The Office of the Attorney General of Massachusetts (under AG Martha Coakley) has succeeded in obtaining a preliminary injunction against Fremont Investment & Loan, a California mortgage lender. The motion for injunction alleged that Fremont had violated the Massachusetts consumer protection statute, known locally as “93A.” 93A has some real teeth because it outlaws “unfair or deceptive acts or practices in the conduct of any trade or commerce” even if the acts are otherwise legal, and because an act may be found “unfair” even if no deception occurred.

In a state court in Boston, the AG’s office asked for and obtained a preliminary injunction against Fremont. The court found that there was a good chance Fremont’s subprime loans would be illegal, because the terms were such that the lender reasonably expected default. Therefore, the court issued an order requiring Fremont to give the Attorney General 30 days notice before foreclosing. If the AG’s office objects, the court will decide whether the loan is unfair and whether Fremont may foreclose.
The court set out criteria for determining whether loans are presumptively unfair. The AG’s office may object if the loan meets all of these four criteria: ARM with an introductory period of three years or less, introductory rate at least 3% lower than the fully indexed rate, borrower’s debt-to-income ratio over 50% measured by the fully indexed rate, and loan-to-value ratio of 100% or substantial prepayment penalty, or prepayment penalty extending beyond the introductory period.
The court will consider the four criteria, whether the loan is secured by the borrower’s primary residence, whether Fremont has attempted to negotiate with the homeowner to avoid foreclosure, and whether fair alternatives to foreclosure exist.
The court, in general, was unsympathetic to Fremont, commenting that Fremont had ample warning of the high rate of default in the subprime market yet continued to make loans. Borrowers who had inflated their stated income to obtain loans also received little sympathy.
The injunction stated that Fremont is currently servicing 2,500 Massachusetts loans, most of which are sub-prime. It is unclear how many homes will be saved from foreclosure under this injunction, which only lasts until the AG’s lawsuit against Fremont is resolved. The injunction’s greater significance is as an important precedent for similar suits and injunctions against other subprime lenders.