Insights

With the troubled housing market of the past few years, a relevant question going forward is whether a foreclosure is affected if a mortgage was originated by an unlicensed broker. An Illinois court recently ruled on that issue. Here’s what happened.

Frank Knight sought financing using an online service to solicit offers from mortgage brokers. Erik Sternberg, an employee of defendant MortgageIt Co., LLC, contacted Knight and offered to find him a 30-year mortgage loan at a fixed rate of 8%. While Sternberg did not end up finding a loan on those terms, he did secure a loan that Knight accepted and used to purchase the house. Sternberg was not a licensed mortgage broker, a fact Knight claimed to be unaware of. Knight eventually defaulted on the loan and the lender foreclosed. Knight sued Sternberg claiming that Sternberg’s failure to disclose that he did not have a mortgage broker’s license violated section 2 of the Illinois Consumer Fraud and Deceptive Practices Act (815 ILCS 505/2 (West 2010)). Knight also claimed that Sternberg was his fiduciary and breached his duties to Knight by providing him with a bad loan that he had no hope of being able to repay and failing to give information that would have allowed him to realize the true nature of the loan. The trial court dismissed Knight’s claims and the Appellate Court of Illinois, First District, Second Division affirmed.

The appellate court explained that in order to state a claim for consumer fraud, a plaintiff must allege “(1) a deceptive act or practice by defendant; (2) defendant’s intent that plaintiff rely on the deception; and (3) that the deception occurred in the course of conduct involving trade and commerce.” Additionally, if the plaintiff is a private individual, then the plaintiff must also allege that “the consumer fraud proximately caused the plaintiff’s injury.” The court ruled that Knight did not prove that his inability to pay his loans was caused by Sternberg being unlicensed. Sternberg’s lack of licensing did not cause Knight to accept the loans, did not prevent him from learning the terms of the loans and he would still have had the same obligations regardless of Sternberg’s license status.

As for Knight’s claim that Sternberg was his fiduciary, the appellate court found that Knight did not prove he had the right to control Sternberg’s actions. There was no evidence that he told Sternberg how to go about finding financing and as such Sternberg was not an agent and therefore had no fiduciary duty to Knight. The court noted that Section 5-7 of the Residential Mortgage License Act of 1987 establishes that an agency relationship exists as a matter of law between a borrower and a mortgage broker. However, that statute was not in effect when the loan in question was made and therefore was not applicable.

This decision makes clear that in Illinois, a mortgage broker does not have a fiduciary duty to a borrower unless an agency relationship is established statutorily, or there is evidence of the borrower controlling the search for a loan in the way a principal would control an agent. In holding that a the unlicensed broker was not the cause of the plaintiff’s injury, the court also makes clear that a borrower can’t default on a loan and use the broker’s license status as an excuse.

Knight v. Decision One Mortg. Co., LLC, 2012 Ill. App. Unpub. LEXIS 2479 (Ill. App. Ct. 1st Dist. 2012)

Latif Zaman is an associate in the Hanover, Maryland office of Hudson Cook, LLP. Latif can be reached at 410-782-2346 or by email at lzaman@hudco.com.