FYI: Ill App Ct (2nd Dist) Holds Mortgage Not Void Due to Lack of Licensure by Originating Lender

The Appellate Court of Illinois, Second District, recently held that even though the Illinois Residential Mortgage License Act, 205 ILCS 635/1-1, et seq. ("IRMLA") was applicable to a lender that only made one loan in Illinois, an amendment to the IRMLA provided an exception to the law of the case doctrine and under the amendment the mortgage was not void merely because the lender was not licensed under the IRMLA at the time the loan was extended.

 

A copy of the opinion is available at:  Link to Opinion

 

As you may recall, in First Mortgage Co. v. Dina, 2014 IL App (2d) 130567 (Dina I), the Illinois Appellate Court held that where the mortgage lender ("Lender") lacked a required license under the IRMLA, the mortgage was void.  Based on the Court's uncertainty over the Lender's licensure status, the Court vacated the foreclosure judgment and sale and remanded the case.

 

Following the remand, the Illinois General Assembly proposed Public Act 99-113, which amended the IRMLA to reject the holding and Dina I, providing that "[a] mortgage loan brokered, funded, originated, serviced, or purchased by a party who is not licensed under this Section shall not be held to be invalid solely on the basis of a violation under this Section." 

 

While the amendment remained pending, the foreclosing mortgagee ("Mortgagee") filed a new motion for summary judgment on July 8, 2015, asserting two bases: (1) that if the amendment passed it would reveal the legislative intent in enacting the statute, reversing Dina I, and (2) that the IRMLA did not apply to the Lender, because it "only applies to entities engaged in the business of residential mortgage lending in Illinois," and the only loan the Lender ever made in Illinois was the loan at issue.

 

On July 23, 2015, the Illinois General Assembly passed Public Act 99-113.  This legislation amended section 1-3(e) of the IRMLA to provide:

 

"A mortgage loan brokered, funded, originated, serviced, or purchased by a party who is not licensed under this Section shall not be held to be invalid solely on the basis of a violation under this Section. The changes made to this Section by this amendatory Act of the 99th General Assembly are declarative of existing law."

 

Pub. Act 99-113, § 5 (eff. July 23, 2015) (amending 205 ILCS 635/1-3(e)).

 

On September 10, 2015, the borrowers ("Borrowers") filed their response to the new motion for summary judgment, arguing: (1) that Dina I created law of the case that barred the Mortgagee from arguing that the IRMLA was inapplicable to the Lender, and (2) that the amendment was constitutionally defective to the extent it applied retroactively.

 

The trial court granted the Mortgagee's motion, finding that the law of the case doctrine did not prevent it from finding that the IRMLA did not apply to the Lender under an exception to the doctrine where the legislature makes a change in the controlling law.  The trial court also held that the IRMLA did not apply to the Lender because the phrase "engage in the business" excluded isolated transactions, and that the Lender "presented uncontroverted evidence that the [Borrowers] mortgage loan was an isolated transaction in Illinois" for the Lender.  The matter then proceeded to judicial sale and confirmation of sale.  The Borrowers then appealed. 

 

On appeal, the Borrowers asserted four arguments: (1) the trial court erred in finding that the IRMLA did not apply to the Lender, (2) the amendment "violates the Illinois constitutional prohibition against retroactive application of amendments to existing legislation, (3) because the amendment was an attempt to nullify or reverse Dina I, it was a violation of the separation of powers, and (4) the amendment "violate[s] the Special Legislation Clause of the Illinois Constitution . . . by attempting to create a separate class of brokers for special treatment." 

 

The Mortgagee argued that: (1) the court did not err when it ruled that the Lender did not need to be licensed under the IRMLA, and (2) the Borrowers' other arguments were superfluous, because "the amendment merely clarified what has always been true: there is not, and has never been, a right to void a mortgage that secures a loan made by a lender that was in violation of [the IRMLA]." 

 

The Appellate Court first addressed the issue of the IRMLA's applicability to the Lender.  The Court looked to the language of the statute, which provides: "No person partnership, association, corporation or other 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."  205 ILCS 635/1-3(a).  Section 1-3(h) provides that the IMRLA "applies to all entities doing business in Illinois as residential mortgage bankers, as defined by [the Old Act], regardless of whether licensed under that or any prior Act."  205 ILCS 635/1-3(h). 

 

The Mortgagee argued that section 1-3(h) created an "isolated transaction exception" to the IRMLA.  The Appellate Court disagreed.  Instead, it found more persuasive the Borrowers' argument under section 1-4(d) expressly provides exemptions under the IRMLA, which the Court determined is an exhaustive list of exemptions, and did not include an isolated incident exemption.

 

After finding that the IRMLA applied to the Lender, the Appellate Court next addressed the Borrowers' constitutional challenge to the application of the amendment.  In holding that the amendment applied, the Appellate Court determined that "the amendment can be read to avoid any constitutional defects." 

 

First, the Court ruled that contrary to the Borrowers' assertion, the amendment did not violate the special-legislation cause by giving special rights to unlicensed brokers, because it did not provide them with any special rights, it "merely prevents them from suffering forfeitures." 

 

The Appellate Court next rejected the Borrowers' argument that Illinois has a general bar on amendments with retroactive effect, noting that no such bar exists.  Instead, "Illinois has adopted the basic principles of the Supreme Court's two-part retroactivity analysis in Landgraf v. USI Film Products, 511 U.S. 244 (1994)."  The first step is to decide whether the legislature explicitly stated the extent of the statute's retroactivity.  Any express statement of intent controls, unless the retroactivity is unconstitutional for other reasons.

 

The second step, applicable when legislative intent is not clear, is to decide whether the amendment would "impair the rights a party possessed when acting, increase[] a party's liability for past conduct, or impose new duties with respect to transactions already completed."  If the amendment has such an effect, it must not be applied retroactively.

 

However, the Appellate Court also noted that 5 ILCS 70/4 "supplies what amounts to a default statement on retroactivity, applicable when the General Assembly has failed to speak on the point."  The section 4 default rule is that amendments "that are procedural may be applied retroactively, while those that are substantive may not."  

  

"Thus, the rule for an Illinois amendment is that we apply any express statement of retroactivity or, if none, apply section 4." 

 

With respect to the amendment, the Court noted determined that the provision stating that "[t]he changes made to this Section . . . are declarative of existing law" stated an intent to give the amendment maximal retroactive effect.

 

The question then was whether the retroactivity is constitutionally objectionable. 

 

In this case, the Appellate Court ruled that "[a]ny claim to reverse a decision stating a judicial construction . . . is constitutionally objectionable," and therefore "the amendment itself does not bar the application of Dina I."  However, the Appellate Court has "the power to power to depart from [the Dina I] decision, and we exercise it here."

 

The Court concluded that "declining to apply Dina I, we avoid an inequitable result."  The Court noted that when it decided Dina I, concluding that a mortgage made by an unlicensed vendor was void, "we placed great weight on what we deemed to be this state's existing public policy."  However, "the amendment makes clear that this state's current public policy does not require such forfeiture."  Thus, the Court affirmed the ruling of the trial court.

 

 

 

 

Ralph T. Wutscher
Maurice 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@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments 

 

FYI: 7th Cir Holds State and Local Transfer Taxes Apply to Private Entities Doing Business With GSEs

The U.S. Court of Appeals for the Seventh Circuit recently held that federal laws exempting federal entities from state and local taxation do not apply when the transfer tax is charged to a private buyer who purchases real estate from Fannie Mae, Freddie Mac, or the Federal Housing Finance Agency ("FHFA").

 

A copy of the opinion is available at:  Link to Opinion

 

A group of buyers (the "buyers") purchased real property in Chicago from Fannie Mae. 

 

The City of Chicago imposes a Real Property Transfer Tax on the transfer of real property located within Chicago.  Chi. Municipal Code § 3-33-030.  The "primary incidence of the tax and the obligation to pay the tax are on the purchaser, grantee, assignee, or other transferee of the property."  Id. § 3-33-030(C).  This was the "City portion" of the transfer tax.

 

A supplemental tax, referred to as the "CTA portion" of the transfer tax, was to be paid by the transferor, unless the transferor was exempt by operation of state or federal law, in which case the transferee was held responsible for that portion of the tax as well.  Id. § 3-33-030(F). 

 

The Illinois Department of Finance assessed the buyers for the tax, and the buyers argued that they should be exempt from taxation like the exempt federal entities.  An administrative law judge in the Department of Finance ruled that each buyer was liable for the tax, and the director of the Department affirmed.  The buyers and the federal entities sued the City of Chicago and its taxing officials in federal court seeking review of the Department's decision.

 

The trial court held that the tax was preempted by the federal exemption statutes, and issued an injunction barring the City of Chicago from collecting the taxes from the federal entities or the buyers.  This appeal followed.

 

As you may recall, the Seventh Circuit recently held that the federal tax exemptions preempted property transfer taxes insofar as the tax was charged to the exempted federal entities.  Dekalb County v. Fed. Hous. Fin. Agency, 741 F.3d 795 (7th Cir. 2013).  All other circuits that have addressed this issue have reached the same conclusion. 

 

The sole issue on appeal in this matter was whether the exemption applied as to the individuals who purchased property form the exempt federal entities. 

 

The Seventh Circuit began its analysis by examining the plain language of the federal tax exemption provisions. 

 

The statute governing Fannie Mae states:

 

"The Corporation, including its franchise, capital, reserves, surplus, mortgages or other security holdings, and income, shall be exempt from all taxation now or hereafter imposed by any State, territory, possession, Commonwealth, or dependency of the United States, or by the District of Columbia, or by any county, municipality, or local taxing authority, except that any real property of the corporation shall be subject to State, territorial, county, municipal, or local taxation to the same extent as other real property is taxed." 

 

12 U.S.C. § 1723a(c)(2).

 

The statute governing Freddie Mac states:

 

"The Corporation, including its franchise, activities, capital, reserves, surplus, and income, shall be exempt from all taxation now or hereafter imposed by any territory, dependency, or possession of the United States or by any State, county, municipality, or local taxing authority, except that any real property of the Corporation shall be subject to State, territorial, county, municipal, or local taxation to the same extent according to its value as other real property is taxed."

 

12 U.S.C. § 1452(e).

 

And, the statute governing the FHFA states:

 

"The Agency, including its franchise, its capital, reserves, and surplus, and its income, shall be exempt from all taxation imposed by any State, county, municipality, or local taxing authority, except that any real property of the Agency shall be subject to State, territorial, county, municipal, or local taxation to the same extent according to its value as other real property is taxed, except that, notwithstanding the failure of any person to challenge an assessment under State law of the value of such property, and the tax thereon, shall be determined as of the period for which such tax is imposed."

 

12 U.S.C. § 4617(j)(2).

 

The Seventh Circuit noted that each provision was specific to the federal entity, and its various assets, and nothing in these provisions mentioned parties that transact with the exempt entities.  Because the exemption provisions did not specifically address transactions entered into by the federal entities, the Seventh Circuit determined that such transactions should not be read into the "including" phrases of the provisions.

 

Additionally, the Court found that by definition, transactions were not considered assets or property.  See Black's Law Dictionary (8th ed. 2004) (defining "transaction" as "the act or an instance of conducting business or other dealings, esp., the formation, performance, or discharge of a contract"). 

 

Moreover, the Seventh Circuit did not interpret such transactions to be considered an element of any of the specified exempt assets listed in the statutes. 

 

As you may recall, in Pittman, the U.S. Supreme Court reviewed whether a tax on recording deeds was preempted by a federal law exempting the former Home Owners' Loan Corporation from state and local taxation; the Supreme Court focused on the term "loans" and determined that the use of that term was meant to shield from taxation the entire process of lending, including mortgages, and held that the Home Owners' Loan Act preempted the recording tax regardless of who recorded the deed.  Pittman v. Home Owners' Loan Corp. of Wash., D.C., 308 U.S. 21, 32 (1939).

 

However, the Seventh Circuit found that for Pittman to apply, it would need to find that transferring property was an "indispensable element" of one of the exempt assets listed in the exemption provisions.  In the Seventh Circuit's view, transferring property was not an element of the entities' franchise, capital, reserves, surplus, loans, or income assets. 

 

Further, while the Fannie Mae provision exempted the corporation's mortgages, the Seventh Circuit found that the sale of property did not involve any mortgage held by Fannie Mae.  Similarly, Fannie Mae's exemption of "activities" from all taxation could be logically understood to include the transfer of property, but the Seventh Circuit concluded that the transfer tax was a tax imposed on the transferee's receipt of property rather than a tax imposed on the act of selling property.

 

Therefore, the Seventh Circuit held that there was nothing in the plain language of the exemptions that indicated "clear and manifest purpose of Congress" to exempt from taxation persons or entities that transact with Fannie Mae, Freddie Mac, and FHFA.

 

The buyers alternatively argued that this interpretation was contrary to what Congress intended, because if a buyer was required to pay the real estate transfer tax, Fannie Mae, Freddie Mac, and FHFA will have to lower the price of the real estate they sell.  As a result, the federal entities will have less capital available for investing in the secondary mortgage market. 

 

The Seventh Circuit rejected the argument because a tax that has an effect on an entity did not make it a tax on that entity.  See, e.g., United States v. New Mexico, 455 U.S. 720, 734 (1982) ("[Constitutional] immunity may not be conferred simply because the tax has an effect on the United States, or even because the Federal Government shoulders the entire economic burden of the levy."). 

 

In sum, the Seventh Circuit concluded that a statute preempted the traditional state power of taxation only if that result was the "clear and manifest purpose of Congress."  Because the plain language of the federal tax exemption provisions did not shield from state and local taxation of individuals or corporations that transact with Fannie Mae, Freddie Mac, or FHFA, and there was no evidence that Congress intended for the exemptions to apply to who buy property from the exempt entities, the Seventh Circuit held that the exemption did not apply to the buyers.

 

Accordingly, the Seventh Circuit reversed the judgment and orders of the trial court, and dissolved the injunction barring the City of Chicago from collecting the taxes.

 

 

 

Ralph T. Wutscher
Maurice 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@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   Michigan   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments