The Appellate Division recently issued its decision in GMAC Mortgage, LLC v. Clyde Fraser and Toye Fraser, and held that financing by an unlicensed financial entity does not render the debt instruments illegal and unenforceable against the borrower. This was the second appearance by defendants Clyde and Toye Fraser ("Defendants") before the Appellate Division in an attempt to render the note and mortgage illegal and unenforceable.

Defendants obtained a residential mortgage back in 2005, and in 2006 obtained replacement financing in the principal sum of $1.8 million from Zurich Mortgage Solutions, LLC ("Zurich"). This was not your typical financing arrangement.  Defendants agreed to make interest-only payments of $18,735 per month for the first sixty months!

At the time of the financing, Zurich was not a licensed financial entity in New Jersey.  The mortgage and note were then transferred to American Residential Equities, LLC, also an unlicensed financial entity in New Jersey.  Defendants then contacted the Department of Banking and Insurance, which issued a refund directive because Zurich has charged unreasonable interest to Fraser.  Counsel for Defendants then advised them not to make any payments on the note and mortgage because Zurich was unlicensed.  

In the face of these allegations, the mortgage was transferred to GMAC Mortgage, LLC ("GMAC") in November 2007. GMAC, a licensed financial entity in New Jersey, immediately instituted a declaratory judgment action seeking a declaration that it may enforce the note and mortgage.  Defendants filed counterclaims and sought declarations, inter alia, that the mortgage and note were unenforceable and that they were not obligated to pay interest because Zurich was unlicensed. The Law Division held that the mortgage and note were enforceable, that the Defendants were in default, and that GMAC was owed the full amount of the debt.  Defendants appealed the decision to the Appellate Division

The Appellate Division, the first time around, pointed to N.J.S.A. 17:11C-46 which expressly provides that the failure to comply with statutory licensure requirements does not affect the validity or enforceability of the mortgage, and no person acquiring the loan must ascertain if the licensee was licensed at the time the loan as made.  

The Appellate Division revisited this decision on the Defendants' appeal of a Chancery Division order granting summary judgment issued in a foreclosure action filed by GMAC.  The Defendants' defense to the foreclosure action was the same defense presented in the declaratory judgment action.  The Appellate Division had already determined that the note and mortgage were enforceable and affirmed the applicability by the Chancery Division of the doctrine of res judicata.

This decision highlights the protections afforded to out-of-state lenders who enter into financing transactions with borrowers in New Jersey.  However, while unlicensed lenders may not enforce their debt instruments, licensed assignees certainly can.  Copies of the opinion can be requested by emailing [email protected].