post-foreclosure forbearance agreements were "extensions of credit"
covered by the New Jersey Consumer Fraud Act, and that unconscionable
practices in negotiating or collecting on such loan agreements would
constitute violations of that statute.
A copy of the opinion is available at:
http://www.judiciary.state.nj.us/opinions/supreme/A9909GonzalezvWilshireCr
editCorp.pdf
The borrower on the loan at issue passed away. The surviving mortgagor
continued to make payments on the loan in order to avoid foreclosure. The
surviving mortgagor eventually defaulted on the loan, and the loan owner
filed a foreclosure action.
Before the scheduled sheriff's sale of the property took place, the
mortgage servicer and surviving mortgagor entered into a written agreement
("First Agreement") whereby the servicer agreed not to pursue the
foreclosure sale if the surviving mortgagor paid a specified lump sum and
monthly payments, consisting of the original loan's monthly payments plus
certain fees through a specified future date. The servicer also agreed to
dismiss the foreclosure action when the account became current. After
entering the First Agreement, the surviving mortgagor paid the majority of
amounts due, but missed a number of monthly payments. The trial court
then calculated the amount of arrears, and a sheriff's sale was again
scheduled.
Soon thereafter, the servicer contacted the surviving mortgagor directly
to negotiate a second agreement to avoid foreclosure of her home ("Second
Agreement"). According to the allegations, neither the servicer nor the
loan owner notified the mortgagor's attorney, and the surviving mortgagor
allegedly could neither read nor speak English.
The Second Agreement, entirely in English, set the arrearages at roughly
68% higher than the amount calculated by the trial court a short time
earlier and required the mortgagor to purchase force-placed insurance
despite an active homeowner's insurance policy on the property. As in the
First Agreement, the servicer agreed to dismiss the foreclosure action
once the mortgage payments became current. Both agreements included
language stating that the agreements were an attempt to collect a debt.
The surviving mortgagor made all payments required by the Second
Agreement. However, instead of dismissing the foreclosure action as it
had agreed, the servicer allegedly contacted the mortgagor when the Second
Agreement was about to expire to notify her that another agreement was
needed in order to avoid foreclosure. The mortgagor then notified her
attorney, who, among other things, requested that the servicer explain how
it calculated the amount of arrearages in the Second Agreement and why the
loan was not considered current. The servicer allegedly was unable to
provide an explanation as to the arrearages or the status of the loan.
The surviving mortgagor filed a complaint alleging that the servicer and
loan owner had engaged in deceptive and unconscionable practices in
violation of the New Jersey Consumer Fraud Act, N.J.S.A. 56:8-1 - 195
("NJCFA"). The complaint alleged that the servicer and loan owner,
supposedly knowing that the surviving mortgagor did not read or speak
English and that she was represented by an attorney, contacted her
directly to negotiate the Second Agreement. The complaint further alleged
that the servicer included in the Second Agreement improper costs and fees
in calculating her arrearages and demanded amounts that were not yet due
and owing.
The trial court granted summary judgment in favor of the servicer and loan
owner, holding that the NJCFA did not apply to "post-judgment settlement
agreements entered into to stave off a foreclosure sale." The court
reasoned that the NJCFA was not intended to apply to settlement agreements
entered into by parties to a lawsuit, and that the surviving mortgagor's
only option for relief was to file a motion to vacate, modify, or enforce
the settlement.
The appellate court reversed the trial court judgment, holding that the
agreements were contracts covered by the NJCFA and that the surviving
mortgagor had standing under the NJCFA because she was a signatory to the
post-judgment agreements. The appellate court also concluded, among other
things, that, if proven, the surviving mortgagor's monetary damages from
the servicer's alleged unconscionable practices satisfied the NJCFA's
"ascertainable loss" requirement. The New Jersey Supreme Court affirmed
the appellate court's ruling, and reinstated the surviving mortgagor's
alleged cause of action.
The Supreme Court of New Jersey held that the NJCFA provides relief if a
consumer can prove: (1) an unlawful practice prohibited by the CFA; (2) an
"ascertainable loss"; and (3) a causal relationship between the misconduct
and the loss. Citing Lemelledo v. Beneficial Mgmt. Corp., 150 N.J. 255
(1997), the Supreme Court noted that the broad language of the NJCFA
applies to lending activities and to the sale of insurance related to a
loan, and that an unlawful practice under the CFA includes a person's use
of "any unconscionable commercial practice . . . in connection with the
sale or advertisement of any merchandise or real estate, or with the
subsequent performance of such person." The Court further observed that
an "ascertainable loss" includes one incurred through improper "loan
packing," such as forcing the borrower to purchase unnecessary insurance.
The Court rejected the defendants' assertion that the alleged collection
activities of a servicer do not constitute "subsequent performance" in
connection with a loan. Without deciding whether the forbearance
agreements and the servicer's alleged collection activities were the
"subsequent performance" with respect to the original loan, the Court
concluded that "the post-judgment agreements, standing alone, constitute
the extension of credit, or a new loan, and that [the servicer's]
collection activities may be characterized as 'subsequent performance' in
connection with [that] extension of credit."
The Court remarked that the servicer's alleged dealings with the surviving
mortgagor "placed her on a credit merry-go-round" that "would keep her in
a constant state of arrearages." The Court also further pointed out that
these were not ordinary settlement agreements, as the mortgagor was not
only required to pay the original monthly payments, but also additional
charges such as foreclosure, attorney, and lender-placed insurance fees.
The Court enumerated certain factors regarding the servicer's alleged
conduct with respect to the forbearance agreements that appeared
questionable, including: (1) what this court described as the servicer's
"inexplicably" contacting the surviving mortgagor and negotiating with her
directly even though she was represented by an attorney and did not speak
or read English; (2) the servicer's threat to foreclose even though the
mortgagor allegedly had made every payment under the Second Agreement; (3)
the servicer's alleged inability to explain how it arrived at the
arrearages figure in the Second Agreement or why the loan was not
considered current; and (4) the Second Agreement's requirement to purchase
supposedly unnecessary lender-placed insurance.
The Court further rejected the servicer's and loan owner's argument that
the NJCFA is not an available remedy and that the only options available
to the mortgagor were either to seek relief from the post-judgment
agreements or to pursue common law claims based on breach of contract
and/or fraud. The Court observed that the relief available under the
NJCFA is in addition to any other relief provided by state or federal law.
In addition, the Court stated that there was no need to address whether a
direct relationship existed with the non-borrower mortgagor and the
originating lender. Rather, the assignment of the note and mortgage to
the loan owner and the appointment of the servicer substituted them for
the originating lender with regard to the mortgagor. The Court also
stated that, [a]s a practical matter . . . the agreements were nothing
more than a recasting of the original loan," and concluded that the
forbearance agreements established privity" between the parties.
In remanding to determine whether the defendants' conduct fell below the
NJCFA's permissible standard, the Court stressed that its decision did not
extend to settlement agreements generally. The Court limited its holding
to the narrow issue of the applicability of the NJCFA to the creation of
and collection on a post-foreclosure judgment agreement involving a
stand-alone extension of credit.
Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
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