Appeals Court Affirms Preliminary Injunction Against Option One and H&R Block Mortgage, Restricting Foreclosures on Unfair Subprime Loans
In a summary order issued late last week, the Appeals Court affirmed the preliminary injunction. The Appeals Court cited the Supreme Judicial Court's decision in Commonwealth v. Fremont Investment & Loan and determined the Superior Court's injunction was proper. The Fremont case also involved a restriction on foreclosures obtained by the Attorney General based on evidence of unfair and deceptive loan origination practices. Option One had appealed the November 2008 order on due process and other grounds, but was rejected by the court. AHMSI, the current servicer of Option One loans, did not appeal the order and has complied with its terms for the past 12 months.
"We are pleased with the court's decision, but we are most pleased that, for nearly a year, the court's preliminary injunction has helped ensure that no unnecessary foreclosures take place with respect to Option One loans," stated Attorney General Coakley. "Our office has worked with the current loan servicer to achieve reasonable workouts, which serve the interests of borrowers, the public, as well as the holders of these loans."
The Attorney General's Office filed suit against Option One and its parent company, H&R Block, Inc., in June 2008, alleging that they originated thousands of risky subprime loans in Massachusetts, with reckless disregard as to whether borrowers would be able to afford their loan payments - a practice that has contributed significantly to the foreclosure crisis in Massachusetts. According to the complaint, filed in Suffolk Superior Court, Option One and H&R Block engaged in unfair and deceptive conduct on a broad scale by selling extremely risky loan products to Massachusetts consumers that the companies knew or should have known were destined to fail. The complaint also alleges that the companies discriminated against black and Latino borrowers in Massachusetts by charging them higher points and fees to close their loans than similarly situated white borrowers and by targeting black and Latino consumers with marketing that pushed the sale of predatory loan products.
In the November 2008 preliminary injunction, the court held that certain mortgage loans were "presumptively unfair," because they posed an unreasonable risk of default and foreclosure. On those loans, Option One must direct AHMSI not to foreclose without giving the Attorney General's Office 45-days to object. During that time, the Attorney General's Office can object to the foreclosure going forward if it is determined that the loans were so risky as to be unfair, or was originated using unfair or deceptive acts or practices. If the Attorney General's Office objects, the parties have 15 days to resolve their differences and discuss alternatives, such as an affordable loan modification. If they cannot reach a mutually agreeable resolution in this time period, then AHMSI may only proceed with a foreclosure if it receives Court approval. To date, no foreclosures have gone forward over the Commonwealth's objection.
Under the order, a loan is "presumptively unfair" if it possesses the following characteristics:
- The loan is an adjustable rate mortgage with an introductory period of three years or less;
- The borrower has a debt-to-income ratio (the ratio between the borrower's monthly debt payments, including the monthly mortgage payment, and the borrower's monthly income) that would have exceeded 50% if Option One had measured the debt, not by the debt due under the teaser rate, but by the debt due under the fully-indexed rate, except when the borrower had a student loan in which payment had been deferred at least six months from the date of submission of the mortgage loan application, in which case debt-to-income ratio need exceed only 45 percent;
- The loan has an introductory or "teaser" rate for the initial period that is at least 2 percent lower than the fully indexed rate, (unless the debt-to-income ratio is 55 percent or above, in which case the difference between the teaser rate and fully indexed rate is not relevant);
- The loan-to-value ratio of the loan is 97% or the loan carries a substantial prepayment penalty or a prepayment penalty that lasts beyond the introductory period.
The Option One litigation is being handled by a team of attorneys from the Consumer Protection Division and Civil Rights Division, both part of Attorney General Coakley's Public Protection and Advocacy Bureau. The appeal was handled by Assistant Attorney General Gabriel O'Malley, with Assistant Attorney General Jonathan Miller.