The Massachusetts Attorney General reached a settlement with Goldman Sachs & Company to resolve potential claims stemming from the AG’s investigation of the role of investment banks in the origination and securitization of subprime loans in Massachusetts. Under the settlement, Goldman has agreed to provide a $50 million loan restructuring program to Massachusetts subprime borrowers. The loan restructuring program is designed to enable subprime borrowers to replace problem loans with new, more affordable loans that take into account the current value of their properties. Goldman also agreed to pay $10 million to Massachusetts and will continue to cooperate with the AG’s ongoing investigation of subprime lending and securitization practices.

Under the loan restructuring program, Goldman will significantly reduce principal balances to allow borrowers to refinance or sell their homes. For borrowers with loans held by Goldman entities, Goldman has agreed to reduce the principal of first mortgages by up to 35% and second mortgages by 50% or more. Borrowers whose first mortgage is significantly delinquent will be required to make a reasonable monthly loan payment while seeking refinancing or until they sell their home. If after six months, a borrower is still unable to find financing or sell their home, Goldman will reduce the principal owed on the existing loan to assist the borrower. For loans not currently held by Goldman, but which are serviced by Goldman’s affiliated servicing company, Litton Loan Servicing LP, Goldman has agreed to assist qualified borrowers with finding refinancing options and other alternatives to foreclosure.

The AG began its investigation into the securitization of subprime loans in December 2007 and has focused on a variety of industry practices involved in the issuance and securitization of subprime loans to Massachusetts consumers. The AG is investigating whether securitizers may have:

• facilitated the origination of "unfair" loans under Massachusetts law;
• failed to ascertain whether loans purchased from originators complied with the originators' stated underwriting guidelines;
• failed to take sufficient steps to avoid placing problem loans in securitization pools;
• been aware of allegedly unfair or problem loans;
• failed to correct inaccurate information in securitization trustee reports concerning repurchases of loans; and
• failed to make available to potential investors certain information concerning allegedly unfair or problem loans, including information obtained during loan diligence and the pre-securitization process, as well as information concerning their practices in making repurchase claims relating to loans both in and out of securitizations.

The settlement with Goldman and the AG’s investigation into securitizers are the latest developments in the AG’s ongoing enforcement actions in response to the subprime lending crisis. The AG recently sued Fremont Investment & Loan, as well as Option One and its parent H&R Block, alleging unfair, deceptive and predatory lending practices, and obtained preliminary injunctions against those companies. The AG also promulgated new Massachusetts consumer protection regulations, effective in January 2008, governing mortgage lenders and brokers.

Click here for the settlement agreement and here for the AG’s press release and other settlement-related materials.