The Appellate Court of Illinois, Second District, recently reversed a judgment of foreclosure because the original lender was not a licensed lender under the Illinois Residential Mortgage License Act of 1987 (205 ILCS 635/1-1 et seq.) (“IRMLA”). In so ruling, the Second District made clear that violation of the IRMLA results in a void mortgage.
A copy of the opinion is available at:
In May 2010, the lender (“Lender”) filed a complaint to foreclose on a property as collateral for loan extended by the Lender’s wholly owned subsidiary, which later merged into Lender in April of 2011. The borrowers (“Borrowers”) filed an answer and asserted affirmative defenses.
The Borrowers argued that the Lender lacked standing to foreclose because it was neither the mortgagee nor the successor in interest to the mortgagee. The borrowers further argued that Lender failed to mitigate its damages and comply with federal obligations to consider them for modification programs.
The Lender moved for summary judgment. The Borrowers, having missed the deadline to respond, filed a belated response arguing that the Lender and its former subsidiary were not registered to do business in Illinois or licensed under the IRMLA. They also asserted that Lender was attempting to collect insurance premiums despite the premiums having been paid by the Borrowers. The lower court allowed the late filing.
In reply, Lender argued that Borrowers could not raise new defenses in response to a motion for summary judgment. In addition, Lender argued that under the Illinois Limited Liability Company Act (“LLC Ac”) (805 ILCS 180/1-1 et seq.), an LLC’s failure to register does not impair its contracts. Moreover, Lender argued that pursuit of a legal proceeding is not considered engaging in business in Illinois. Lender further argued that as a “registered domestic entity with the National Information Center under the laws of Oklahoma,” it was a bank and was therefore exempt from the licensing requirements of the IRMLA. Finally, Lender argued that the insurance was purchased because the Borrowers’ coverage was going to lapse and it did not receive evidence of coverage from Borrowers.
The lower court granted Lender’s motion for summary judgment.
On appeal, Borrowers argued that neither Lender nor its former subsidiary were a licensed mortgage lender or an exempt entity under the IRMLA. Relying on Carter-Shields v. Alton Health Institute, 201 Ill. 2d 441 (2002), Borrowers argued that a contract made by an entity that lacked the proper license is void. Borrowers further argued that as an unregistered LLC, the Lender was barred by section 45-45 of the LLC Act (805 ILCS 180/45-45) from bringing any civil action in Illinois. Alternatively, they argued that the confirmation of the sale worked an injustice because an agreement to modify the loan would have been beneficial for both parties.
The Appellate Court flatly rejected the Lender’s attempt to assert status as an exempt entity under 205 ILCS 635/1-4(d) of the IRMLA because even if Lender were an exempt entity, which it had failed to demonstrate that it was, the Lender did not extend the loan to the Borrowers, its former subsidiary did.
Under the IRMLA, “[n]o [nonexempt person or entity] shall engage in the business of brokering, funding, originating, servicing or purchasing of residential mortgage loans without first obtaining a license from the Commissioner [(now Secretary)].” 205 ILCS 635/1-3(a). Thus, the Court held that it is status of the Lender’s subsidiary that was relevant, not the Lender’s. The Court also held that Lender failed to demonstrate that its subsidiary was an exempt entity and therefore the Borrowers’ mortgage violated the IRMLA.
The Appellate Court then considered the consequences of a violation of the IRMLA. No Illinois ruling directly addressed unlicensed mortgage lending. However, the Court noted that in Chatham Foot Specialist, P.C. v. Health Care Service Corp., 216 Ill. 2d 366 (2005), the Illinois Supreme Court held that a contract made by an unlicensed individual calling for his personal services is unenforceable. Chatham Foot Specialist, P.C. v. Health Care Service Corp., 216 Ill. 2d 366, 380-81 (2005). Moreover, the Court noted that Illinois courts have held that where a licensing requirement is enacted not to generate revenue, but to safeguard the public by assuring them of adequately trained practitioners, the unlicensed party may not recover fees for services or otherwise enforce a contract. Id.
The Court also noted that the IRMLA was enacted to protect the public. Section 1-2(b) (205 ILCS 635/1-2(b)) states that “[t]he purpose of this Act is to protect Illinois consumers from seeking residential mortgage loans and to ensure that the residential mortgage lending industry is operating fairly, honestly and efficiently, free from deceptive and anti-competitive practices.”
Therefore, the Appellate Court concluded that a mortgage made by an entity that lacked authorization under the IRMLA to conduct such business is void as against public policy.
Finally, the Appellate Court turned to whether the Borrowers forfeited the defense by failing to raise the lack of a needed license as an affirmative defense in their answer. Although the Court noted that the affirmative defense should have been raised in the answer, the Borrowers here did not forfeit the defense as a matter of public policy. See e.g., First Trust & Savings Bank of Kankakee v. Powers, 393 Ill. 97, 103 (1946) (a court of equity should refuse to enforce a provision that is against public policy even if no party has raised the point).
Accordingly, the Appellate Court vacated the foreclosure judgment and the order confirming the sale, and remanded the matter for further proceedings consistent with its ruling.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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