So what’s a “predatory loan?”  Well, people who live in Massachusetts now know because on Tuesday of this past week the Massachusetts Supreme Court weighed in on the issue.  (Here’s the Massachusetts Attorney General’s press release.)

I’m pretty sure that for all the non-lawyer readers out there, reading case law is only slightly more interesting than watching paint dry or grass grow.  But for those who pay attention to things like “judicial activism,” and have been wondering what the Courts have been up to while Nero fiddles, Rome burns and Congress hands out 11-figure welfare checks to the profligate lunatics who created this problem in the first place, the Massachusetts Supreme Court has just handed us a whopper.  Well, at least I think so.  You may quote me a year from now:  This is the leading edge of a wave, and is a harbinger of what we will be seeing more and more of if Congress doesn’t take comprehensive action.

On December 9, the Massachusetts Supreme Judicial Court published its slip opinion in the case of Commonwealth v. Fremont Savings & Loan.  (The published version on that link is a bit hard to read, so I have cut and pasted the whole opinion at www.dcwintonlaw.com.)

(Fremont Investment & Loan was a high flyer that went down in flames last year when its parent,Fremont General filed bankruptcy on June 18, 2008.  Its receivership is now called “Fremont Reorganizing Corporation.”  For those interested in the gory details of its crash, there is a lot of, um, fascinating, information available on the Fremont General website.)

The Court held that the loan in question was “presumptively unfair” due to the presence of four characteristics.  These are:

1. The loan is adjustable (keyword there being “ARM”), with the first adjustment set to occur within the first three years.

2. The teaser rate is 3% or more lower than the ultimate indexed rate.

3. At the full indexed interest rate, not the introductory or teaser rate, the debtor’s monthly mortgage dept-to-income ration is 50% or more at the fully indexed rate.  What does this mean?  It means the borrowers’ mortgage payment, after the adjustment to the fully indexed rate is calculated exceeds 50% of their monthly income.

4. It was a “no down payment” loan.  The amount of the home purchase financed was 100%.

So what does this mean?  Well, if you don’t live in Massachusetts or have a loan with Fremont Investment, technically it means nothing.   Opinions of the Massachusetts Supreme Judicial Court are not binding on the rest of the country, and you can’t really use this to help you much.  It isn’t “law” anywhere other than Massachusetts.

However, what it does mean is that at least one Court is starting to do what Congress hasn’t (so far) had the cojones to do; smack the lenders down and start giving homeowners some relief.  This is, essentially, a judicially created “predatory lending”  law.  (Here in California, we have had a predatory lending statue for several years.  It is codified at Financial Code §4970 (Definitions and General Provisions);  §4973 (Prohibited Acts”), and §§4774-4979.8 (Remedies and other Procedural minutiae.)

These are the sorts of judicial opinions that cause quiet revolutions.  They also scare bankers and the legislators who depend on them for reelection campaign contributions down to their toes.

 

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