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Massachusetts Judge Grants Preliminary Injunction Barring Mortgage Company From Initiating or Proceeding on Foreclosures on Loans Deemed "Presumptively Unfair"

On Monday, Suffolk County Superior Court Judge Ralph D. Gants granted Massachusetts Attorney General Martha Coakley’s motion for a preliminary injunction against Fremont Investment & Loan, barring Fremont from initiating or advancing foreclosures on mortgage loans that the Court deemed “presumptively unfair loans” unless certain conditions are met.

On July 10, 2007, Fremont and the Massachusetts Attorney General entered into an agreement that set forth procedures for Fremont to follow before foreclosing on any Massachusetts residential mortgage loans and for the Attorney General to follow to object to certain foreclosures. On October 4, 2007, the Attorney General objected to every foreclosure Fremont proposed, except as to those loans where the home was not owner-occupied and Fremont had been unable to contact the borrower. The same day, the Attorney General, filed a complaint against Fremont, alleging that its past lending practices in the subprime market constituted unfair and deceptive acts or practices in violation of Mass. Gen. Law ch. 93A, § 2 (Chapter 93A). On December 10, Fremont exercised its contractual right to terminate the July 10 agreement, and the Attorney General subsequently moved to enjoin Fremont from initiating or advancing any foreclosure, or, in the alternative, from initiating or advancing any foreclosure of what she characterized as “presumptively unfair loans,” without the Attorney General’s written consent.

Largely agreeing with the Attorney General’s arguments, the court granted an injunction with respect to foreclosure of “presumptively unfair loans,” which it defined as having the following four characteristics:

(i) The loan is an adjustable rate mortgage (ARM) with an introductory period of three years or less (generally, a 2/28 or 3/27 ARM);

(ii) The loan has an introductory or ‘teaser’ rate for the initial period that is at least 3 percent lower than the fully indexed rate;

(iii) The borrower has a debt-to-income ratio that would have exceeded 50 percent if the lender’s underwriters had measured the debt, not by the debt due under the teaser rate, but by the debt due under the fully indexed rate; and

(iv) The loan-to-value ratio is 100 percent or the loan carries a substantial prepayment penalty or a prepayment penalty that extends beyond the introductory period.

In reviewing the record before it, the court found that there was no evidence that Fremont (a) knew that borrowers and/or brokers had falsified loan applications for certain loans, (b) willfully blinded itself to these facts, or (c) recklessly supervised its brokers. Rather, the court noted that “Fremont was a victim of these misrepresentations and did not encourage or tolerate them.” Likewise, the court found that there was no evidence that Fremont made false representations to borrowers regarding the terms of their loans, or that it joined brokers in mischaracterizing loan terms or making baseless promises.” Rather, “there was evidence that at least some of the borrowers either did not read the closing documents or did not understand their terms,” and the Court did “not find Fremont responsible for that misunderstanding, especially since many of the loan documents are forms required under federal law.”

The court further explained that there was nothing in the record to suggest that, in making loans with the characteristics of “presumptively unfair loans,” Fremont violated any federal or state consumer credit law. Rather, the court based its decision on the grounds that loans satisfying its own definition of “presumptively unfair loans” fall within the “penumbra” or “spirit” of the Predatory Home Loan Practices Act (the “Act”), Mass. Gen. Law ch. 183C, enacted in 2004, which only governs loans that fall under the definition of “high cost mortgage loans.” This assertion was made despite the fact that the Attorney General did not allege that the loans at issue fell under the definition of “high cost mortgage loans” in the Act. The court found that “just as a high cost mortgage loan is treated as structurally unfair under the Act if the lender reasonably believes at the time the loan was issued that the borrower would be unable to make the scheduled payments … [i]t is within the penumbra of that concept of unfairness that any mortgage loan secured by the borrower’s principal dwelling should be presumed structurally unfair if the loan possesses the four characteristics described above.” The Court further noted its belief that “the Legislature [in 2004] thought it sufficient to focus on high cost mortgage loans because it did not imagine that lenders would issue loans with this degree of risk unless they were high cost mortgage loans.” It opined that the mortgage industry has changed since the Act’s enactment and “[a]s the mortgage market changes, so, too must the understanding of what lending conduct is unfair.”

In addition, the court found that, although Fremont’s lending conduct was not generally recognized in the industry to be unfair at the time these loans were made, it was not inappropriate for the Court to now suddenly find the conduct unfair. “Just because we, as a society, failed earlier to recognize that loans with [the characteristics of “presumptively unfair loans”] were generally unfair does not mean that we should ignore their tragic consequences and fail now to recognize their unfairness.”

On the basis of the foregoing analysis, the court granted the preliminary injunction because it believed that the Attorney General was “likely to prevail in proving that many of the mortgage loans issued by Fremont … that bear the four characteristics outlined above are not merely presumptively unfair but actually unfair under Chapter 93A.” The preliminary injunction requires, in pertinent part, the following process to be followed before Fremont may initiate or advance a foreclosure:

• Fremont must give the Attorney General 30 days advance written notice before initiating or advancing a foreclosure on any mortgage loan that is (a) not a “presumptively unfair loan,” (b) not secured by the borrower’s principal dwelling, or (c) is secured by a dwelling that is vacant or uninhabitable, so that the Attorney General can verify that the proposed foreclosure falls outside the scope of the preliminary injunction.

• Fremont must give the Attorney General 45 days advance written notice before initiating or advancing a foreclosure on any mortgage loan (i) that is a “presumptively unfair loan,” secured by the borrower’s principal dwelling, and the dwelling is neither vacant nor uninhabitable, or (ii) for which the Attorney General has provided a written objection in accordance with paragraph 1 above, identifying the reasons why foreclosure is reasonable and/or why the Attorney General’s written objection under paragraph 1 was in error.

• If the Attorney General has timely given a written objection under paragraph 2, the Attorney General and Fremont must within the next 15 days attempt to resolve their differences regarding the foreclosure. If the differences are not resolved, Fremont may only proceed with the foreclosure with prior approval of the court, which it may seek on the 16th day.

At this point, it is not known whether Fremont will appeal the court’s decision. We will continue to follow this important and potentially precedent setting case in further editions of InfoBytes.

For additional information, contact John Kromer, Jeff Naimon, Matthew Previn, Jerry Buckley or Joe Kolar. For a copy of this decision, please see http://www.buckleykolar.com/publications/documents/FremontInjunction.pdf.

© Buckley Kolar, LLP 2005. INFOBYTES is not intended as legal advice to any person or firm. It is provided as a client service and information contained herein is drawn from various public sources, including other publications.

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