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Lemelledo v. Beneficial Management Corp.

150 N.J. 255, 696 A.2d 546 (1997)

LOANS; CONSUMER FRAUD—The Consumer Fraud Act applies to “loan packing” in commercial loans.

Does the Consumer Fraud Act (CFA) apply to lenders who engage in “loan packing”, a practice of commercial lenders that involves increasing the principal amount of a loan by combining it with loan-related services that the borrower may or may not want?

In July, 1992, a borrower received approval for a $2,000 loan. Instead of receiving a $2,000 check, borrower received a loan contract for $2,538.47 and a check for $2,203.19. The difference between the latter two amounts consisted of credit insurance premiums paid initially by lender, but added to the principal to be paid by borrower. The lender offered the credit insurance policies to all borrowers to assure repayment of loans. The lender’s “Disclosure of Credit Costs” form stated that this insurance is not a prerequisite to obtaining credit, and that a borrower can obtain the insurance from any insurer. Although the borrower received the disclosure form, she claimed that the lender implicitly led her to believe that if she did not purchase the insurance, she would not get the loan. After repaying the loan in full, the borrower filed a class action suit alleging violation of the CFA. The Law Division dismissed the CFA claim, but the Appellate Division reinstated it. Lender appealed to the New Jersey Supreme Court for dismissal of the CFA claim, claiming it inapplicable to insurance matters, or alternatively, that to apply the CFA would result in conflicting administrative obligations.

The Supreme Court held that the CFA protects consumers by prohibiting fraudulent and unconscionable practices in the marketing or sale of real estate. The Court found clear legislative intent to apply the CFA provisions broadly, and, therefore its terms were applicable to the sale of insurance in conjunction with lending, also known as loan packing. The Court stated that it must look at the potential conflicts among all applicable laws regulating fraudulent practices. The CFA is presumed to apply. To overcome this presumption, a clear, direct conflict must exist between it and other regulatory schemes, and the alternate regulatory scheme must deal specifically and concretely with the activity in question. In this case, the CFA accomplishes the legislative intent of enlarging fraud-fighting authority. Furthermore, the Court refused to carve out an exemption for each fraudulent practice that is also regulated by another law. The Court concluded that while other statutes regulate credit insurance sales, the CFA complements them without inhibiting their enforcement or subjecting lenders to conflicting duties and duplicative regulatory burdens.


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