Mortgage Lending: 5.12.8.2 Contract Claims in Option ARM Cases
Option adjustable rate mortgage loans (option ARMs) that were originated in the years leading up to the subprime mortgage collapse often include a term requiring the borrower to “pay principal and interest by making a payment every month.” Such a loan term is arguably inconsistent with a loan that is structured so that the borrower’s monthly payments are applied only to interest, and not to principal, during the negative amortization period.