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Financial Services Law Insights and Observations

NJ Supreme Court Applies State Consumer Fraud Act to Post-Foreclosure Judgment Forbearance Agreement

State Issues

In Gonzalez v. Wilshire Credit Corp., No. 065564 (N.J. Aug. 29, 2011) a unanimous New Jersey Supreme Court held that a post-foreclosure judgment forbearance agreement qualified as a stand-alone extension of credit under the New Jersey Consumer Fraud Act (CFA), which provides a private cause of action to consumers subjected to "any unconscionable commercial practice . . . in connection with the sale or advertisement of any merchandise or real estate, or with the subsequent performance" thereof, including the extension of consumer credit.  After obtaining a judgment for foreclosure, the defendant mortgage servicer entered into an agreement with plaintiff mortgagor whereby the defendant agreed to refrain from proceeding with the sheriff's foreclosure sale in exchange for a lump sum, up-front payment and a series of monthly paymentsthat included various fees to reinstate the loan and bring it current. Noting that the CFA, a remedial statute, was intended to be "flexible enough to combat newly packaged forms of fraud," the New Jersey Court ruled that a post-judgment forbearance agreement may be reviewed for unconscionable practices relating to both origination and execution as "a lender or its servicing agent cannot use unconscionable practices" in "fashioning and collecting" any loan. The court rejected the defendant's argument that applying the CFA to work-out agreements would discourage servicers from negotiating such forbearance agreements and lead to increased loss of homes, noting application of the CFA had not chilled extensions of credit in other industries.  The court opined that "[t]hose businesses dealing with the public fairly and honestly . . . have nothing to fear" from the CFA. The court, was, however, careful to note that its holding was limited to the applicability of the CFA to post-foreclosure judgment agreements involving stand-alone extensions of credit and did not extend to settlement agreements in general.