Joy Harmon Sperling on the Groundbreaking Decision in Massachusetts v. Fremont Investment

Joy Harmon Sperling on the Groundbreaking Decision in Massachusetts v. Fremont Investment


The Massachusetts Superior Court recently enjoined a mortgagee from foreclosing on "presumptively unfair" mortgages without first obtaining the assent of the Massachusetts Attorney General or, if approval is not granted, without the Court's permission. In so doing, the Court has taken the doctrine of "parens patriae" to an entirely new level by finding that it has the authority to modify the terms of a loan, even if the parties to that loan voluntarily executed the loan documents and have not voiced any complaints about the terms of the loan. Discussing Massachusetts v. Fremont Investment & Loan, Joy Harmon Sperling writes:
 
     Fremont is a California state-chartered bank that was a substantial lender in the Massachusetts subprime market between January 2004 and March 2007, the time period relevant to the case. Many of the loans Fremont made during this period went into default, thereby affording Fremont with the right, pursuant to the loan documents, to foreclose on the properties securing the loans. On July 10, 2007, following the entry of an Order to Cease and Desist entered by the Federal Deposit Insurance Company [sic], Fremont and the Massachusetts Attorney General entered into a Term Sheet letter agreement (the “Term Sheet”) whereby Fremont agreed to submit loan documents to the Attorney General for review in advance of commencing any foreclosure proceeding. Fremont provided the Attorney General with documentation for 193 loans pursuant to the Term Sheet; the Attorney General objected to the foreclosure of all but one of the 193 loans. As a result, Fremont exercised its right to terminate the Term Sheet, to which the Attorney General responded by filing a motion to enjoin Fremont from initiating or advancing the foreclosure of “Presumptively Unfair Loans” without its consent.
 
     In granting the injunction, the Court held that any mortgage loan secured by a borrower’s principle residence would be “presumptively unfair” if it met the following criteria:
 
1. The loan is a two or three-year adjustable rate mortgage (“ARM”);
 
2. The loan’s introductory rate is at least three percentage points lower than the fully indexed rate to be paid after the introductory rate expires;
 
3. The borrower’s debt-to-income ratio would have exceeded fifty-percent at the time of the loan if the debt were measured by the fully indexed rate; and
 
4. The loan-to-value ratio is 100 percent or the loan carries a substantial prepayment penalty or a prepayment penalty that extends beyond the prepayment period.
 
     By finding that Fremont’s loans were presumptively unfair, the Court shifted the burden to Fremont to demonstrate that the loans were actually fair by showing either: (1) the existence of special circumstances; or (2) that the borrower owned additional liquid assets, not reflected in the loan documents, so as to bring the debt-to-income ratio into compliance with the Court’s holding.