The Truth-in-Lending Act (“TILA”) requires creditors to accurately and conspicuously disclose the material terms of consumer mortgage loans. As explained by the United States District Court for the Eastern District of Wisconsin in a putative class action case, TILA’s mandates also preclude creditors from including conflicting and superfluous information in those disclosures. Andrews v. Chevy Chase Bank, FSB, No. 05C0454 (E.D. Wis., Jan. 16, 2007).
In Andrews, the plaintiffs claimed that several features of their home loan were not properly disclosed in a refinancing through Chevy Chase Bank in 2004. The loan program accepted by the plaintiffs provided that the interest rate was 1.95 percent for the first month only and would adjust each subsequent month for the life of the loan while the monthly payment would remain the same for the first five years of the loan. Because of the fluctuation of the interest rate and the fixed monthly payments, the loan could negatively amortize. Plaintiffs stated that the disclosures provided at the loan closing led them to believe that the interest rate and the monthly payment were fixed for five years and would adjust thereafter and that there would not be any negative amortization.
TILA requires creditors to disclose certain information concerning the loan repayment schedule, including the number, amount and period of payments, in a clear and conspicuous manner, segregated from all other terms and loan information.
The court held that while the number and amount of payments were adequately and conspicuously disclosed, Chevy Chase did not adequately disclose the frequency of the payments in a clear and conspicuous manner. Instead, Chevy Chase disclosed only the date of the first and last payments and included a provision in small print on the disclosure statement that the “loan program allows you to select the type of payment you may make each month, in accordance with disclosures provided to you earlier.”
The court concluded that this provision was ambiguous and would not lead an ordinary consumer to believe that loan payments were due monthly. Furthermore, the disclosure was inadequate because it was sandwiched in between other information instead of being conspicuous.
Chevy Chase argued that in addition to being listed in the disclosure statement, the required information also was set forth in other disclosures, which were provided at and before closing, rendering the disclosures as a whole in conformance with TILA.
The court was not persuaded and held that even though provided in other documents, the required information was not grouped with other payment information, not segregated from other loan terms and would not, therefore draw the ordinary consumer’s attention.
Furthermore, the disclosure of the annual percentage rate and variable rate feature must be clear. The court found that statements in the disclosures indicating that the annual percentage rate was a “yearly rate” of 4.047 percent but also disclosing that the loan carried a “yearly” interest rate of 1.95 percent were conflicting and confusing and did not meet the TILA requirement. Chevy Chase also was required to disclose the fact that the 1.95 percent initial rate was a discounted or teaser rate, but it failed to do so, stating instead that the rate “may” have been discounted.
The court also held that Chevy Chase violated TILA by including a reference to the 1.95 percent interest rate on the disclosure statement. TILA bars creditors from adding superfluous information to the disclosure statement. The court reasoned that the inclusion of this information was not meaningfully connected to the required information since the interest rate is not an item which must be disclosed, and because it would not have been useful to an ordinary borrower. The inclusion of the 1.95 percent teaser interest rate served no useful purpose and was only used to make the loan appear attractive.
Chevy Chase further violated TILA by including a provision in the disclosure statement that the loan was a “5-year fixed” loan. Since the interest rate was not fixed, the court found this statement to be misleading. The court suggested that Chevy Chase could have avoided TILA liability if it had simply used the word “payments” after the word “fixed” since the payments were in fact fixed for five years. The “5-year fixed” language also was problematic because it was located near the interest rate, further suggesting that the interest rate was fixed.
In addition, the disclosure statement contained the incorrect statement that the interest rate “may” change.
As a result of Chevy Chase’s violations of TILA, the borrowers were entitled to rescind the loan and have their attorney’s fees paid by Chevy Chase. In addition, the court granted the borrowers’ motion for class certification, thus opening the door to rescission by a nationwide class of borrowers