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February 06, 2007

Mortgage scam, or not?

A federal judge has allowed a class action suit to go forward claiming that Chevy Chase Bank violated the Truth-in-Lending Act when it entered into a mortgage agreement with a Wisconsin couple. Here's a summary of the story:

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.
The libertarian in me says that when you borrow huge sums of money with your house as security, you should pay attention to the details.

But I've heard enough outrageously misleading radio ads for mortgage lenders that I really can understand how someone could get snookered. Here's what allegedly happened in this case:
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.
And I can't feel too sorry for lenders who use one-month teaser rates, or set up loans where the monthly payments don't even cover the interest, so that the principle of the loan actually increases -- unless they grab the borrowers by the lapels and shake them, saying, "Do you understand what this means?"

So while I'm an economic libertarian in many ways, I don't think we have to let lenders play three-card monte with the borrowers. (Go ahead, kick me out of the club.)