"A federal district court judge ruled banks must rescind certain option
adjustable-rate mortgages because they violate the Truth in Lending Act.
A suit filed by Susan and Bryan Andrews against Chevy Chase Bank claimed they
thought the 1.95% introductory rate on their option ARM was fixed for the first
five years. Two months after the mortgage was originated, the interest rate
increased to 4.375%.
The judge determined disclosures about the loan were “unclear and confusing,” according to the Wall Street Journal. The mortgage was also confusing because, while payments were fixed for five years, the interest rate was not.
Based on the ruling, Chevy Chase will have to rescind all the loans that have similar language in the disclosure forms. An exact number of how many customers this involves was not immediately known, but Chevy Chase originated more than $7 billion in mortgages in 2006, the majority of them option ARMs.
The bank plans to appeal"
Combine legal liability with underperforming loan portfolios in the secondary market and you will be seeing a significant change in how lenders market and underwrite these products to the general market.
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