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CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

Special Alert

Massachusetts Intermediate Appeals Court Upholds Fremont Preliminary Injunction

Trial Court Order Upheld. On Friday, May 2, a Massachusetts appellate judge upheld the trial court's entry of a preliminary injunction (the "Order") requested by the Massachusetts Attorney General (the "Mass AG") against Fremont Investment & Loan ("Fremont") (first reported in InfoBytes Special Alert, Feb. 27, 2008), including the Order's later modification to prohibit future servicing sales by Fremont unless the new servicer agreed to abide by the terms of the Order. The appeal was heard by an individual justice of the appellate court rather than a panel.

Trial Court Order. The Order prohibits Fremont from foreclosing on mortgage loans secured by owner-occupied property without first obtaining permission from the Mass AG or, if the Mass AG does not give permission, the trial court. The trial court declared certain loans presumptively unfair; for those loans, Fremont must give the Mass AG 45 days advance written notice of the proposed foreclosure, identifying why foreclosure is reasonable under the circumstances. The Mass AG has the opportunity to object, and if it does, and Fremont and the Mass AG cannot work out a resolution of the issue, the court will determine whether to approve of the foreclosure after considering whether (i) the loan was actually unfair (as opposed to presumptively), (ii) the home is actually occupied by the borrower as the primary residence, (iii) Fremont took reasonable steps to work out the loan, and (iv) there is any fair or reasonable alternative to foreclosure. After the Order went into effect, Fremont sold the servicing rights to certain loans. The Mass AG sought to enjoin the sale and to modify the Order to prohibit sales of servicing rights to Fremont loans secured by property in Massachusetts unless the purchaser agreed to abide by the Order. The trial court expressly permitted the sale to proceed (out of concern that prohibiting the sale would force Fremont into receivership) but modified the Order as requested by the Mass AG for future sales.

Appellate Ruling. The appellate justice held that the trial court did not impermissibly expand the scope of Massachusetts's high cost home loan law, Chapter 183C, in looking to that law to determine whether Fremont's conduct was unfair. Rather, the appellate justice held that it "has long been understood that a factor to be considered in determining whether a practice should be deemed unfair is whether it is within the penumbra of some common-law, statutory or other established concept of unfairness." The appellate justice also concluded that the Order was permissible based on the trial court's reliance on the recent federal agency guidance. The appellate justice did not address the fact that this recent federal agency guidance was issued after the loans in question had been originated. 

The appellate justice also upheld the trial court's determination that the existence of four loan characteristics combined could indicate that a loan is unfair even if the characteristics, on an individual basis, "were and are legal."  The appellate justice held that it was not enough that the characteristics were not prohibited by law for the statutory exemption from liability under the Massachusetts unfair practices law-they must be expressly permitted by other laws to be eligible for the exemption.

The appellate justice also upheld the trial court's requirement that Fremont obtain permission from either the Mass AG or the court to foreclose and make additional showings if the loan was presumptively unfair.

What's Next? The appellate justice did not request that the case be heard by a three justice panel of the intermediate appellate court. However, Fremont has until May 15 to make such an appeal. 

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Buckley Kolar filed an Amicus Curiae brief before the appellate justice on behalf of the American Financial Services Association, the Consumer Mortgage Coalition, the Housing Policy Council of the Financial Services Roundtable and the Mortgage Bankers Association (for a copy of this brief, please see Amicus Brief filed by Buckley Kolar). A copy of the appellate decision is available at http://www.buckleykolar.com/documents/MassachusettsvFremont.pdf. For further information about the case, please call us at any of the phone numbers listed below

Jeff Naimon                   202-349-8030

John Kromer                  202-349-8040

Matthew Previn              202-349-8090

Kirk Jensen                    202-349-8048

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