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From a public policy standpoint, the
Fremont Investment & Loan decision is surely the most
interesting of the Business Session’s first quarter of
2008. OCM featured the attorney-client privilege
decision because it will apply more broadly to other
types of litigation. But the Fremont decision raises
complex policy issues about mortgage lending.
In broad strokes, the Attorney General
sought an injunction against the Defendant, barring
foreclosure on “Presumptively Unfair Loans” in default
without obtaining the Attorney General’s written
consent. These loans were allegedly unfair because they
involved adjustable interest rates issued with an
initially low, introductory rate, applicable for less
than three years, later adjusted upward and which
either: “(1) the combined loan-to-value ratio was 90
percent or higher; (b) the loan was approved on ‘stated
income’ basis, meaning that [Defendant] essentially
accepted the borrower’s statement of income without
requiring verification, or (c) the loan had a prepayment
penalty.”
The Court recognized policy
considerations supporting these loans, including that:
(1) these loans involved a high risk of default, which
dictated higher than normal interest rate; (2) these
loans benefit consumers by allowing people to obtain
mortgages who would not otherwise qualify; (3) when
borrowers lie about their income on a “stated income
basis,” the lender is the victim; and (4) these loans
were not prohibited by any |
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state or federal statute. The Court
nevertheless entered an injunction.
The Court’s reasoning relied heavily on
the Predatory Home Loan Practices Act, M.G.L. ch. 183C,
§ 2, enacted August 9, 2004, effective November 7, 2004
(the “Act”). The Act makes certain high cost loans
“predatory” and a violation of M.G.L. ch. 93A, unless
the lender qualifies for a safe harbor by verifying that
the borrower’s debt-to-loan ratio is 50 percent or less.
The Act does not require any deception of the borrower.
Rather, the presumed unfairness lies “in the equities
between the parties.”
In entering the injunction, the Court did
not, however, limit its application to high cost loans.
“The reason is that this Court does not believe the
Legislature believed this practice to be tolerable for
mortgage loans that did not meet the definition of high
cost mortgage loans. Rather, . . . the Legislature
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 loans. What has changed since the Legislature
promulgated the Act is the increasing prevalence of
mortgage-backed securities, which enabled lenders such
as Fremont to assign large quantities of their high-risk
mortgages, take a quick profit, and avoid the risks
inherent in the loan.”
The Fremont decision raises and purports
to in part resolve difficult policy questions that one
might well conclude are better left for the Legislature.
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