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Supreme Judicial Court Affirms AG's Claim

Rules sub-prime lending to be unfair and deceptive

BOSTON – December 10, 2008 - In a unanimous decision, the Supreme Judicial Court (SJC) has affirmed the Superior Court's order barring subprime lender Fremont Investment & Loan from foreclosing on any structurally unfair loan without court approval. The preliminary injunction, issued February 25, 2008, was the first order in the nation that restricted a subprime lender’s ability to foreclose based on unfair or deceptive loan origination misconduct. Today’s decision from the high court sets precedent by affirming the application of Consumer Protection Law to subprime lending and the foreclosure crisis.

“In affirming the ruling of the Superior Court earlier this year, the SJC today confirmed what we have alleged for some time: that we have a likelihood of proving that it is illegal for subprime lenders to issue loans that they knew borrowers likely could not pay and, therefore, would predictably lead to foreclosure,” said Attorney General Coakley. “The SJC held that type of lending—without meaningful regard for a borrower’s ability to repay—is unfair and deceptive in violation of the Consumer Protection Act. A lender like Fremont who made those unsustainable loans should be required to achieve reasonable workouts and avoid foreclosures. Our office will continue to apply those standards and seek accountability from lenders who engaged in this unfair, deceptive, and illegal conduct and we will continue to seek significant relief from lenders that violate the Consumer Protection Act.”

The decision confirms the fundamental aspects of Attorney General Martha Coakley’s lawsuit, which was filed in Suffolk Superior Court in October 2007, against California-based Fremont. The complaint contends that a lender’s failure to reasonably assess a borrower’s ability to repay his loan and the use of loan features that predictably lead to foreclosure is unfair and deceptive and in violation of Massachusetts law.

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Suffolk Superior Court Judge Ralph D. Gants found that the Attorney General’s Office had established a likelihood of success on the merits of her claim that Fremont committed an unfair act or practice by originating home mortgage loans that it knew the borrower would not be able to afford, thus inexorably leading to default and foreclosure.

The Attorney General’s Office obtained an injunction on February 25, 2008 that requires Fremont to give it advance notice of its intent to foreclose on any home mortgage loan. The injunction also requires that Fremont work with the Attorney General’s Office to modify or restructure any loan that possesses characteristics that made the loan “presumptively unfair” in order to avoid foreclosure if at all possible. The injunction was further expanded on March 31, 2008 to ensure that the protections of the injunction extend to the purchasers of Fremont Massachusetts loans or the servicing obligations on those loans.

The SJC affirmed Judge Gants's finding that Fremont knew or should have known that the combination of features its loans contained essentially guarantee that the borrower would be unable to pay, and unless real estate values continued to rise indefinitely, would doom the borrower to foreclosure. This, the SJC confirmed, was unfair and deceptive and a violation of Massachusetts law.

The high court also found that Fremont made no effort to determine whether borrowers could make the scheduled payments under the terms of the loan. Instead, Fremont loans were made with the understanding that house prices would increase, permitting its borrowers to refinance before higher payments began. The SJC found that relying on “such unsupportable optimism” instead of sound underwriting judgment was “unreasonable, and unfair to the borrower.”

Today’s ruling stated that Fremont had ample notice that its conduct likely was unfair in light of numerous, prior warnings by state and federal regulators, and established, statutory expressions of unfairness found in Massachusetts law, including the Predatory Home Practice Act. The ruling further stated that the Superior Court's order unquestionably served the public interest by requiring Fremont to explore alternatives to foreclosure in the first instance and only if foreclosure is unavoidable for it to seek court approval.

The Attorney General’s Office filed suit on October 5, 2007, in Suffolk Superior Court against Fremont and its parent company, Fremont General Corporation based on the defendant’s unfair and deceptive loan origination and sales conduct. The complaint specifically alleges that the company was selling risky loan products that it knew was designed to fail, such as 100% financing loans and “no documentation” loans. The complaint further alleges that the company sold these loans through third party brokers and provided financial incentives to these brokers to sell high cost products. In addition to injunctive relief, the Attorney General’s Office is seeking civil penalties and restitution.

This matter is being handled by Assistant Attorney General Christopher Barry-Smith, Chief of the Consumer Protection Division, Assistant Attorneys General Jean Healey, John Stephan, and Shannon Choy-Seymour, and Financial Investigator Christine Murphy, all of the Consumer Protection Division.

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