Sales staff inside Fremont Investment & Loan had a nickname for no-down-payment loans for subprime borrowers with low credit ratings: "pulse products."
"If a borrower had a pulse, he or she could qualify for one of Fremont's products," former Fremont account executive, Thai Lee, said in an affidavit filed this week as part of a lawsuit Massachusetts Attorney General Martha Coakley brought against the California subprime lender.
Lee and Jeffrey McKay, another Fremont account executive, in affidavits filed in Suffolk Superior Court, provided a glimpse inside the aggressive sales culture at a company that was once one of the nation's largest subprime lenders and the second largest in Massachusetts. They described a company where salespeople targeted both high-cost housing markets and minority neighborhoods to generate mortgages the company could then sell to Wall Street firms with enormous appetites for these high-risk loans.
In its lawsuit against Fremont, Coakley's office alleged predatory lending and fraud were systemic inside the company, making McKay's and Lee's state ments central to the state's argument. The state this week asked the court to stop Fremont from foreclosing on 500 Massachusetts homeowners.
Fremont did not respond yesterday to requests to comment. But earlier this week, its attorneys denied the firm engaged in fraud and said it was not responsible for rogue brokers from firms outside Fremont or for borrowers who may have committed fraud.
Lee and McKay were both involved in selling loans in the Boston area. They oversaw squads of brokers who worked outside the company and who were the primary source of prospective loan customers. They also helped the brokers process loan documents. Both worked for Fremont between early 2003 and March 2006, when the subprime lending market was booming.
They said they refused to process fraudulent or questionable mortgages submitted by loan brokers. But when McKay complained to supervisors, "I received the impression Fremont did not want to cancel the brokers' accounts for fear of upsetting the brokers or losing business," he said.
To help brokers entice new customers, Fremont rolled out special offers for loans to people with poor credit ratings as low as 550 or even 500, according to sales fliers filed in court; the minimum for a traditional mortgage is about 680.
McKay said Fremont loan salespeople targeted expensive housing markets, such as California, Massachusetts, and New York, because mortgages there generated larger commissions for the brokers. Brokers also targeted minority neighborhoods in Lawrence, Quincy, and Dorchester for "stated-income" subprime mortgages, he said in his statement. He said brokers selling these loans in low-income neighborhoods "were too lazy, uneducated, or inexperienced" to sell other products.
Stated-income mortgages do not require prospective customers to prove the income they declare on their loan application.
Fremont checked a borrower's income to determine if it matched what others in the same field earned using websites such as salary.com. Stated-income loans, Lee said, "were prone to abuse, particularly when combined with" no- or low-down-payment terms.
Lee said in his statement that investors with a huge appetite for loans, such as Merrill Lynch and Morgan Stanley, "influenced the types of products Fremont would sell." He said he used Fremont's easy qualifying terms as a "sales tool" to persuade loan brokers to sell Fremont's subprime loans to borrowers.
Fremont's primary mortgage product provided 100 percent financing - no down payment - and carried an initial teaser rate that was set to increase automatically two years after the loan was made.
Fremont executives intended these high-cost mortgages to be temporary, Lee said, expecting borrowers to refinance within months, as the value of their homes rose.
When the housing market entered a downturn in 2006, subprime mortgages caused an unprecedented foreclosure crisis in Massachusetts and nationwide. Many subprime borrowers could not meet their increasing payments, but they were unable to refinance their subprime mortgages because their house values had plunged.
In Massachusetts, lenders seized more than 6,500 homes through foreclosure through November 2007, according to Warren Group, a Boston real estate and research firm.
Kimberly Blanton can be reached at blanton@globe.com.
