Dangerous Loans: Consumer Challenges to Adjustable Rate Mortgages

Abstract

As recently as the first quarter of 2007, home ownership rates were up across the board, including in low-income, fixed-income, and minority communities. By the fourth quarter of 2007, sales volume had flattened, housing prices had peaked or dropped, interest rates for consumers were uncertain, and mortgage lenders had tightened access to credit. Additionally, notices of default rose, as did forced (equity) sales, and completed foreclosures as measured by trustee deeds of sale filed. This article analyzes the relationship between innovative mortgage products, like adjustable-rate mortgages, and the first wave of consumer legal challenges brought against those products under the Truth in Lending Act (TILA), 15 U.S.c. section 1601, et seq. (TILA). Legislation has been introduced to address the rise in mortgage distress among consumers, but much of that legislation is limited in application. Hence, by default, courts will continue to play an important role in resolving consumer claims against lenders, and many of the lawsuits will be brought as class actions. TILA explicitly allows class action lawsuits for damages under section 1640, but section 1635, which covers rescissions, is silent on the question of whether class-wide rescission claims are permissible. On the legal side, the answer will depend upon how courts interpret section 1635 in light of TILA's overall consumer protection purpose. On the economic side, the answer will depend upon how access-tocredit issues get framed in light of the expanding mortgage crisis. Harry H. and Lillian H. Hastings Research Chair (2006-2007) and Professor of Law, University of California, Hastings College of the Law. The author gratefully acknowledges the Hastings Board of Directors and the Hastings Research Chair donors, The Center for the Study of Law and Society at the University of California Berkeley, School of Law (Boalt Hall), which hosted me as a Visiting Scholar in 2006-2007, and the Roger Traynor Scholarly Publication Award (2007-2008). Berkeley Business Law Journal