In a boon for the mortgage lending industry, a federal appeals court has said the Truth in Lending Act does not allow for rescission of mortgages on a class action basis.
The 7th U.S. Circuit Court of Appeals, in a 2-1 decision on Wednesday, averts the potential of significant damages for creditors accused of violating disclosure requirements in some of the exotic mortgage vehicles that exacerbated the mortgage market meltdown and has Congress contemplating ways to restore credit market confidence.
The Circuit decision joins an earlier ruling by the 1st and 5th Circuits and one California state appellate court that have held that the Truth in Lending Act (TILA) does not allow claims for rescission in a class action format.
A 'SIGNIFICANT WIN'
"This is a significant win for all lenders," said Jeffrey W. Sarles of Chicago-based Mayer Brown, who represented Chevy Chase Bank FSB in a successful appeal that overturned a trial court ruling that certified a class in a Wisconsin mortgage loan case. Andrews v. Chevy Chase Bank, No. 07-1326.
"Allowing thousands of class members to rescind their mortgages at one fell swoop would threaten lenders with intolerable liability," Sarles said.
Kevin J. Demet of Demet & Demet in Milwaukee, attorney for the plaintiff class, did not return calls for comment.
The TILA allows consumers to rescind purchases, including mortgages, for any reason within three days and for more limited reasons beyond that.
Rescission requires a bank to repay all down payments, earnest money, fees and other payments, while creditors must return any principle amount received to unwind the deals.
The decision does not affect the ability of individual consumers to seek rescission on mortgages for alleged violation of the TILA.
The opinion included the estimate that the Chevy Chase liability could be as high as $210 million if the rescission claims were allowed to proceed as a class action. The statute caps class action damages for other causes, unrelated to rescission.
The 7th Circuit majority said the rescission remedy "appears to contemplate only individual proceedings; the personal character of the remedy makes it procedurally and substantively unsuited to deployment in class actions.
"Using a class action to resolve a multitude of individual, varied rescission claims is neither 'economical' nor 'efficient' in any sense of those terms," wrote Judge Diane Sykes for the majority.
In this case, a Cederburg, Wis., couple refinanced their home with an adjustable-rate loan that allowed them to vary their payment, depending on monthly cash flow, in a loan product the court called a "trap for the unwary."
The Chevy Chase loan interest started at 1.95 percent but fluctuated monthly, although the debtor was allowed to keep a consistent minimum payment.
The low payments, coupled with rising interest, kicked in a negative amortization feature that added unpaid interest to the principal, extending the life of a loan for years.
The borrowers said they believed that both the payment and interest were fixed for five years and fluctuated thereafter.
Sarles noted that, although the circuits are consistent in disallowing class action status for rescissions, the issue has recently split district judges across the country as mortgage markets deteriorated and consumers pressed claims that they were not told the details of loans.
At least five judges have permitted class certification, while another five have disallowed class certifications across the country, he said.
A DISSENT
In dissent, 7th Circuit Judge Terence Evans wrote that Congress created an ambiguous law and did not make its intentions on class status in these cases clear. The court should assume that if Congress wanted to limit access to rescission in the class action context it would have said so, Evans wrote.
He said that, while it is possible the individual differences in unwinding rescinded mortgages in a class action would prove too complex to satisfy class certification rules, that should not bar class actions in the TILA as a matter of law.
Rather than forcing the statute to further a supposed policy vision of Congress, Evans wrote, the court should acknowledge the ambiguity and construe the language "that protects the innocent, not the guilty."
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Mortgage Lenders Fight Off Rescission Class Action in 7th Circuit
The National Law Journal
September 30, 2008
