Attorney General Martha Coakley has obtained a preliminary injunction in a case against California-based Fremont General Corp. and its subsidiary, Fremont Investment and Loan, a subprime lender that originated thousands of loans in Massachusetts.
The firm’s risky loan-selling conduct significantly contributed to the foreclosure crisis in the Bay State, according to Coakley.
The order, granted Feb. 25 by Judge Ralph D. Gants in Suffolk Superior Court, prohibits Fremont from initiating or advancing foreclosures on loans that are “presumptively unfair.”
Under the terms of the injunction, Fremont must provide Coakley’s office with at least a 30-day notice of all foreclosures it intends to initiate on the approximately 2,200 loans the company owns and services in Massachusetts, and allow the attorney general an opportunity to object to the foreclosure going forward.
If Fremont has issued a loan that is considered “presumptively unfair” and the borrower occupies the property as his or his principal dwelling, the attorney general has 45 days to object to the foreclosure.
The injunction is effective immediately and will remain so until the court case is settled, according to Coakley spokeswoman Amie Breton. The court’s decisions on civil penalties against Fremont, and restitution for borrowers, are forthcoming.
In a prepared statement, Coakley said, “This decision shows again that in many cases, irresponsible and unlawful lending practices caused this foreclosure crisis. We intend to hold accountable those who allegedly engage in unlawful lending conduct.”
A loan is considered “presumptively unfair,” by the court’s definition, if it is adjustable-rate; has an introductory period of three years or less that is at least three percent lower than the fully indexed rate; the borrower has a debt-to-income ratio (the ratio between the borrower’s monthly debt payments, including the monthly mortgage payment and the borrower’s monthly income) that would have exceeded 50 percent if Fremont had measured the debt under the fully-indexed rate; and Fremont extended 100 percent financing – or the loan has a substantial prepayment penalty or penalty that lasts beyond the introductory period.
Fremont may only proceed with a foreclosure to which the attorney general objects if Fremont files a request with the court, and the court reviews the matter and agrees that a foreclosure is appropriate.
In considering whether to allow the foreclosure, the court will consider, among other factors, whether the loan is unfair and whether Fremont has taken reasonable steps to work it out and avoid foreclosure.
The preliminary injunction does not release borrowers from their monthly mortgage obligations.
In granting the preliminary injunction, the court found that it was unfair for Fremont to make loans where Fremont reasonably expected borrowers to default on the loans after the initial introductory interest rates adjusted.
In some instances, Fremont also offered those same borrowers 100 percent financing, increasing their risk of default if they were unable to obtain refinancing if the market value of their homes declined.
The risk of default was further heightened by Fremont’s substantial prepayment penalties that required borrowers to immediately obtain refinancing after their introductory rates ended.
‘Be on Watch’
The lawsuit was filed Oct. 5, 2007, in Suffolk Superior Court against Fremont Investment and Loan – as well as its parent company – under Massachusetts’ consumer protection law, Chapter 93A, which governs unfair and deceptive practices.
The complaint specifically alleges that the company was selling risky loan products that it knew was designed to fail, such as 100 percent financing loans and “no documentation” loans. It further alleges that the company sold those loans through third-party brokers and provided financial incentives to those brokers to sell high-cost products.
Assistant Attorney General Christopher Barry-Smith, chief of Coakley’s Consumer Protection Division, is among those working on the case. Others include Assistant Attorneys General Jean Healey and John Stephan, financial investigator Christine Murphy and paralegal Christopher Garcia-Rivera, all of the Consumer Protection Division.
Fremont general counsel Donald Royer did not return a call seeking comment. The company sold off most of its subprime loan business last spring.
Thomas Callahan, executive director of the Massachusetts Affordable Housing Alliance, said he’s glad for any tools that regulators have that will make lenders who made unscrupulous loans “feel some responsibility.”
Callahan said the injunction will help counselors trying to help borrowers stave off foreclosure of Fremont loans. Counselors and lawyers attempting to help borrowers facing foreclosure have complained that reaching the lender or loan servicer, or getting someone on the line who has the power to hold off a loan, even temporarily, is one of the most difficult parts of the process.
The question of which lenders the attorney general or other Massachusetts regulators have jurisdiction over remains an open one, since some federally chartered institutions are not subject to certain local regulations.
However, any lenders who had lending practices the attorney general sees as questionable should “absolutely be on watch, because we absolutely will take action against them,” said Breton, Coakley’s spokeswoman.
