InfoBytes Special Alert, December 9, 2008
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MASSACHUSETTS SUPREME JUDICIAL COURT UPHOLDS FREMONT PRELIMINARY INJUNCTION
On December 9, 2008, the Massachusetts Supreme Judicial Court (the "SJC") upheld a preliminary injunction (the "Order") against Fremont Investment & Loan ("Fremont"), which had been requested by the Massachusetts Attorney General (the "Mass AG") and entered by the trial court (first reported in InfoBytes Special Alert, Feb. 27, 2008).
Summary of the Order. As previously reported, the Order prohibits Fremont from foreclosing on mortgage loans secured by owner-occupied property that have characteristics which make the loans "presumptively unfair" without first obtaining permission from the Mass AG or, if the Mass AG does not give permission, the trial court. The Order defines "presumptively unfair loans" as having the following four characteristics:
- 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);
- The loan has an introductory or "teaser" rate for the initial period that is at least 3 percent lower than the fully indexed rate;
- 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
- (a) The loan-to-value ratio is 100 percent or (b) the loan carries a substantial prepayment penalty or (c) a prepayment penalty that extends beyond the introductory period.
The Appeals. On appeal, a single justice of the Appeals Court upheld the Order, as modified to apply to the subsequent purchaser of the loans at issue (reported in InfoBytes Special Alert, May 7, 2008). The Mass AG applied for direct appellate review to the SJC, which granted the application for direct appellate review and affirmed the trial court’s Order.
Before the SJC, Fremont argued that the trial court erroneously concluded that the Mass AG was likely to prevail on the merits first, because it improperly applied the terms of the Massachusetts Predatory Home Loan Practices Act (the "MPHLPA") to loans that were not, by definition, subject to the Act; and second, that the loans were exempt from G.L. c. 93A because they were permitted by Federal and/or State mortgage lender laws and regulations. Fremont also argued that the trial judge erred by retroactively applying a G.L. c. 93A "unfairness standard" that did not exist at the time the loans were made, and that this error would create an uncertain lending environment in Massachusetts.
The SJC’s Decision. The SJC rejected each argument in turn.
- The SJC rejected Fremont’s argument that the Order created a retroactive standard, holding that the G.L. c. 93A unfairness standard used by the trial court was not applied retroactively because "[a]s a bank and mortgage lender, Fremont had been warned repeatedly before 2004 (in the context of guidance on loan safety and soundness) that it needed to consider the performance of its loans in declining markets." For this reason, the Court also rejected Fremont’s argument that the Order creates an uncertain lending environment.
- The SJC rejected Fremont’s argument that the trial court improperly applied MPHLPA restrictions to loans that were not subject to the MPHLPA, concluding:Even though the loans have different terms from Fremont’s, the conduct the act prohibits, and deems a violation of G.L. c. 93A, is similar to the central element of unfairness the judge found in Fremont’s lending practices: the origination of a home mortgage loan that the lender should recognize at the outset the borrower is not likely to be able to repay. See G.L. c. 183C, § 4. That the Legislature chose in the act to focus specifically on home loan mortgages with different terms and features from Fremont’s is not dispositive; the question is whether the act may be read to establish a concept of unfairness that may apply in similar contexts.
- The SJC rejected Fremont’s argument that its conduct was permitted by state and federal laws and regulations, and therefore exempt from G.L. c. 93A. According to the Court, which assumed without deciding that the use of each of the four loan characteristics had been permitted by law, no law affirmatively permitted Fremont to combine each of the four characteristics into the same loan: "it was Fremont’s choice to combine them into a package that it should have known was ‘doomed to foreclosure.’" Thus, Fremont could not avail itself of the exemption to G.L. c. 93A.
Finally, the Court held that the Order properly promotes the public interest by striking a balance between the interests of borrowers who are facing foreclosure as the result of "presumptively unfair" mortgage loan terms and the interest of Fremont in recovering the value of the loans it made. Importantly, the Court noted that the Order neither barred foreclosure entirely nor relieved borrowers from their repayment obligations; instead, it provided an alternative set of processes to be followed prior to foreclosure.
Buckley Kolar filed an Amicus Curiae brief before the SJC 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 http://www.buckleykolar.com/documents/BuckleyKolarAmicusBrief.pdf). A copy of the SJC’s decision is available in our Document Library and can be downloaded by clicking here. For a copy of the original Order, please see http://www.buckleykolar.com/publications/InfoBytes022708.html.