Mortgage lenders feel the wrath of a Federal Judge and Attorneys General: a District Court judge in Wisconsin grants class-action status to plaintiffs, and attorneys general file suit against Countrywide

Risk & Insurance, Sept 15, 2008 by Dan Reynolds

It's a case that's got bankers and other mortgage lenders and brokers quivering in their collective wing tips because the exposures could run into the hundreds of millions, if not the billions, of dollars.

A lawsuit filed in 2005 by a Cedarburg, Wis., couple alleging deceptive lending practices on the part of Maryland-based Chevy Chase Bank FSB was granted class-action status by U.S. District Judge Lynn Adelman of the Eastern District of Wisconsin in early 2007.

Bryan Andrews, a carpenter, and his wife Susan, a nurse, parents of four, allege that Chew Chase tricked them into an adjustable rate mortgage on a $191,000 loan they thought was fixed at 1.95 percent for a five-year period.

When the bank started sending the couple notices that indicated the interest rate was indeed adjustable, all the way past 8 percent according to court records, the couple sued, alleging violations of the 1968 Truth in Lending Act.

Adelman added to his decision the remedy that any member of the class in the Andrews case would be able to rescind their mortgage--that is, walk away from their loan--if it were found the bank broke the law and buried news of the adjustable rate on their mortgage somewhere among the fine print.

Adelman judges the size of the class at around 7,000 plaintiffs, but attorneys for Chew Chase say it's lower, although how much lower they won't say. Whether or not the language discussing the adjustable rate was clearly marked is essentially the crux of the argument.

Chew Chase's appeal, which argues in part that the Andrews and anybody else that can read should have noted the adjustable rate headings in the contract, now stands before the 7th U.S. Circuit Court of Appeals in Chicago.

As borrowers with skin in the game await that decision, other legal torpedoes have been fired against the mortgage lending industry from that very same region of the country.

Illinois Attorney General Lisa Madigan in June filed a lawsuit in Cook County Circuit Court against Countrywide Financial Corp., the massive mortgage lender which is now a subsidiary of Charlotte, N.C.-based Bank of America Corp.

In Madigan's state, foreclosures have been running hot and heavy. Her office reports that there were 9,670 foreclosures statewide in May of 2008, an increase of 42 percent over the number of Illinois foreclosures in May 2007.

Madigan alleges that Countrywide sold approximately 94,000 loans in Illinois between 2004 and 2006, and that delinquency rates on those loans outpace Countrywide's national delinquency rates.

Attorneys general in Florida, California and now Connecticut have also filed briefs against Countrywide, which was until recently headed by former CEO Angelo Mozilo.

Chevy Chase may or may not parry the full weight of Adelman's thrust, depending on which way the appeals court rules. But you can bet that other attorneys general are watching both that case and Attorney General Madigan's to see which way the wind is going to blow.

[ILLUSTRATION OMITTED]

"In many instances today, consumers donor know the costs of credit. Charges are often stated in confusing or misleading terms. They are complicated by 'add-ons' and discounts and unfamiliar gimmicks. The consumer should not have to be all actuary or a mathematician to understand the rate of interest that is being charged.

As a matter of fair play to the consumer, the cost of credit should be disclosed fully, simply and clearly.

Now that the right of consumers to be fully informed is protected when they shop in the supermarkets, the time has come to protect that right for shoppers who seek credit.

I recommend the Truth-in-Lending Act of 1967 to assure that, when the consumer shops for credit, he will be presented with a price tag that will tell him the percentage rate per year that is being charged."

--President Lyndon Baines Johnson