The United States District Court for the Northern District of California just certified a nationwide class of individuals who obtained option ARM loans from U.S. Financial Funding. With an option ARM loan the customer picks what payment he will make among a menu of payment options. In most circumstances, the customer picks the minimum payment. Any interest due which the minimum payment does not cover gets tacked on to the principal.

In Lymburner v. U.S. Financial Funds, Inc., Case No. C-08-00325, plaintiff Dian Lymburner refinanced her existing home loan with an option ARM loan. The loan had a low monthly payment option of $700. Shortly after plaintiff got her first bill, she realized that with each payment, the amount she owed went up, not down as she had expected. She sued, claiming violations of the Truth in Lending Act and California Unfair Competition Law. Lymburner claimed that the loan documents she signed did not disclose that her $700 payments would not cover all the interest owed and that negative amortization would result.

In its opinion, the Court carefully reviewed each factor supporting class certification. Among the considerations was all putative class members had the same loan documents which said negative amortization “may,” rather then “will,” result if minimum payment is made. Although the Court did not address the merits, plaintiff will likely argue that the clause is misleading in that it suggests that negative amortization is merely a possibility where, in fact, under every circumstance, it is certainty that if one makes only the minimum payment the loan balance will go up.