Lender Prohibited from Foreclosing Without Notice to Attorney General
Beveridge & Diamond, P.C. - Massachusetts Environmental, Land Use & Real Estate Alert, 2008
In a recent decision, Massachusetts Superior Court Judge Ralph D. Gants enjoined Fremont Investment & Loan (“Fremont”), a California based lender, from foreclosing any of its 2,200 loans in Massachusetts without providing notice to the Commonwealth through the Attorney General’s office. Commonwealth v. Fremont Investment & Loan, et.al., Superior Court Civil Action No. 07-4373-BLS. What makes this ruling important is that it was issued without evidence of fraud by Fremont. The court held that despite the lack of fraud, the characteristics of Fremont’s mortgage loans made them presumptively unfair and therefore in violation of G.L.c.93A.
The Attorney General argued that Fremont issued mortgages with terms that most borrowers would be unable to meet, therefore requiring borrowers to either refinance or face foreclosure. In a market with falling residential real estate values refinancing in many cases would be impossible. Fremont operated mainly in the so-called subprime market and issued adjustable-rate mortgages to borrowers with a high debt-to-income ratio characterized by short introductory periods, introductory rates at least 3 percent lower than the fully indexed rate and harsh prepayment penalties. The Attorney General argued that the terms of Fremont’s mortgage loans amounted to an unfair and deceptive trade practice under G.L.c. 93A.
The court agreed and held that despite the lack of fraud, loans with the following characteristics would make a mortgage presumptively unfair under G.L.c. 93A: i) an adjustable rate mortgage with an introductory period of three years or less; ii) an introductory interest rate at least 3 percent lower than the fully indexed rate; iii) the borrower has more than a 50 percent debt-to-income ratio measured by the debt due under the fully indexed rate; and iv) the loan carries a 100 percent loan-to-value ratio or a substantial prepayment penalty or a prepayment penalty lasting beyond the introductory period. The court found that the Attorney General was likely to prevail in proving that many of Fremont’s loans met this criteria and were therefore in violation of G.L.c. 93A.
The court ordered Fremont to give the Attorney General 30 days advance notice before seeking foreclosure of any loan in Massachusetts. If the Attorney General did not object, Fremont could proceed with the foreclosure. Loans that met the presumptively unfair criteria articulated in the decision and which were secured by the borrower’s principal dwelling would require 45 days notice to the Attorney General prior to proceeding with foreclosure.
The judge further stated that his decision should not be viewed as releasing borrowers from their obligations. “The spirit of this decision is simply that Fremont, having helped borrowers get into this mess, now must take reasonable steps to help them get out of it.” Id.
Fremont appealed the Superior Court decision. A hearing was held before a single justice of the Appeals Court on April 17, 2008. On May 5, 2008 the single justice of the Appeals Court denied the petition for review by a single justice pursuant to G.L.c.231, sec. 118.
