Commonwealth v. Fremont Investment & Loan

Fremont Investment & Loan (Fremont) (defendant) sold thousands of subprime mortgages to Massachusetts residents. Subprime mortgages are mortgages with borrowers who normally would have difficulty qualifying for a mortgage. The subprime mortgages Fremont sold were frequently adjustable-rate mortgages (sometimes called ARMs) that had a fixed interest rate for the first two to three years of the loan. After the introductory-rate period, borrowers’ interest rates increased 3 percent or more and varied for the remainder of the mortgage term. Generally, Fremont would not approve a mortgage unless the borrower’s debt-to-income ratio was below 50 percent. A borrower’s debt-to-income ratio represented the borrower’s monthly debt obligations, including the mortgage payment, as compared to the borrower’s monthly income. However, for the adjustable-rate mortgages, Fremont used only the initial mortgage-payment amount to calculate the debt-to-income ratio, not the higher payments that would be due when the mortgage’s rate adjusted in a few years. If Fremont had used the adjusted, higher mortgage payments, most borrowers’ debt-to-income ratios would have exceeded 50 percent. In addition, many of Fremont’s mortgages (1) included prepayment penalties that either were substantial or extended beyond the introductory period, which restricted a borrower’s ability to refinance to avoid the higher adjusted rates; or (2) did not require a down payment, which meant the loan-to-value ratio was 100 percent. A significant number of Fremont’s borrowers defaulted on their mortgage payments, leaving their homes subject to foreclosure. The attorney general for the Commonwealth of Massachusetts (plaintiff) brought a consumer-protection enforcement lawsuit against Fremont. The enforcement action alleged that Fremont had violated state consumer-protection laws by using unfair and deceptive practices to originate and service its subprime mortgages. The attorney general requested a preliminary injunction to prevent Fremont from foreclosing on the allegedly unfair mortgages during the lawsuit. The trial court granted the injunction, which required finding that Fremont had likely engaged in unfair and deceptive mortgage practices. Fremont appealed the injunction order to the Massachusetts Supreme Judicial Court.