Conford, Labrecque and Halpern. The opinion of the court was delivered by Conford, S.j.a.d.
[102 NJSuper Page 552] This appeal presents important questions relating to the validity and applicability to plaintiff, a Pennsylvania loan company not authorized to do business
in New Jersey, of the Secondary Mortgage Loan Act of 1965 (L. 1965, c. 91, N.J.S.A. 17:11 A -1 et seq.),*fn1 and regulations of the Commissioner of Banking and Insurance promulgated pursuant thereto, more specifically in respect of its loan to defendants, residents of New Jersey, secured by a second mortgage on their Newark home. The Attorney General has been granted leave to intervene on the side of defendants to defend the validity of the act and regulations; and Middle Atlantic Finance Association to file a brief amicus curiae, which has been helpful. It has also participated in the oral argument.
The Superior Court, Law Division, granted summary judgment for $5,071.82 in favor of plaintiff in its action on a note executed June 6, 1966 by defendants at the Philadelphia office of plaintiff and there delivered to it, that transaction being purportedly authorized by the Pennsylvania statute, Tit. 7, Purdon's Pa. Stat., §§ 6201-6219 ("Consumer Discount Company Act"). At the same time the court denied defendants' motion for summary judgment. Enforcement of the mortgage taken as security for the loan at the same time the note was delivered was not sought or involved in the action.
Although the scope of defenses to the action now advanced is not identical with those set forth in the original pleadings, we have concluded that the questions of public policy implicated in the appellate arguments are so significant and the desirability in the public interest of present judicial determination thereof so obvious that we ought to decide all relevant legal questions argued on the appeal insofar as the record permits us to do so. None of the parties has contended for a narrower approach.
Basically, defendants and the Attorney General argue that the Secondary Mortgage Loan Act of 1965 is applicable to this transaction; and that there were several violations of
that act in the course of the transaction, thereby calling into play section 29 of the act precluding enforcement in the courts of this State of any obligation arising out of a secondary mortgage loan not negotiated and made in full compliance with the provisions of the act. Defendants also contend there was fraud by plaintiff in that they were not advised and did not know that the papers they signed included a mortgage on their home.
Plaintiff asserts the New Jersey statute does not and constitutionally cannot apply to this transaction; that the loan was valid under the Pennsylvania statute regulating such transactions; that conflict of laws principles call for application of the Pennsylvania rather than the New Jersey statute in resolving the validity and enforceability of the loan, and that denial of enforcement of the cause of action by New Jersey would violate the due process, equal protection, interstate commerce and full faith and credit clauses of the United States Constitution.
I. Legislative Background
The Secondary Mortgage Loan Act of 1965 emerged as a compromise of proposals embodied in three bills in the 1965 session of the Legislature, Assembly Nos. 522 and 732, and Senate No. 244. Its adoption was preceded by widespread complaints to the authorities concerning false and fraudulent advertising of the availability of loans and terms thereof and the exaction of exorbitant rates of interest and concomitant other charges from needy borrowers. Typically, the lenders in these transactions required the furnishing by borrowers of mortgages on their homes as security, and generally the financial difficulties of the borrowers were such that the mortgages given were necessarily junior liens to existing mortgages on their properties.
These conditions were fully documented in a report dated January 5, 1965 from the Secretary-Director of the New Jersey Real Estate Commission to Governor Hughes concerning
the results of an investigation by the Commission of these abuses. Significant in relation to some of the legal questions presented herein is the statement in said report: "Our review showed that, in most cases, the New Jersey second mortgage operator would contact or be contacted by a financial outlet, usually in the Philadelphia area, where money was available for second mortgages if a specific procedure was followed." The report showed that the customary procedure involved the use of New Jersey-based brokers, who made contact with or were approached by New Jersey prospective borrowers, in the latter instances usually as a result of advertisements. The broker then would bring the borrower to the financing loan company for consummation of the transaction, frequently in such nearby but out-of-state locations as Philadelphia.
In approving the bill as enacted Governor Hughes publicly stated:
"Assembly Bill No. 732 represents a major step forward in the vital area of consumer protection. With the enactment of this bill, New Jersey maintains its place in the forefront of States which have been quickest to recognize and curb the activities of those who would prey upon the public under the guise of legality and respectability. New Jersey once again has branded unethical conduct as unlawful conduct in order to protect its citizens from the hardships of exorbitant financial practices."
II. The Act and Regulations
The act defines a "secondary mortgage loan," in effect, as a loan not to be repaid in 90 days or less which is secured by a mortgage on real property used as a dwelling for not more than four families, which property is subject to the lien of a prior mortgage or mortgages, or the purchase of any interest in such a loan. Section 1(a). The business of making such loans is restricted to licensees qualifying under the terms of the act. Section 2. The holders of 50% of the stock in a corporate licensee, and any individual licensee, must have resided in this State for two years prior to
applying for a license. Section 3. There are detailed provisions concerning procedure on applications for licenses and renewals thereof to the Commissioner of Banking and Insurance, including payment of an annual fee of $25 and filing a corporate surety bond of $5,000. Sections 4 et seq. Licensees must indicate the location of "the office or branch," Section 7; and the application, if by a corporation, must state "where the business is to be conducted," section 4. There are provisions for hearings on refusals, suspensions or revocations of licenses. Section 11. The Commissioner may investigate activities, and examine books and records, section 14, which must be maintained by the licensee at its place or places of business in this State, section 17.
Section 21 sets forth a mathematical formula for ascertaining the gross dollar amount of interest which the lender may deduct in advance from the face amount of the loan, given the predetermined net proceeds of the loan to be made available to the borrower on closing and the number of installment payment periods for the whole term of the loan and for any calendar year. The parties agree that the formula produces about 14% simple interest per annum on outstanding unpaid principal balances.*fn2
Maximum incidental charges which may be made by the lender in respect of "costs, fees, services, points and premiums" are specified as: appraisal and inspection -- $50 per parcel of land mortgaged; credit investigation -- $15; search fee -- $50 per parcel; legal fees -- 5% of amount of loan, not exceeding $250; recording and filing fees, not to exceed $5 per document. Section 22. Borrowers may not be required to pay any fee for the procuring or placement of the loan, but such fees may be paid by the lender to an attorney or licensed realty broker. Id., subsection (b). The borrower "shall not be compelled to purchase" from the licensee fire, life or title insurance policies. Id., subsection (c).
Among a variety of kinds of provisions which may not be included in any loan instrument are a power of attorney of any kind, including any power to confess judgment and any provision whereby the debtor waives any rights accruing to him under the act or any other law. Section 23.
The act is not applicable to banking institutions, savings banks, federal savings and loan associations or any "insurance company or other financial institution * * * subject to any other law of this State or the United States" regarding mortgage loan transactions by such institutions. Section 31.
We have already mentioned section 29, which declares that no obligation arising out of a secondary mortgage loan shall be enforceable in the courts of this State unless negotiated and made in full compliance with the provisions of the act.
Other unmentioned provisions of the act are not implicated in the issues here raised.
Pursuant to his rule-making power under section 30 of the act, the Commissioner of Banking and Insurance has promulgated a set of rules, two of which are involved in this litigation. The first is Rule 1, reading:
"Notwithstanding the place of execution, nominal or real, of a secondary mortgage loan, if the real property is located in this State, said secondary mortgage loan will be deemed to be subject to the Secondary Mortgage Loan Act of 1965 * * *."
The second is Rule 5(d), under which the lender is required to notify the borrower in writing that he has the right to the advice of counsel of his own choosing before signing the loan papers.
III. The Instant Transaction
Most of the pertinent facts are undisputed; the parties disagree as to others. We propose to decide this appeal on certain of the material facts which are palpably free of any genuine issue and suffice as a matter of law to dictate judgment for defendants. Certain of the undisputed facts have
already been related. Some of the assertions as to disputed facts will be mentioned as enlightening background.
Defendant Anthony E. Stefanelli made two affidavits in resistance to plaintiff's motion for summary judgment, alleging the following. Prior to June 6, 1966 (when he made the loan) he was "contacted by a brokerage firm in South Jersey who asked [him] whether [he] needed a loan as [he] had accumulated some debts which [he] wanted to consolidate. Shortly thereafter [he] was contacted by Rodney Radhill, of 1401 Reed Street, Philadelphia, who informed [him] that he would be able to procure the money for [him]." On June 6 Radhill took him to plaintiff's office where he executed several papers, including a mortgage on his home. However, it was not stated before or during the transaction that this involved a mortgage, and defendant did not "believe" this was a mortgage transaction at any time. After he received the net proceeds of the loan ($937.34; this was the balance after payment during closing by lender of certain of defendant's prior obligations in addition to prepaid interest and other charges on the loan; see infra), Radhill cashed the check and retained $350 thereof as the price of a small portable television set he "sold" defendants, explaining he was not allowed to charge a brokerage commission for a loan. Only after he received, at a later date, a statement of the loan, did Stefanelli realize he had executed a mortgage on his home. Stefanelli further asserted in his affidavit that he was "compelled" to purchase creditor life insurance and creditor accident-health insurance, the premiums therefor having been "incurred" over his objections.
Plaintiff's sole evidential showing on the motion as to Radhill's part in the transaction is an affidavit of its manager that "Plaintiff does not have and never had an agent by the name of Rodney A. Radhill and plaintiff made no requirement for defendants to purchase anything from anyone in order to obtain the loan." However, plaintiff failed to answer responsively an interrogatory requesting it to state who was present at the loan closing.
There is no dispute that defendants did on June 6, 1966 at the Philadelphia office of plaintiff sign and deliver to it a promissory note in the amount of $4,535.28 payable in 36 monthly installments of $125.98 each, beginning July 6, 1966, and also a second mortgage on their Newark home as collateral security for the note. The note contained a power of attorney for entry of judgment thereon. It is conceded there were deductions from the face amount of the note of $1,020.43 for interest, $15 for service charge, creditor life insurance and creditor accident and health premiums of $102.05 and $145.13, respectively, and recording and releasing fees of $6.25. The amount of allowable interest under section 21 of the New Jersey act would have been some $758. Plaintiff says it did not "compel" defendants to buy the insurance. From the loan proceeds plaintiff at the direction of defendants paid their existing debts: $500 to Household Finance Corp.; $500 to Central Finance; and $1,309.08 to Geraldine Sica; leaving a balance of $937.34 disbursed to defendants (from which they paid $350 to Radhill for the television set, as noted above).
IV. The Pennsylvania Statute
The subject matter regulated under the Consumer Discount Company Act (cited above) is the business of lending sums of $3,500 or less (whether secured or unsecured) and charging interest and fees which aggregate more than 6% per year on unpaid principal balances. Tit. 7, Purdon's, op. cit., § 6203. Such business is restricted to Pennsylvania corporations licensed by the Secretary of Banking. Ibid. Supervision of licensees is comprehensive and comparable to that provided for by the New Jersey act. The amount of interest chargeable is formulated differently from the New Jersey act. It is fixed at $7.50 per $100 per year when the "contract is repayable" within 36 months; if for a longer term, then at $6 per $100 for the remainder of the term. Such interest is computed on the face amount of the loan (including all
permissible charges) for the full term of the contract and deductible in advance notwithstanding provision for installment payments.*fn3 Section 6213, subd. E. By way of comparison with the stated $7.50 rate, the formula set forth in Section 21 of the New Jersey act would permit an amount of interest which, if computed on the ...