Massachusetts High Court Rules That Subprime Loans That Lenders Knew Or Should Have Known Were Unsustainable Are Illegal

The Boston Herald reports:

Massachusetts’ highest court has issued a landmark ruling tentatively declaring whole classes of subprime mortgages unfair under Massachusetts law. “Originating loans with terms that in combination would lead predictably to . . . default and foreclosure (is) within established concepts of unfairness,” state Supreme Judicial Court justices unanimously ruled yesterday. The decision upholds a lower-court injunction issued against subprime-lending giant Fremont Investment & Loan.

Suffolk Superior Court Judge Ralph Gants handed down the injunction in February, declaring – apparently for the first time in state history – that some subprime-mortgage terms automatically violate Massachusetts law.

Ruling in a lawsuit brought by state Attorney General Martha Coakley, Gants found that many of Fremont’s Bay State subprime loans seemed “doomed to foreclosure” from the start. The judge ordered Fremont to give Coakley’s office a chance to object before foreclosing on any of 2,700 Massachusetts subprime mortgages with terms Gants deemed “structurally unfair.”

Last month, the judge issued a similar injunction against Option One Mortgage, which oversees another 8,000 questionable Massachusetts subprime loans. Although Gants’ rulings are preliminary, and subject to change as cases work their way through courts, experts still see yesterday’s SJC move as precedent-setting.

We think this is an important milestone not just for Massachusetts, but also for other states that want to use their consumer-protection powers against unfair and deceptive (mortgage) marketing,” Coakley said.

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