The Housing Chronicles Blog: Ruling on mortgage case could change the industry

Thursday, July 3, 2008

Ruling on mortgage case could change the industry

A lawsuit that has been referred to the 7th U.S. Court of Appeals and which could be decided any day could not only allow a class of borrowers to sue mortgage lenders for violations of the Truth in Lending Act, but also force the lenders to rescind the loans. From a Reuters story:

A lawsuit filed by a Wisconsin couple against their mortgage lender could have major implications for banks should a U.S. appeals court agree that borrowers can cancel their loans en masse when their lenders violate a federal lending disclosure law...

The idea of canceling tainted loans to stem a tide of foreclosures has caught hold in other quarters; a lawsuit filed last week by the Illinois attorney general asks a court to rescind or reform Countrywide Financial Corp (CFC.N: Quote, Profile, Research, Stock Buzz) mortgages originated under "unfair or deceptive practices."...

Federal appeals courts disagree over whether class-wide rescission under the Truth in Lending Act is available, said attorney Christine Scheuneman, whose firm represented Chevy Chase at the district court.

"If class treatment is found to be available for rescission ..., given the current crisis not predicted in 2005, the result all over the country could be massive class suits," said Scheuneman, a partner at Pillsbury Winthrop Shaw Pittman LLP.

The Truth in Lending Act, a 1968 federal law designed to protect consumers against lending fraud by requiring clear disclosure of loan terms and costs, lets consumers seek rescission, or termination, of a loan and the return of all interest and fees when a lender is found in violation.

Should the 7th U.S. Circuit Court of Appeals agree with Judge Adelman, banking industry associations predict "confusion and market disruption" as banks curtail lending further...

...the Andrews' attorney, Kevin Demet, said lenders want to scare the judiciary into banning class action rescissions because they were unable to convince Congress to do so in the 1990s.

Both sides said the case will likely be decided by the U.S. Supreme Court.

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