Could a business lender collect from a Connecticut mortgage lender’s required license bond?

Plain-English summary

In May 2001, Connecticut’s AG concluded that a business lender could not collect on the surety bond a licensed first-mortgage lender had to maintain. The claimant had lent money to the licensee in a commercial transaction. It was not a mortgage borrower or prospective borrower dealing with the licensee in the regulated business.

The bond statute used broad words permitting “any person” damaged by a failure to perform an agreement to sue on the bond. The AG read those words in context: the bond’s conditions concerned commitments to mortgage borrowers, handling funds in the licensee’s mortgage capacity, and compliance with the residential first-mortgage licensing scheme. Reading it to cover an unrelated business loan would also cover ordinary rent or credit-card debts, an outcome the AG rejected as unreasonable.

Commercial creditors at the time

The described lender’s separate commercial loan to the licensee was outside the bond’s protection, even though the borrower happened to hold a mortgage license.

Mortgage borrowers and regulators at the time

The AG described the bond as financial protection for people damaged by the licensee’s conduct in regulated mortgage-lending transactions.

Currency note

This opinion was issued in 2001. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Q: Could a lender claim a mortgage broker’s license bond when the broker defaulted on a business loan?
A: No. The AG said the bond covered regulated mortgage transactions, not a commercial creditor’s unrelated loan to the licensee.

Q: Why did “any person” in the bond statute not include every creditor?
A: The AG read that phrase together with bond conditions protecting borrowers and prospective borrowers in first-mortgage dealings.

Q: Who was the bond intended to protect?
A: The opinion identified people damaged in the licensee’s regulated mortgage business, in particular borrowers and prospective borrowers.

Background and statutory framework

The banking commissioner asked about a claim by a commercial lender against a licensed first-mortgage lender’s required bond. The AG interpreted the bond provision within the larger licensing scheme for residential first-mortgage loans and rejected an interpretation that would turn the bond into security for every debt of the licensee.

Citations and references

Statutes: Conn. Gen. Stat. §36a-492; §36a-485(2).

Case: Ferrigno v. Cromwell Development Associates, 244 Conn. 189, 202 (1998).

Source

• Landing page: https://portal.ct.gov/AG/Opinions
• Opinion page: https://portal.ct.gov/ag/opinions/2001-formal-opinions/honorable-john-p-burke-department-of-banking-2001013-formal-opinion-attorney-general-of-connecticut

Original opinion text

Honorable John P. Burke, Department of Banking, 2001-013 Formal Opinion, Attorney General of Connecticut

Attorney General's Opinion

Attorney General, Richard Blumenthal

May 31, 2001

Honorable John P. Burke

Department of Banking

260 Constitution Plaza

Hartford, CT 06103

Dear Commissioner Burke:

You have requested our advice on whether a creditor of a person licensed as a first mortgage lender can collect on the bond required to be maintained by the licensee pursuant to Conn. Gen. Stat. §36a-492. In the specific matter that prompted your inquiry, the individual seeking to claim against the bond is not a mortgagor who dealt with the licensee in the licensee’s capacity as a mortgage lender or broker. Rather, the potential claimant is a lender, who lent money to the licensee in a commercial lending transaction. We conclude that the bond requirement in Conn. Gen. Stat. §36a-492 was intended specifically to protect borrowers or potential borrowers in their transactions with licensees. Accordingly, we conclude that a licensee’s commercial lender may not collect on a bond posted pursuant to §36a-492.

Section 36a-492 is part of a larger statutory scheme regulating the conduct of non-depository first mortgage lenders and brokers, including the requirement that such lenders and brokers obtain a license from the Department of Banking. Persons subject to the licensing requirement are lenders and brokers in the "first mortgage loan" business. "First mortgage loan" is defined to mean:

"First mortgage loan" means a loan or an extension of credit, including, but not limited to, an extension of credit pursuant to a contract or an assigned contract for the sale of goods or services, made to a natural person, the proceeds of which are to be used primarily for personal, family or household purposes, and which is secured by a first mortgage upon any interest in one-to-four-family residential owner-occupied real property located in this state which is not subject to any prior mortgages and includes the renewal or refinancing of an existing first mortgage loan;
§36a-485(2). Thus, the transactions subject to regulation under the statute are loans to individuals. They must be secured by residential, owner-occupied real property, and the proceeds must be used for personal, family or household purposes. Loans secured by commercial property or made for commercial purposes are not regulated under this statute.

Section36a-492 imposes the bond requirement. It states:

Sec. 36a-492. (Formerly Sec. 36-440g). Bond required. No such license, and no renewal thereof, shall be granted unless the applicant has filed a bond with the commissioner written by a surety authorized to write such bonds in this state, in the sum of forty thousand dollars, the form of which shall be approved by the Attorney General. Such bond shall be conditioned upon such licensee faithfully performing any and all written agreements or commitments with borrowers and prospective borrowers, truly and faithfully accounting for all funds received by the licensee in the licensee’s capacity as a mortgage lender or a mortgage broker, and conducting such mortgage business consistent with the provisions of sections 36a-485 to 36a-498, inclusive. Any person who may be damaged by failure to perform any written agreements or commitments, or by the wrongful conversion of funds paid to a licensee, may proceed on such bond against the principal or surety thereon, or both, to recover damages. The bond shall run concurrently with the period of the license granted to the applicant, and the aggregate liability under the bond shall not exceed the penal sum of the bond. (Emphasis added.)
In construing the scope of coverage of a statutorily required surety bond, one must refer to the language of the statute and the apparent intent of the legislature. "A statute is passed as a whole and not in parts or sections and is animated by one general purpose and intent." Ferrigno v. Cromwell Development Associates, 244 Conn. 189, 202 (1998). Accordingly, it is appropriate to look at the entire statute to determine such intent.

Turning to your specific inquiry, in order to find that the creditor of a first mortgage lender could recover on the statutory bond, we would have to find that the bond protects parties to transactions not regulated by the statute. Section 36a-492 conditions the bond upon the licensee "faithfully performing any and all written agreements or commitments with borrowers and prospective borrowers, [and] truly and faithfully accounting for all funds received by the licensee in the licensee’s capacity as a mortgage lender or mortgage broker..." The licensee's conduct therein described is clearly conduct regulated by the statute as a whole.

Section 36a-492 goes on to state that "[a]ny person who may be damaged by the failure to perform any written agreements or commitments...may proceed on such bond..." without specifically stating that the "agreements and commitments" covered are those entered into with "borrowers and prospective borrowers." If we were to construe the words "any written agreements or commitments" not to be limited by the regulatory parameters of the statute, the bond would be available to any person who had any type of written agreement with the licensee, regardless of its purpose. Under such a construction, the bond would be available if a licensee defaulted on his credit card payments or on a student loan, or if he failed to pay his rent under a written lease, or if he failed to perform any of a multitude of other obligations unrelated to his first mortgage loan business. That would be an unreasonable, even absurd, result. In construing statutes, "common sense must be used and courts must assume that a reasonable and rational result was intended." Willow Springs Condominium Association v. Seventh BRT Development Corporation, 245 Conn. 1, 26 (1998). "It is a rule of statutory construction that those who promulgate statutes or rules do not intend to promulgate statutes or rules that lead to absurd consequences or bizarre results." Ferrigno, 244 Conn. at 201. "If there are two possible interpretations of a statute, we will adopt the more reasonable construction over one that is unreasonable." Id. at 202.

Construing §36a-492 in the context of the entire statutory scheme regulating non-depository first mortgage lenders, we conclude that the bond is intended to provide financial protection to persons dealing with licensees in their capacity as such, and is available only to persons damaged in transactions regulated by the statute, in this case borrowers and prospective borrowers. Accordingly, a creditor by virtue of a commercial lending transaction with the licensee may not recover on the bond of the licensee posted under §36a-492.

Very truly yours,

RICHARD BLUMENTHAL

ATTORNEY GENERAL

Shelagh P. McClure

Assistant Attorney General

RB/SPM/rj