Alert November 18, 2008

Massachusetts Trial Court Enjoins Certain Foreclosures by Subprime Lender

A trial court judge in Massachusetts who earlier this year declared certain types of loans “presumptively unfair,” and enjoined foreclosures prior to review by the Massachusetts Attorney General, has issued a similar injunction against another subprime lender. 

In a wide-ranging opinion, the court denied most grounds defendants raised in several motions to dismiss.  With respect to the preliminary injunction, the Attorney General sought to expand the criteria established in the court’s earlier Fremont decision (Click here for the February 28, 2008 Alert discussing the original Fremont opinion and here for the May 6, 2008 Alert discussing the appeals court's affirmance) in determining whether a loan is “presumptively unfair,” and offered three different model injunctions from which the court could fashion an order.  After finding that the Commonwealth failed to prove any pervasively deceptive practices on the part of the lenders, failed to demonstrate that the lenders ignored or acquiesced in alleged broker misconduct, and failed to demonstrate that the lenders’ commission structure forced any borrower into a more expensive loan, the court nevertheless revised the Fremont criteria, and found loans containing all of the following features to be reviewable by the Attorney General before a foreclosure may proceed:

  • an adjustable rate loan with an introductory period of three years or less; and
  • a debt-to-income ratio in excess of 50% using the fully indexed rate (or 45% if borrower has a student loan payment with a six-month or greater deferral); and
  • an introductory rate at least 2% lower than the fully indexed rate unless the debt-to-income ratio is 55% or higher; and
  • the loan-to-value ratio is 97% or the loan carries a “substantial” prepayment penalty or a prepayment penalty extending beyond the introductory period.
If the Attorney General objects, defendants have 15 days to reach a resolution satisfactory to the borrower and Attorney General.  If there is no resolution, foreclosure may proceed only with leave of court.  Click here for a copy of Commonwealth v. H&R Block, Inc., et al., No. 08-2474-BLS1 (Mass. Super. Ct. Nov. 10, 2008).