"I think we were the first (claim like this)," says Kevin Demet, a Milwaukee lawyer from the 3 lawyer firm of Demet and Demet S.C.
Three years ago, Susan and Bryan Andrews came to Demet and Demet with a problem. They were in a dispute with their bank over a mortgage they had recently signed. When they signed it, they thought they were getting a 1.95 per cent fixed rate for five years. However, in the second month, the rate jumped to a monthly adjustable rate that went as high as 8.5 percent.
"The Andrews had good credit, they were credit worthy people and they basically were prime borrowers, stuffed into a sub prime loan," says Demet. A lawyer with two decades of expertise in real estate law, Demet was more than puzzled as he looked over the documents. After inspecting the agreement, it was clear to him there was a problem.
"There are a number of deceptive documents in the transaction," says Demet, "including the truth and lending disclosure statement. So ultimately, the Andrews documents, and anyone else who had similar documents, had three material misrepresentations in the truth and lending documents."
Demet filed suit on behalf of the Andrews, seeking class action status. In 2007, a District court judge agreed with Andrews and Demet that the bank had violated the Truth in Lending Act, or TILA. The judge certified the case as a class action. The judge's ruling means that thousands of other borrowers could join the Andrews as plaintiffs.
The Chevy Chase Bank (FSB) has recently appealed the lower court's decision, and a ruling from the 7th U.S. Circuit Court of Appeals is expected any day now.
LAS: Isn't it incumbent upon the borrower to read the fine print?
KD: No. That is a gross misstatement of the law. The Truth and Lending Act (TILA) was enacted to basically take away prior precedent, which was basically 'buyer beware', tough luck, if you don't read the fine print, you are screwed.
Congress said, 'No', this is not fair, we will not allow you to refinance
people's residences, unless you give them material disclosure the main terms of their loan, in a simple manor, following the guidelines of the Federal Reserve Board residences, unless you give them material disclosure the main terms of their loan, in a simple manor, following the guidelines of the Federal Reserve Board.
The main reason the Federal Reserve did that is that they did not want people to be hoodwinked out of their houses. The buyer beware concept is something that pre-dates the TILA and the last 40 years of jurisprudence in this area and so that is NOT the law.
Prior to this whole sub prime mess lenders were doing their best to comply with the law. Something changed in the lending industry when sub prime loans started being marketed to people with good credit.
If you look at the precedent cases under TILA (Truth in Lending Act), I never saw documents like this coming out of a bank until recently. Something happened in the early 2000s and you started seeing very unusual products and very unusual disclosures.
LAS: In what way were they unusual?
KD: Well, like negatively amortizing mortgages with teaser rates. Misleading terms were stated all over every document you get in the transaction. In the past, I think the industry was perhaps more regulated, because you just did not see crazy things like this at federally insured institutions.
This whole thing evolved recently, having teaser rates. Why would you tell someone they are paying a lower rate than what they are actually paying? It just doesn't make any sense. In credit transactions and you have to do it in a simple manner, just following the disclosure terms created by the Federal Reserve Board. The main reason the Federal Reserve did that is that they did not want people to be hoodwinked out of their houses. The buyer beware concept is something that pre-dates the TILA and the last 40 years of jurisprudence in this area and so that is NOT the law.
LAS: What do the Andrews, and possibly other have to gain here?
KD: They are looking to rescind their mortgages. They will recover all the money they paid to Chevy Chase, all their closing costs, and all their monthly payments.
The Chevy Chase Bank, if they follow the statutory guidelines, would have the right to recover all the money they loaned to the Andrews. It is essentially offsets several years of mortgage payments, because Chevy has delayed the case and run up damages calculations, by anyone's standards, because they refused to allow the class members the right to rescind when they became aware of these lawsuits we brought.
LAS: If the Court of Appeals upholds the lower court decision, what would that mean for borrowers?
KD: If the court of appeal affirms then many people will have the opportunity to get their interest they paid back from the bank. Basically, it would allow them to refinance with credit for all the money they paid over the years to the bank that was wrongfully collected.
LAS: Prior to the sub prime crisis, did you see mortgages like this?
KD: If you look at the precedent cases under TILA, I never saw documents like this coming out of a bank until recently. Something happened in the early 2000s and you started seeing very unusual products and very unusual disclosures.
LAS: In what were they unusual?
KD: Well, like negatively amortizing mortgages with teaser rates. The Chevy Chase documents stated all over every document you get in the transaction that the rate was fixed for a period of years at a teaser rate. In the past, I think the industry was perhaps more regulated, because you just didn't see crazy thing like this at federally insured institutions. And Mortgage lenders, this whole thing evolved recently, having teaser rates and pretending they were effective for a period of years. Why would you tell someone they are paying a lower rate than what they are actually paying? It just does not make any sense.
The Andrews got their teaser rate for one month. Who would go through the process of re-financing to get a teaser rate for one month? No one would do that.
LAS: Is this typical of the current mortgage foreclosure cases?
KD: I don't think every lender gives false disclosures. I really don't. The point is that these loan disclosures were the product of a deceptive mind. Lenders like Chevy Chase, unfortunately, have drawn down the standards and the reputations of the industry. Their conduct is shameful and dishonest.
I think that Chevy Chase is trying to argue the sky is falling. In fact, companies with honest disclosures and honest product should not have to worry about legal claims. Unfortunately, the good companies may be letting the rotten apples spoil the whole bushel.
The database Chevy Chase produced in this case, 8041 members, in the first year. We don't know how many people will get relief from the actions we filed, but it is thousands.
Kevin Demet is a partner in Demet and Demet in Milwaukee, Wisconsin. He graduated from Marquette University, B.S. in1986 and went on to graduate from the University of Wisconsin-Madison, JD in 1989. Civil Litigation; Probate; Corporate; Insurance; Employment; Real Estate; Closely Held Business; Class Actions.