SJC-10258, December 9, 2008.
The Massachusetts Supreme Judicial Court has upheld a preliminary injunction requested by the Massachusetts Attorney General and issued by a Superior Court judge preventing a subprime lender, Fremont Investment & Loan Co., from proceeding to foreclose on property subject to its mortgages, without first negotiating with the owners, and then if deemed necessary, obtaining specific court approval to proceed to foreclose.
Fremont is an industrial bank chartered by the State of California. Between 2004, and 2007, Fremont had originated almost 15,000 loans to Massachusetts residents secured by mortgages on owner-occupied homes, over fifty to sixty per cent of which were subprime.
When the Attorney General brought suit in 2007, a significant number of Fremont’s loans were in default. The Attorney General analyzed ninety-eight of those loans and found that all were ARM loans with a substantial increase in payments required after the first two or three years, and that ninety per cent of the ninety-eight had a one hundred per cent loan-to-value ratio.
The SJC agreed with the lower court judge who concluded that there was a likelihood of success on the merits of the claim because the lender had originated home mortgage loans with four specific characteristics, which made it almost certain that the borrower would not be able to make the necessary loan payments, leading to default and then foreclosure, which the court deemed was an unfair act or practice within the meaning of G.L. c. 93A, § 2.
The four features were as follows:(1) the loans were ARM loans with an introductory rate period of three years or less; (2) they featured an introductory rate for the initial period that was at least three per cent below the fully indexed rate; (3) they were made to borrowers for whom the debt-to-income ratio would have exceeded fifty per cent if the lender had measured the borrower’s debt by the monthly payments at the fully indexed rate rather than the introductory rate; and (4) the loan-to-value ratio was one hundred per cent, or the loan featured a substantial prepayment penalty or a prepayment penalty that extended beyond the introductory rate period.
Fremont had argued that each of the four features was permitted by statute and by regulatory authorities. However, the SJC decided that the lender, by choosing to combine them into a package, should have known that the loans were “doomed to foreclosure” and that no State or Federal authority permitted such a combination.
Although there was evidence to demonstrate a G.L. c. 93A violation, the judge nonetheless found no evidence in the record that Fremont encouraged or condoned misrepresentation of borrowers’ incomes or deceived borrowers by concealing or misrepresenting the terms of its loans.
The case was remanded to the Superior Court for further proceedings.