Court Strikes Class Action in Option ARM Case.

Byline: Jennifer Harmon

Chicago-The Seventh Circuit Court of Appeals has struck down the class certification in a closely watched lawsuit by a Wisconsin couple who maintained that they didn't understand the initial 1.95% teaser rate was only for one month when they took out a payment-option adjustable-rate mortgage from Chevy Chase Bank.

The decision is a significant win for lenders, according to Laurence Platt, a partner with the Washington law firm K&L Gates LLP. "Finally some good news for the mortgage industry," Mr. Platt told MSN.

"A contrary decision would have permitted borrowers to rescind their mortgages on a class-wide basis providing an economic windfall that is disproportionate to any actual harm and reeking economic havoc on the holders of the related mortgage-backed securities."

A U.S. District Court judge had formerly ruled in favor of Bryan and Susan Andrews in their request to rescind the loan under the Truth in Lending Act and certified a class-action lawsuit. But circuit judges reversed the class certification and said the right of rescission is an individual remedy and Congress did not intend to leave lenders exposed to class actions costing hundreds of millions of dollars. "Using a class action to resolve a multitude of individual, varied rescission claims is neither economical nor efficient in any sense of those terms," the opinion said.

The court found support for that conclusion in the text and history of the TILA statute, which limits the damages available in a class action.

Tom McCormick, executive vice president at the Maryland based-Chevy Chase Bank, said he does not think the ruling is necessarily a victory for lenders because it is not a loss for borrowers. "Borrowers have all the remedies that they are entitled to. Those are significant remedies, which they should have," he said. "This is a loss for plaintiff class-action lawyers looking for a windfall. This borrower had no actual damages, is paying an interest rate of 5.5%, lower than he'd get in a conventional mortgage, and did not allege that he in fact was misled." He said this case ...