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Bankruptcy

: Credit Slips

Massachusetts SJC to Subprime Lenders: Clean Up Your Own Mess

By Adam Levitin

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A major legal development in the foreclosure crisis occurred today in Massachusetts. The Massachusetts Supreme Judicial Court, regarded as one of the finest state courts in the country, upheld a preliminary injunction against Fremont Investment and Loan for foreclosing on any "structurally unfair loan" without court approval.

The Massachusetts Attorney General had argued that "a lender?s failure to reasonably assess a borrower?s ability to repay his loan and the use of loan features that predictably lead to foreclosure is unfair and deceptive and in violation of Massachusetts law." More precisely, a consumer loan that is not intended to be repaid, but intended to be refinanced (a process that can only work if property values rise indefinitely) is inherently predatory. By upholding the preliminary injunction, the SJC endorsed this view and imposed a serious good faith workout effort on Fremont.

The SJC pretty much told Fremont (and subprime lenders in general): You made the mess, now clean it up without burdening the state's resources with foreclosures. Go work it out.

There is something to be said for not letting the engine of law (judicial or non-judicial foreclosures...all under color of law, though) be used to effect an unfair and deceptive bargain. Somewhere in Mt. Auburn Cemetery, Justice Story must be whispering "He who comes into Equity must do so with clean hands" (or maybe he's indulging in legal Latin and chortling ex turpi cause non oritur actio or aequitas numquam cacum tolerat).

It'll be interesting to see if the SJC ruling provides a model for other states.

The Massachusetts AG's press release, with a link to the ruling, is here.

Full post as published by Credit Slips on December 10, 2008 (boomark / email).