Option Arm Loans

There are Legal Challenges you may be able to raise to challenge Predatory Option Arm Loans.  As most people already know, the Option Arm loan is the one of the most predatory loan products the financial wizards have ever produced and marketed.  These loans are resulting in “payment shock,” loan default, and leading many homeowners toward foreclosure.  The Attorney Generals of several states have sued major lenders for deceptively marketing this product on a nation wide basis.

THERE ARE SOME POTENTIAL LEGAL CHALLENGES TO THE OPTION ARM LOAN WHICH MAY HELP SAVE YOUR HOME FROM FORECLOSURE:

  1. The loan is inherently unconscionable (arguments under the California Legal Remedies Act or Contract Unconscionability principles)
  2. The loan is falsely and deceptively marketed (California violation of Business and Professions Code Section 17200 and 17500)
  3. Predatory underwriting – also a potential 17200 violation
  4. “Steering” elders and minorities into option arm loans when they may lack the financial sophistication to understand the loan (argue this is a form of discrimination)
  5. Option Arm loans that are negotiated in a foreign language (targeting a minority group), but the loan documents are in English (California Civil Code Section 1632 may provide rescission rights)
  6. Bait and Switch tactics at the doc-signing table (argue fraud, deception, unfair business practices, etc.)
  7. Borrowers who are told they are getting one type of loan (ex. a 30 year fixed loan or 5 year fixed) only to find out they got the dreaded option arm that is fixed for one month.
  8. Truth in Lending “material violations” that trigger an extended three year right to rescind the loan (material disclosures involving the notice of right to cancel document, APR, Finance Charges, Total of Payments, and Payment Schedule).  Right to rescind is applicable as against ALL loan assignees
  9. High cost Option ARM loan under HOEPA (without receiving proper disclosures) can trigger a rescission right against all loan assignees.
    In Arizona, an Option Arm loan may be found to violate the Arizona Consumer Fraud Statute.
  10. These are just a few ideas.  If you have an option arm loan, (particularly a refinance transaction within the last three years) you owe it to yourself to get a forensic loan audit / TILA audit and tell your story to a foreclosure defense lawyer.

OPTION ARM LOAN GLOSSARY

Option ARM: An adjustable-rate mortgage which typically provides 4 different types of payment options each month (teaser rate payment, interest-only payment, 15 year amortized payment and 30 year amortized payment).

Teaser Rate: This is the initial interest rate which is typically very low (lower than the actual note rate), and which is designed to induce people to enter into the transaction. Borrowers are often not told that if all they do is make the teaser rate payment, their loan balance will rise, and the loan will eventually “recast” resulting in “payment shock.”

Adjustable rate: Typically an option arm loan will be fixed for ONE MONTH and then adjust every month thereafter. This can lead to payment shock in a relatively short amount of time.

Index: When a loan adjusts, the new interest rate is based on an “Index” and a “Margin” (you add the two together and that becomes the new rate for that period). An index is a widely used index that is used to help calculate the index portion of the loan. A common index is the LIBOR index.

Margin: This is the fixed rate portion of an adjustable rate loan (ARM loan) and is set forth in the promissory note and adjustable rate rider. When the loan adjusts, you add the index + margin to figure out what your new interest rate will be.

Payment shock: When the new interest rate exceeds a borrowers reasonable expectation and reasonable ability to repay a loan, this is referred to as “payment shock” and can often times have the effect of forcing the borrower into default and ultimately foreclosure.

Negative amortization: This is what happens when a borrower under an Option Arm Loan pays only the teaser rate. Because the borrower is not paying all of the interest called for under the Note, there is “deferred interest” which gets added to the loan balance. At some point the loan balance will reach 105%, 110%, 115% or 120% of the original loan balance, and when that happens the the loan will “recast” pursuant to the terms of the note, into a mandatory priniciple and interest payment often resulting in payment shock, default, and foreclosure.

Loan Interest Rate Caps: Adjustable rate loans typically havea “interest rate caps” that prevent them from adjusting to unafforadable levels. For example, in an ARM loan, you will typically see 5/2/5/ caps and 6/2/6 caps. The first number is the most the interest rate can adjust up or down at the first “interest rate change date.” The second number is the maximum the interest rate can change during subsequent adjustment periods, and the third number is the “lifetime cap” or the highest the interest rate can adjust over the life of the loan. For example, if the initial interest rate in the note is 5%, with a 5/2/5 cap the highest the interest rate could ever be is 10%.

Prepayment penalty: This is a “penalty” a lender puts in a loan document often times to ensure that a certain amount of interest payments will be received by the lender. It also has the effect of preventing a person with a prepayment penalty from refinancing the loan. A typical prepayment penalty will be two or three years in duration, and the penalty will often be 6 months of interest on the loan. For borrowers with a predatory and toxic option arm loan, this means they are often times forced to “deal with the loan.”

Loan disclosures: Lenders are required under Federal Truth in Lending law to clearly and conspicuosly explaint the material terms of a loan and the cost of credit. Oftern ARM loan disclosures (including the note, adjustable rate riders, loan program disclosures, and ARM disclosures) are often difficult for the average consumer to understand, which is another problem with these types of adjustable loans.