These related cases raise the question of whether a 1987 amendment to the Secondary Mortgage Loan Act, N.J.S.A. 17:11A-34 et seq. (hereinafter "The Act") should be applied
retroactively or only prospectively. That amendment (included within L.1987, C. 230) drastically changed the effect of a lender's non-compliance with the Act. Prior to its adoption, the Act provided that if a lender violated the Act while making a loan, the loan was void and the lender could recover neither the principal advanced nor any interest. The 1987 amendment modified that harsh result to permit recovery of the principal of the loan. For certain violations however, interest can still not be recovered and for other violations the Act specifies additional penalties.
The loans in both these cases were made before the 1987 change in the law, although both cases were filed thereafter. The applicable facts can be set out briefly.
MORAN V. AMERICAN FUNDING, LTD.
In February, 1984 Donald and Judy Moran obtained a $50,000 loan from defendant, American Funding Ltd,*fn1 with the loan secured by a second mortgage on their home in Ridgewood, New Jersey. The Morans allege that at or before closing, they were required to pay charges for title insurance to cover the mortgagee's interest in the property, and also to increase the fire insurance coverage on their dwelling.
At the time of the transaction, the Act barred both of those charges by the lender. N.J.S.A. 17:11A-46 prohibited the charge for title insurance because the Act contained no authorization for such a charge, and thus the "catch all" prohibition of that section applied: viz., the lender may not "contract for, charge, receive or collect" any one of a number of designated charges, nor may it "receive or collect . . . any other thing of value other than charges authorized by this act". And N.J.S.A. 17:11A-49.1 specifically prohibited the lender from requiring
the mortgagors to increase their "property insurance" because of the loan.
The Morans made regular monthly payments on their loan through January, 1988. At that time, they refinanced their home but instead of paying off the American Funding mortgage, they filed this suit alleging that the loan was void and unenforceable. The amount in question has since been paid into court. Plaintiffs now move for summary judgment and claim that the pre 1987 law governs and bars any recovery -- of principal or interest -- by defendants.
For purposes of this motion only defendants "admit" that they did impose the charges and obligations alleged by plaintiffs. They assert a number of defenses including laches, estoppel, and unclean hands, and include as well a claim that the forfeiture provisions of the pre-1987 Act are unconstitutional.*fn2 They have counterclaimed seeking foreclosure of their mortgage and argue that, at most, plaintiffs are entitled to the lesser relief provided by the post-1987 Act (forfeiture of interest) and they must in any event repay the principal of the loan.
GOLD TRENDS, INC. V. BENEDUCE
In August, 1986 defendants Mario and Dora Beneduce borrowed $130,000 from plaintiff Gold Trends, Inc. As collateral they executed two mortgages on properties located respectively in Lyndhurst and Rutherford, New Jersey. Both mortgages were subject to prior encumbrances and thus constituted second mortgages.
Approximately one month later, in September 1986, the Beneduces borrowed an additional $160,000 from defendant Martin Burger as "trustee for an undisclosed principal." That loan was secured by two further mortgages, one a second mortgage on property in East Rutherford, and the other an additional mortgage on the same Lyndhurst property that formed part of the security for the Gold Trends loan.
On August 29, 1988, Gold Trends filed a foreclosure complaint against the Beneduces in which they also named Burger as a defendant.*fn3 The Beneduces defended by claiming that neither Gold Trends nor Burger is a licensed second mortgage lender and thus, under the Act as it read when the loans were made, both loans are "void and unenforceable".
Both Gold Trends and Burger acknowledge that they were not licensed under the Act and on the basis of that acknowledgment the Beneduces have filed a motion for summary judgment dismissing the foreclosure complaints. The mortgagees claim that the Beneduces may be guilty of fraud by accepting the loans with no intention of repaying them. And they argue further that, in any event, the less severe "penalty" provisions of the 1987 amendment should apply, rather than the harsher language in effect theretofore.
Before adoption of the 1987 amendment to the Act, section 58 thereof, N.J.S.A. 17:11A-58, provided that,
Any obligation on the part of a borrower arising out of a secondary mortgage loan shall be void and unenforceable unless such secondary mortgage loan was executed in full compliance with the provisions of this Act. (emphasis added)
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.
Further, that loss of principal and interest could be imposed not only because of the imposition of unlawful charges, but also for any failure to act "in full compliance with the provisions" of the Act. For example, and of particular significance in the Gold Trends suit here, if the lender was not licensed, the loan was treated as being in violation of the Act, and neither principal nor interest ...