New Jersey Sup Ct Applies Consumer Fraud Act to Post-Foreclosure Forbearance Agreements as "Extensions of Credit"

The Supreme Court of New Jersey recently held that certain 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.