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Ruling Faults Lender

In Option ARM Suit

A federal district court judge ruled that a Maryland bank must rescind loans made to certain borrowers who took out so-called option adjustable-rate mortgages because it violated the Federal Truth in Lending Act.

The ruling comes at a time of heightened scrutiny of option ARMs and other nontraditional mortgages, which grew in popularity during the housing boom. Option ARMs typically carry a low introductory interest rate and give borrowers multiple payment options.

In recent years, option ARMs have found favor with borrowers looking to buy houses they couldn’t otherwise afford and with homeowners looking to pull out cash without increasing their monthly payments.

Some $208 billion of these loans were originated in the first nine months of 2006, according to Inside Mortgage Finance. That is on top of $280 billion in option ARMs originated in 2005.

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