California District Court Clarifies the Extent of TILA and Regulation Z’s Disclosure Requirement Regarding Initial “Teaser” Interest On Adjustable Rate Mortgages

By: Brendan F. Hug

On July 10, 2014, a federal judge in the Central District of California ruled in favor of defendant JPMorgan Chase Bank, N.A. (“Chase”) in connection with the March trial of a class action lawsuit that posed novel questions about the scope of the federal Truth in Lending Act (“TILA”) and California’s Unfair Competition Law (“UCL”) (Cal, Bus. & Prof. Code §17200 et seq.). Among other claims, the class alleged that the lender defendant was liable for damages under the UCL for failing to properly disclose interest pursuant to TILA and Regulation Z.

In Schramm et al. v. JPMorgan Chase Bank NA et al., case no. 2:09-cv-09442, the Plaintiff homeowners accused Chase of deceiving them by securing higher interest payments than disclosed in the documentation for their adjustable rate mortgage. The lawsuit was filed in December 2009, and the class of homeowners was certified in late 2011. The UCL claim survived summary judgment in October 2013.

Plaintiffs alleged that they paid Chase an initial interest or “teaser” rate of 3.875 percent for a fixed period of time after the origination of their loans. They alleged that they accepted this teaser rate relying on Chase’s claim that the rate reflected the sum of a specified index and a fixed margin. However, that sum was actually 3.5 percent. Plaintiffs alleged that the disclosures they received failed to state that the initial interest rate could exceed the sum of the index and margin. The basis for achieving an interest rate in excess of the sum is termed a “premium.”

U.S. District Judge John A. Kronstadt ruled after trial that the Plaintiffs failed to prove that the bank’s practices violated the unlawful, fraudulent, or unfair prongs of the UCL. While TILA and Regulation Z requires that lenders make certain disclosures regarding the interest rate, the Judge found that the regulation was silent on the issue of “whether the initial interest rate may be discounted or based on a premium.” The decision further held that nothing in the regulation requires any specific disclosure about how such initial teaser rates are calculated. Without an underlying TILA or Regulation Z violation, the court dispensed with the attendant UCL claim.

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