[231 NJSuper Page 411] Cross motions for summary judgment in this case raise an unresolved question as to the consequence of a lender's noncompliance with the provisions of the Secondary Mortgage
Loan Act, N.J.S.A. 17:11A-34 et seq. (hereinafter "the Act").*fn1 Section 58 of that statute, N.J.S.A. 17:11A-58, says that the obligation of a borrower arising out of a secondary mortgage loan "shall be void and unenforceable" unless the loan was executed in full compliance with the act. It has already been held that those words mean just what they say: if a loan is subject to the act, and there was not full compliance with its provisions, the debt incurred by the borrower is void. The noncomplying lender can recover neither the principal he advanced to the borrower nor any interest. See, e.g., Stubbs v. Security Consumer Discount Co., 85 N.J. 353 (1981).*fn2
This case raises a further question: If the borrower pays off the entire loan and only thereafter learns that the seller violated the act when the loan was made, can the borrower then file suit against the lender and recover all of the money he had repaid on the loan?
The loan here was made on September 8, 1983, when plaintiffs Murray and Elizabeth Connell borrowed $150,000 from defendant American Funding Limited and as security therefore, gave a second mortgage on their home in Ridgewood, New Jersey. At the closing defendant required that plaintiffs pay certain closing costs representing expenses incurred by defendant. They included filing fees of $70, search fees of $131, title insurance premiums of $450 and a messenger service charge of $20. There is no question that the Secondary Mortgage Loan Act prohibits such charges respecting any transaction to which
it applies. N.J.S.A. 17:11A-46.*fn3
For approximately two years following closing, plaintiffs made the normal monthly payments called for by their loan agreement. They then decided to sell their home and contacted defendant in order to obtain the necessary payoff figure to discharge the second mortgage.
Plaintiffs were given that payoff figure over the phone. They had a question as to the correctness of the amount, but inquiries to defendant brought only further statements reiterating the original figure. Upon the advice of the attorney representing them in connection with the sale of their home (not present counsel) they paid defendant the full amount requested, and obtained the discharge of the second mortgage. Only two months later did their attorney write to defendant requesting a "complete breakdown" and information as to how defendant had computed the payoff figure.
Approximately three weeks after that letter defendant's attorney responded, saying that he had "reviewed the entire loan file" and had concluded that plaintiffs were entitled to a refund of $17,913.68. He added that a check for that amount was being enclosed "in full satisfaction of your inquiry." Although the letter did not set out the reason for the original overcharge, it was subsequently acknowledged that defendant had included a prepayment penalty which was not permitted under the law of this State (N.J.S.A. 46:10B-2) and had also calculated accrued interest in an incorrect manner.*fn4
That correspondence apparently induced plaintiffs to contact their present counsel who then, for the first time, focused on the improper charges imposed when the loan closed some years before. On that basis plaintiffs' new attorney wrote to defendant and demanded repayment of all monies that had been paid to defendant -- both the monthly installments and the lump-sum payoff amount -- less only the $17,913.68 which had already been refunded. Defendant rejected that demand and this litigation followed.
Defendant raises a number of defenses to plaintiffs' claim. Most of them can be disposed of briefly before addressing the dispositive issue, which is the proper interpretation of N.J.S.A. 17:11A-58.
First, defendant claims that the Secondary Mortgage Loan Act does not apply to this transaction. Rather, it says, N.J.S.A. 31:1-1, which is part of the General Usury Law, governs this matter.
N.J.S.A. 31:1-1 sets general ceilings for interest rates on loans. It also defines certain exceptions to those ceilings. The specific provision relied on by defendant is N.J.S.A. 31:1-1(e) which states that, notwithstanding the general interest rate ceiling set out in the General Usury Law, certain described transactions "may provide for any rate of interest which the parties agree upon." One such class of exempt transaction is described as "loans in the amount of $50,000 or more," except for certain loans secured by first mortgages on described types of real property. Plaintiff says that since the loan here was for more than $50,000, and did not involve one of the described first mortgages (it was a second mortgage), the loan is exempt from the interest limitations of the General Usury Law.
That conclusion seems unassailable. However, defendant uses that conclusion as a basis for a claim that N.J.S.A. 31:1-1(e) thus leaves "totally unregulated the charges that a borrower pays" on such a loan in excess of $50,000.
That logic and that conclusion, however, are not supported by the language or the policy of either the General Usury Act or ...