The court found that the Prepayment Law prohibits charging a prepayment premium only with respect to a "mortgage loan" as that term is defined in the Prepayment Law.
The New Jersey Superior Court, in Lopresti v. Wells Fargo Bank, N.A., determined that the New Jersey Prepayment Law, N.J.S.A. § 46:10B-1, does not apply to individual guarantors who had guaranteed a commercial loan. There, the lender made a commercial loan to a corporate borrower. The principals of the borrower guaranteed the loan and executed a mortgage encumbering their residence to secure their obligations under the guaranty. The note evidencing the loan contained a prepayment provision that required the borrower to pay a "yield maintenance" premium in the event that the borrower repaid the loan prior to its maturity date. The borrower refinanced the loan, and at the closing of the refinancing, the borrower paid to the original lender a payoff amount that included the prepayment premium.
After the closing of the refinancing, the guarantors filed a complaint, contending that the lender violated the Prepayment Law and the New Jersey Consumer Fraud Act by collecting a prepayment premium in connection with the refinancing of the loan to the borrower. The trial court granted summary judgment in favor of the lender.
On appeal, the New Jersey Superior Court affirmed the trial court's ruling. The court found that the Prepayment Law prohibits charging a prepayment premium only with respect to a "mortgage loan" as that term is defined in the Prepayment Law. The loan in question did not meet the definition of a mortgage loan because the proceeds of the loan were used for commercial purposes and not used for purposes relating to the guarantors' residence. Additionally, the Prepayment Law defines a "mortgagor" to be a person, other than a corporation, which is liable for the payment of a mortgage loan. The corporate borrower did not satisfy this definition of the Prepayment Law. The court observed that the New Jersey Legislature intended the Prepayment Law to protect individual consumers, not commercial borrowers.
To have a claim under the Consumer Fraud Act, there must be unlawful conduct that results in an ascertainable loss. Because the New Jersey Superior Court found that there was no violation of the Prepayment Law, the court concluded that there was no unlawful conduct to support the guarantors' claim under the Consumer Fraud Act.
The case appears to be a positive development for lenders that make commercial loans in New Jersey that are guaranteed by individuals who provide a mortgage securing their guaranty. In those situations, lenders will be able to collect prepayment premiums without running afoul of the Prepayment Law.
If you have any questions about this Alert, please contact David R. Augustin, George J. Kroculick, any of the attorneys in our Real Estate Practice Group or the attorney in the firm with whom you are regularly in contact.
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