Illinois Appellate Court invalidates mortgage where lender was not properly licensed under the Residential Mortgage License Act

In a case of first impression in Illinois, the Appellate Court for the Second District of Illinois has determined that a mortgage made by an entity lacking authorization to conduct business under the Residential Mortgage License Act (205 ILCS 635/1-1 et seq.) is void as against public policy.  First Mortgage Company, LLC v. Daniel Dina and Gratziela Dina, 2014 IL App (2d) 130567 (March 31, 2014).

The Plaintiff, First Mortgage Company, LLC, filed a foreclosure complaint relating to property in North Barrington, Lake County, Illinois, naming as defendants Daniel Dina, the property owner and borrower, and Gratziela Dina, who had also signed the mortgage.  According to the Complaint, the lender was an entity identified as FMCI.  Defendants, the Dinas, appeared through counsel and asserted that Plaintiff, First Mortgage Company, LLC was neither the mortgagee nor the successor in interest to the mortgagee and that Plaintiff lacked standing.  Plaintiff moved for summary judgment in which it provided evidence of a merger between FMCI and Plaintiff.

The Dinas missed their deadline to respond to the motion for summary judgment, sought additional time and filed a proposed response asserting that neither entities were licensed to do business in Illinois or licensed under the RMLA. The circuit court granted Plaintiff’s motion for summary judgment and entered judgment for foreclosure.

On appeal, the appellate court relied on Illinois law relating to other licenses and sister-state law concerning statutes analogous to the License Act to reach its determination that a License Act violation results in an unenforceable contract. The court further concluded that because the mortgage contract would be void as a matter of public policy, any technical flaw in the way the defendants raised the defense did not result in a forfeiture of the defense.

The court’s opinion made clear that where a mortgage has been assigned to another entity who then seeks to enforce its terms through foreclosure, it is the licensure status of the original mortgagee that is relevant. Under the License Act, “[n]o [nonexempt person or entity] shall engage in the business of brokering, funding, originating, servicing or purchasing of residential mortgage loans without first obtaining a license from the [Secretary]. Opinion ¶16; 205 ILCS 635/1-3(a).  Thus it is the original mortgagee’s status, not plaintiff’s that is relevant here. Id.

In reaching its decision, the court relied on the rationale stated in Chatham Foot Specialists, P.C. v. Health Care Service Corp., 216 Ill 2d 366 (2005):

It is well settled that ‘courts will not aid a plaintiff who bases his cause of action on an illegal act.’ More specifically, ‘courts will not enforce a contract involving a party who does not have a license called for by legislation that expressly prohibits the carrying on of the particular activity without a license where the legislation was enacted for the protection of the public, not as a revenue measure.’

The Second District concluded, therefore, that a mortgage made by an entity lacking authorization to conduct business under the RMLA is void and against public policy.  The court noted that although the Dinas did not properly raise the defense, under the circumstances they did not forfeit the defense as a matter of public policy, and stressed that it is within the court’s power and discretion to sua sponte consider whether an agreement is unenforceable as against public policy, even if no party raised the point. The court vacated the foreclosure judgment and remanded to the circuit court to permit the Plaintiff to respond to the Dinas’ defense.