Brief Fact Summary. Fredmont is a mortgage lender. The Attorney General, under his authority given in Consumer Protection Law 93a, filed for an injunction against Fredmont that precluded foreclosures on the mortgages until a full investigation was conducted. Fredmont appealed the Judges decision to issue the injunction.
Synopsis of Rule of Law. Mortgage loans with characteristics that make it almost certain the borrower will default are subprime loans. Giving subprime loans are considered unfair practices in violation of Consumer Protections Act and in violation of Massachusetts Predatory Home Loan Practices Act. An Injunction against foreclosing on these loans serves public interest.
Between January 2004 and March 2007 Fredmont, an industrial bank, originated 14, 578.00 loans to Massachusetts residents secured by mortgages to owner-occupied homes. Of those loans, 50 to 60 percent of those loans where considered subprime loans. Subprime loans are given to borrowers who usually do not qualify for conventional or prime mortgages and thus have higher interest rates to make up for the risk the lender is taking. Fredmont sold most of these loans right away to avoid losses the servicer of the loan, current owner, would suffer if the mortgagor/borrower should default and the lender had to foreclose on the loan. Fredmont did not deal directly with the borrowers a broker’s agent did. The loan would be an ARM loan or adjustable rate mortgage. The loan would have a low fix rate for the first two or three years and then it would become adjustable. The lender had the right to adjust the rate every six months. Also for low income borrowers they would help them obtain piggy-back mortgages; this is when you take out a second loan to pay for the down payment on the loan. The debt to value ratio is 100 percent when the borrower puts no money down. Lenders are required to make sure that the mortgage payment is below 50 percent of what a person makes; however, Fredmont only made that calculation on the fixed rate period of the loan. The Attorney General commenced consumer protection enforcement upon certain findings. In 2007 a significant number of Fredmont loans where in default. Of those loans in default 98 percent where ARM loans, and of that 98 percent 90 percent of those loans had a debt to value ratio of 100 percent. The Attorney General entered into a Term Sheet agreement that Fredmont must go to the Attorney General before commencing any foreclosures on those loans. However the Attorney General turned down every application to foreclose and sought a preliminary injunction against Fredmont from foreclosing on loans or originating any new ARM loans. The Judge granted the preliminary injunction. Fredmont appealed the injunction.
Issue. Whether there was a retroactive application of unfairness standards (in violation of the Consumer Protection Act) applied to Fredmont’s lending practices when their actions did not amount to misrepresentation or violation of any laws at the time of origination of the loans.
Whether Fredmont loans can be considered high-cost home mortgage loans in violation of Predatory Home Loan Practices Act when the loans where not the exact type of loan as described in the statute.
Held. No. There was not a retroactive application of the unfairness standard. Fredmont argues that at the time the loans were originating the terms of the loan where not considered unfair; therefore, finding the terms unfair now is creating new standards. The Consumer Protection Statues specifically does not define unfair acts because there are no limits to what humans will come up with to hurt consumers. There is no requirement that business actions be previously defined as unfair for a Judge to then find that such actions are unfair in violation of the Consumer Protection Act. Fredmont’s actions are unfair because acted in such a way that guaranteed the borrowers would not be able to pay and would have to fall into default unless the market went up. Making loans that require the market to rise is unreasonable.
Dissent. Yes. These loans are in violation of the Predatory Home Loan Practices Act. This act requires that the payment be less than 50 percent of the borrower’s income. That calculation was made only for the fixed rate. Fredmont knew once the rate became adjustable that the payment would be well beyond 50 percent. Also while these loans did not have the specific characteristic/terms of the loans described in the statute these loans are predatory. The characteristic are; (1) the loans were ARM loans with an introductory rate period of three years or less; (2) they featured an introductory rate for the initial period that was at least three per cent below the fully indexed rate; (3) they were made to borrowers for whom the debt-to-income ratio would have exceeded fifty per cent had Fremont measured the borrower's debt by the monthly payments that would be due at the fully indexed rate rather than under the introductory rate; and (4) the loan-to-value ratio was one hundred per cent, or the loan featured a substantial prepayment penalty. While each characteristic in a loan was not illegal, Fredmont choose to have all four characteristics in its loans. The act specifically deems unfair, loans that the lender does not reasonably believe the borrower will be able to pay to avoid foreclosure.
Discussion. Fredmont’s main argument that there was no specific law that preventing them making these types of loans. Fredmont knew that issuing subprime loans would be considered unfair, and these loans where made in such an unreasonable way that they knew the borrowers would be forced to default.