Commonwealth v. Fremont Investment & Loan

897 N.E.2d 548 (2008)

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Nature of the Case

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Facts

D is an industrial bank chartered by the State of California. D originated 14,578 loans to Massachusetts residents secured by mortgages on owner-occupied homes. An estimated fifty to sixty percent of Fremont's loans in Massachusetts were subprime. Because subprime borrowers present a greater risk to the lender, the interest rate charged for a subprime loan is typically higher than the rate charged for conventional or prime mortgages. After funding the loan, D generally sold it on the secondary market, which largely insulated D from losses arising from borrower default. Mortgage brokers acting as independent contractors would help a borrower select a mortgage product, and communicate with a D account executive to request a selected product and provide the borrower's loan application and credit report. If approved by D's underwriting department, the loan would proceed to closing, and the broker would receive a broker's fee. A large majority of D's subprime loans were adjustable rate mortgage (ARM) loans. Payments would start out lower and then increase substantially after the introductory two-year or three-year period. D generally required that borrowers have a debt-to-income ratio of less than or equal to fifty percent. D considered only the monthly payment required for the introductory rate period of the mortgage loan, not the payment that would ultimately be required at the substantially higher 'fully indexed' interest rate. D offered loans with no down payment. D would finance the full value of the property, resulting in a 'loan-to-value ratio' approaching one hundred percent. There would be a first mortgage providing eighty percent financing and an additional 'piggy-back loan' providing twenty percent. When P initiated this case in 2007, a significant number of D's loans were in default. D came to terms with the Federal Deposit Insurance Corporation (FDIC), settling charges of unsound banking practices and agreed to cease and desist from originating ARM products to subprime borrowers in ways described as unsafe and unsound, including making loans with low introductory rates without considering borrowers' ability to pay the debt at the fully indexed rate, and with loan-to-value ratios approaching one hundred percent. D also entered into a term sheet letter agreement with P agreeing to give P ninety days' notice before foreclosing on any Massachusetts residential mortgage loan. If P objected, D agreed to negotiate in good faith to resolve the objection, possibly by modifying the loan agreement. P objected to every proposed foreclosure except those where the home was not owner-occupied, and Fremont had been unable to contact the borrower. P then filed this action and a motion for preliminary injunctive relief. The judge granted a preliminary injunction. The judge reasoned that D as a lender should have recognized that its ARM 100% loans were 'doomed to foreclosure' unless the borrower could refinance the loan at or near the end of the introductory rate period. With housing prices falling it was virtually impossible to get a new loan. D was ordered to work with P and to obtain court approval for each foreclosure. This appeal resulted. D contends its loans are exempt from c. 93A because all of D's challenged loan terms were permitted under the Federal and Massachusetts laws and regulatory standards governing mortgage lenders. D also contends that the judge erred in determining that the public interest would be served by the preliminary injunction order.