknowledged last week that the bank is concerned about
the possible precedent.
Wall Street banks are also worried. In many cases, the cost of
reimbursement falls not on the mortgage lender but on the
financial institutions that later bought and securitized the
loans.
But this unnerving scenario is a source of optimism for lawyers
like Demet.
"This is not going to save everyone in the country who got a bad
loan, but a lot of people who were misled, we will be able to
help those people," he said.
Staff researcher Richard Drezen contributed to this report.
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