The Andrews believed the payments and the interest rate were fixed for five years and then became variable. But, according to court documents, only the minimum payment of $701.21 was fixed for five years. The court said the loan carried a teaser interest rate of 1.95%, but that rate only applied to the first monthly payment. Thereafter, the interest rate increased each month. As the rate increased, a larger portion of the minimum monthly payment was needed to cover the interest.

The bank told the trial court that its disclosures satisfied the law's requirements because it had included a sentence on the disclosure statement that the loan program allowed the borrower to select the type of payment made each month in accordance with other provided disclosures.

The federal Truth in Lending Act requires lenders to disclose certain information about the terms of the loan to prospective borrowers. TILA requires that disclosures be clear and conspicuous.

The trial court found several errors in the TILA statement the bank provided the Wisconsin homeowners. The court concluded that the 1.95% interest rate had no significant connection to the cost of the loan and also criticized the bank for printing parts of the disclosure in small print.

The court said the Andrews could cancel the loan and granted class certification, allowing an estimated 7,000 to 8,000 Chevy Chase borrowers who had option ARMs to join the lawsuit and have their loans canceled. Industry observers were concerned that the ruling could open up a floodgate of class action claims from borrowers nationwide, claiming their option ARM loans should also be canceled.

When the case came before the appellate court, the U.S. Court of Appeals for the Seventh Circuit said the right of recission is an individual remedy and not one that can be handled under a class action lawsuit. The appeals court said the trial court granted class certification based upon a Massachusetts case that was reversed two weeks after the Chevy Chase case was certified for class action status. The appellate court also said that Congress did not intend to leave lenders exposed to class action lawsuits costing hundreds of millions of dollars.

"Of possible interest to credit unions is that the court here held that class actions could not be brought in these types of rescission actions, both because the Truth in Lending Act does not permit it and because these claims should be decided individually, not as part of a class. This is good because class actions are easier for borrowers to bring and the judgments can be higher. Denying class actions in these situations may, therefore, limit future rescission claims. Although the issue here is the option ARM loan, this will apply to all claims to rescind credit under the Truth in Lending Act," said Jeff Bloch, senior assistant general counsel for CUNA.