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Subprime lender sued under predator law

AG accuses Fremont of 'worst practices'

The Massachusetts attorney general's office has sued Fremont Investment and Loan, once the state's second-largest subprime lender, accusing it of using predatory lending practices to sell loans to some borrowers who eventually lost their homes or had to file bankruptcy.

The lawsuit, filed Thursday in Suffolk Superior Court, alleged Fremont paid rich commissions to a network of independent mortgage brokers who sold risky mortgages with high payments that borrowers could not afford, a violation of the state's antipredatory lending law.

Fremont customers identified in the lawsuit include a single mother in Dorchester who earned $1,800 a month and financed her first home purchase with a Fremont mortgage that had a $7,000 monthly payment; and a North Attleborough couple who refinanced their mortgage with Fremont, paying a $4,680 broker fee, and are now facing foreclosure this month because they could not afford their monthly payments.

"There was no consideration of what's in the consumers' best interest," Attorney General Martha Coakley said. Fremont "exemplified all of the worst practices we've seen by lenders that have resulted in foreclosures," she said.

An estimated 2,500 Fremont mortgages are still outstanding in the state, said the suit.

Coakley said a disproportionate share of mortgage-related complaints filed with her office are against Fremont, though she did not provide specific figures.

The attorney general is seeking fines from Fremont for violating the state's 2004 antipredatory lending law, which bars lenders from making loans that customers are unable to pay, as well as compensation for borrowers.

In a statement, Fremont General Corp., the Brea, Calif., parent company of Fremont Investment, said that it continues to work with regulators around the country to modify loans for customers struggling to make their payments. The company said it is "regrettable that the Massachusetts attorney general has abandoned these cooperative efforts to help borrowers keep their homes."

Fremont had a large presence in Massachusetts. It was the state's second-largest subprime lender in 2005 and Boston's largest, according to mortgage industry specialist James Campen, a former economics professor at the University of Massachusetts. Campen said the company sold more than 5,000 subprime mortgages in 2005 alone.

Coakley's lawsuit attempts to peel back the cover on a key business strategy lenders used to capture a share of the explosive growth of subprime mortgages during the housing boom earlier this decade: that brokers could earn bigger commissions when borrowers took out higher-rate loans; lower rate loans paid smaller commissions.

For example, Coakley's suit said that if a broker sold a loan that had an interest rate 1.25 percentage points above those of Fremont's published rates, the broker earned a commission equal to 2 percent of the mortgage, or about $7,000 for a $350,000 mortgage.

"The way in which the mortgage products are marketed and sold is key to the suit," Coakley said. "It shows on the part of Fremont a willingness to look at their own profit margin and ignore deceptive practices," she said.

The suit is one of a growing number of actions brought by attorneys general in Ohio, Connecticut, New York, and other states against subprime lenders to prevent them from selling new loans.

Kimberly Blanton can be reached at blanton@globe.com.

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