897 N.E.2d 548
The Commonwealth, acting through the Attorney General, commenced this consumer protection enforcement action against Fremont Investment & Loan and its parent company Fremont General Corporation.1 The claim alleged that Fremont originated and serviced certain subprime mortgage loans in Massachusetts between 2004 and 2007 in violation of G. L. c. 93A, § 2.2 Fremont is a California-chartered industrial bank.3 Between January 2004 and March 2007, Fremont originated 14,578 loans secured by mortgages on owner-occupied homes in Massachusetts.4 Of those loans, roughly 3,000 remained active and roughly 2,500 continued to be owned or serviced by Fremont.5
An estimated fifty to sixty percent of Fremont's loans in Massachusetts were subprime.6 A large majority of those subprime loans were adjustable rate mortgage loans.7 Such loans carried a fixed introductory interest rate for the first two or three years.8 After that period the loans adjusted every six months to a substantially higher variable rate for the remaining term of a generally thirty-year loan.9 Fremont did not deal directly with borrowers.10 Instead Fremont worked through independent mortgage brokers who submitted loan applications and credit reports.11
Fremont qualified borrowers using a debt-to-income ratio of fifty percent or less.12 That ratio was calculated solely on the introductory-rate monthly payment rather than the fully indexed rate that would apply after the introductory period.13 Fremont also offered loans with no down payment.14 Those loans resulted in loan-to-value ratios approaching one hundred percent, often through a first mortgage for eighty percent and a piggy-back loan for twenty percent.15
As of the time the Attorney General initiated the case in 2007, a significant number of Fremont's loans were in default.16 An analysis of ninety-eight of those loans showed that all were ARM loans with substantial payment increases after the introductory period.17 Ninety percent of the analyzed loans had a one hundred percent loan-to-value ratio.18 On March 7, 2007, Fremont executed a consent agreement with the Federal Deposit Insurance Corporation.19 The agreement required Fremont to cease originating certain ARM products to subprime borrowers without considering ability to repay at the fully indexed rate.20
On July 10, 2007, Fremont entered a term sheet agreement with the Attorney General.21 Under the agreement Fremont promised to give ninety days' notice before foreclosing on any Massachusetts residential mortgage loan.22 Fremont also agreed to negotiate in good faith if the Attorney General objected.23 The Attorney General objected to every proposed foreclosure except those involving non-owner-occupied homes where contact with the borrower had failed.24 Fremont terminated the term sheet agreement on December 10, 2007.25 The Attorney General filed the complaint on October 4, 2007, and later moved for preliminary injunctive relief.26
On February 25, 2008, a Superior Court judge granted a preliminary injunction.27 The injunction required Fremont to give advance notice of intent to foreclose.28 For loans possessing all four identified characteristics, Fremont had to work with the Attorney General to resolve differences or obtain court approval for foreclosure.29 The judge modified the injunction on March 31, 2008, to bind any assignee or purchaser of Fremont's servicing rights.30 Fremont sought interlocutory relief in the Appeals Court.31 A single justice declined to reverse the orders and reported the matter.32 The Supreme Judicial Court then granted the Commonwealth's application for direct appellate review.33
Whether the judge retroactively applied new standards of unfairness under G. L. c. 93A, § 2 to Fremont's loans?34
A practice may be deemed unfair if it is within at least the penumbra of some common-law, statutory, or other established concept of unfairness.35 Chapter 93A does not define unfairness, recognizing that there is no limit to human inventiveness in this field.36 What is significant is the particular circumstances and context in which the term is applied.37
No. The judge did not apply a new standard retroactively to Fremont's loans.38 Fremont originated 14,578 loans secured by mortgages on owner-occupied homes in Massachusetts between 2004 and 2007. An estimated fifty to sixty percent of those loans were subprime adjustable rate mortgage loans. The loans carried a fixed introductory interest rate for the first two or three years before adjusting to a substantially higher variable rate. Fremont qualified borrowers using a debt-to-income ratio of fifty percent or less calculated solely on the introductory-rate monthly payment rather than the fully indexed rate. Fremont offered loans with no down payment resulting in loan-to-value ratios approaching one hundred percent. By 2007 a significant number of these loans were in default. An analysis of ninety-eight defaulted loans showed that all were ARM loans with substantial payment increases after the introductory period and that ninety percent had a one hundred percent loan-to-value ratio.
Prior regulatory guidance from the FDIC, OCC, and Massachusetts Division of Banks had warned that loans made without considering the borrower's ability to repay at the fully indexed rate were unsafe and unsound.39 The March 2007 consent agreement with the FDIC ordered Fremont to cease originating such products.40 These sources confirm that the combination of features was within established concepts of unfairness at the time the loans were made.41
The judge properly applied established standards of unfairness under G. L. c. 93A, § 2 rather than creating new standards retroactively.42
Whether the Superior Court judge abused his discretion in granting the preliminary injunction after finding the Attorney General had shown a likelihood of success on the G. L. c. 93A claim?43
A judge reviewing a preliminary injunction must determine that the plaintiff has shown a likelihood of success on the merits of the case at trial.44 If the plaintiff is the Attorney General, the judge must then determine that the requested order promotes the public interest, or, alternatively, that the equitable relief will not adversely affect the public.45 The grant or denial is reviewed for abuse of discretion, meaning whether the judge applied proper legal standards and whether there was reasonable support for the evaluation of factual questions.46
No. The Superior Court judge did not abuse his discretion in granting the preliminary injunction.4748 The Attorney General established a likelihood of success on the merits by showing that Fremont originated loans with four characteristics.49 Those characteristics were an ARM loan with an introductory rate period of three years or less, an introductory rate at least three percent below the fully indexed rate, a debt-to-income ratio exceeding fifty percent when measured at the fully indexed rate, and a one hundred percent loan-to-value ratio or substantial prepayment penalty.50 The combination made default almost certain unless housing prices rose indefinitely.51
The record included the consent agreement with the FDIC requiring Fremont to cease such practices.52 The record also included the term sheet agreement under which the Attorney General objected to nearly every proposed foreclosure.53 Roughly 2,500 loans remained owned or serviced by Fremont with a significant number already in default by 2007.54 The judge applied the correct legal standards for unfairness under G.
L. c. 93A, § 2 and properly balanced the equities in the injunction terms requiring notice, negotiation, and court approval for presumptively unfair loans.55
The Superior Court judge did not abuse his discretion in granting the preliminary injunction.
Whether the judge improperly applied the Massachusetts Predatory Home Loan Practices Act, G. L. c. 183C, to Fremont's loans?56
General Laws c. 183C prohibits a lender from making a high-cost home mortgage loan unless the lender reasonably believes the borrower will be able to make the scheduled payments based on current and expected income and obligations.57 A violation of the statute constitutes a violation of G. L. c. 93A.58 Even when loans are not high-cost loans governed by the statute, the act may be read to establish a concept of unfairness that applies in similar contexts where the lender originates a home mortgage loan that the lender should recognize at the outset the borrower is not likely to be able to repay.59
No. The judge did not improperly apply G. L. c. 183C to Fremont's loans.60
Although Fremont's loans were not high-cost home mortgage loans subject to the statute, the central element of unfairness found by the judge mirrors the conduct prohibited by G. L. c. 183C, § 4.61
That element is the origination of loans that the lender should recognize the borrower is not likely to be able to repay without refinancing.62 Fremont's loans featured the combination of an introductory rate period of three years or less, qualification based only on the introductory payment, and loan-to-value ratios of one hundred percent.63 Those features made repayment impossible for subprime borrowers once the fully indexed rate applied.64 The combination is exactly the type of conduct the statute identifies as unfair.65
The judge appropriately looked to the statute as an established expression of public policy that such lending practices violate G. L. c. 93A, § 2 without extending the statute's specific coverage to loans outside its terms.66
The judge properly considered G. L. c. 183C as evidence of an established concept of unfairness without improperly applying the statute to Fremont's loans.67
Whether Fremont's loans were exempt from G. L. c. 93A under G. L. c. 93A, § 3 because their terms were permitted under federal and state regulatory standards?68
General Laws c. 93A, § 3 provides that nothing in the chapter shall apply to transactions or actions otherwise permitted under laws as administered by any regulatory board or officer.69 To sustain the exemption a defendant must show more than the mere existence of a related regulatory scheme and must demonstrate that the scheme affirmatively permits the specific practice alleged to be unfair or deceptive.70
No. Fremont's loans were not exempt from G. L. c. 93A under G.
L. c. 93A, § 3.7172 Fremont failed to show that any regulatory scheme affirmatively permitted the combination of all four presumptively unfair characteristics into a single loan product that the lender should have known was doomed to foreclosure.73
Although individual features such as adjustable rates or high loan-to-value ratios may have been permitted separately, no authority permitted their combination in subprime loans without regard to the borrower's ability to repay at the fully indexed rate.74 The FDIC consent agreement and prior interagency guidance explicitly warned against precisely this combination of practices as unsafe and unsound.75 The facts that Fremont originated thousands of such loans through brokers without direct borrower contact and that defaults occurred at high rates confirm that the exemption does not apply.76
Fremont's loans were not exempt from G. L. c. 93A under G. L. c. 93A, § 3.
Whether the preliminary injunction order promotes the public interest?77
When the Attorney General brings an action to enforce the Consumer Protection Act, the judge must determine that the preliminary injunction order promotes the public interest or that equitable relief will not adversely affect the public.78 The order must balance the interests of borrowers facing foreclosure under presumptively unfair loan terms against the interest of the lender in recovering loan value while not relieving borrowers of their repayment obligations.79
Yes. The preliminary injunction order promotes the public interest.8081 The order requires Fremont to give advance notice of intent to foreclose.82 For loans possessing all four unfair characteristics secured by the borrower's principal dwelling, Fremont must work with the Attorney General to resolve differences or obtain court approval for foreclosure.83
This balances the interests of borrowers who face foreclosure and loss of their homes under terms that are at least presumptively unfair against the interest of the lender in recovering the value of its loans to borrowers who received the funds and remain obligated to repay.84 The order does not bar foreclosure entirely or relieve borrowers of repayment obligations.85 It builds on the term sheet agreement under which Fremont had already agreed to provide notice and negotiate in good faith.86 The facts of thousands of active loans, widespread defaults, and the Attorney General's objections to nearly every foreclosure demonstrate that the relief serves the public by preventing immediate harm while preserving ultimate judicial determination of fairness.87
The preliminary injunction order promotes the public interest.