SJC Sets Unfair Loan Criteria
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Posted by Attorney Olivier Kozlowski:
Yesterday the Supreme Judicial Court issued a decision endorsing an argument our office made on behalf of a Harwich couple back in March of 2007: mortgage lenders must evaluate their borrowers’ ability to make their payments throughout the entire term of the loan, not simply during an initial “teaser rate” period.
We were successful in obtaining injunctive relief for our clients that froze their initial interest rate on their Ameriquest sub-prime loan while our case was pending.
The Massachusetts Attorney General followed suit, initiating the case the SJC ultimately ruled on yesterday, arguing on behalf of a whole class of borrowers who had obtained sub-prime loans from Fremont Investment & Loan. Attorney General Coakley’s efforts resulted in a decision by Superior Court Judge Gants (now pending appointment to the SJC), that laid out a set of characteristics considered to be “unfair:” 1) adjustable rate mortgages with initial fixed-rate periods of 3 years or less, 2) introductory rates that are at least 3% below the fully-indexed rate, 3) made to borrowers whose debt-to-income ratio would have exceeded 50% if the payments were considered at the fully-indexed rate, rather than the “teaser rate” and 4) a loan to value of 100% or higher, a “substantial” prepayment penalty or a prepayment penalty lasting longer than the “teaser rate.” A combination of all of these factors would make the loan “presumptively unfair.”
Yesterday’s SJC decision upheld this test. Fremont had argued that all of these characteristics were legal at the time the loans were made, and that imposing this test now would amount to impermissible second-guessing. The SJC rejected that argument, holding that when these characteristics were combined, they essentially doomed borrowers to foreclosure or refinance at the expiration of the “teaser” period. The Court also chastised Fremont for assuming that home values would continue to go up and failing to consider what would happen if a borrower had no equity in their home when the “teaser” rate expired.
Since the heydays of the refinance boom, there have been new regulations put in place. Some of the “unfair” characteristics are now subject to additional requirements, and lenders must today evaluate their borrowers’ ability to make payments throughout the term of the loan.
Our office has the ability and experience to evaluate the specifics and timing of your loan, and to argue successfully on your behalf.