G Mortgage Banking Alert November 2003 New Jersey’s Predatory Lending Law and Potential Assignee Liability By Anthony Santoriello, Esq.; Edited by Gary M. Wingens, Esq. O n May 1, 2003, Governor James (a) the primary tangible benefit to the borrower McGreevey signed into law the “New is an interest rate lower than the interest rate Jersey Home Ownership Security Act” on a debt satisfied or refinanced in (the “Act”), with an effective date of connection with the home loan, and it will November 27, 2003. The Act prohibits certain take more than four years for the borrower to practices in the making of “home loans,” and recoup the costs of the points and fees and enumerates additional prohibitions in the making other closing costs through savings resulting of “covered home loans” and “high-cost home from the lower interest rate, and loans.” (b) the new loan refinances an existing home loan that is a special mortgage through A “covered home loan” is defined as “a home governments or nonprofit organizations, loan” in which: which either bears a below-market interest rate or nonstandard payment terms beneficial (a) the total points and fees payable in to borrower and where, as a result of connection with the loan, excluding either a conventional prepayment penalty or not more refinancing, the borrower will lose one or more of the benefits of the special mortgage. than two bona fide discount points, exceed 4% of the total loan amount, or 4.5% of the total A “high-cost home loan” is defined as a home loan amount if the loan is insured by the FHA loan for which the principal amount of the loan or guaranteed by the VA, or does not exceed $350,000 (to be adjusted annually in accordance with increases in the CPI) and for (b) the home loan is such that it is considered a high-cost home loan under [the Act].” which: Lenders are prohibited from “flipping” a covered (a) the rate is equal to or greater than the home loan. “Flipping” occurs when a lender makes allowable HOEPA rates, or a covered home loan to a borrower that refinances (b) the total points and fees payable by borrower an existing home loan within 5 years of the original at or before the closing, excluding either a loan when the new loan does not have reasonable, conventional prepayment penalty or up to tangible net benefit to the borrower. The Act states two bona fide discount points, exceed 5% of that there shall be a presumption of flipping if: the total loan amount if the total loan amount is $40,000 or more. This document is published by Lowenstein Sandler PC to keep clients and friends informed about current issues. It is intended to provide general information only. L Roseland, New Jersey Telephone 973.597.2500 65 Livingston Avenue www.lowenstein.com 07068-1791 Fax 973.597.2400
G With respect to high-cost home loans, lenders may diligence could not determine that such loan was a not, among other restrictions: high-cost home loan. Under the statute, due diligence is presumed if an assignee demonstrates (a) include provisions for balloon payments that it: (unless due to seasonal or irregular income of borrower), (a) had in place at the time of purchase or (b) include negative amortization terms, assignment of the loan policies that expressly prohibit its purchase or acceptance of (c) increase the interest rate upon default, assignment of any high-cost home loan, (d) increase require advance payments, (b) required by contract that the seller or (e) increase charge fees if the proceeds of the assignor represented and warranted to loan are used to refinance an existing loan, assignee that either, (f) increase charge fees for modification or (i) it would not sell any high-cost home deferral of the loan, loan to the assignee, or (g) increase allow the borrower to finance points (ii) the seller or assignor was a beneficiary and fees in excess of 2% of the total amount of of a representation or warranty from a the loan, and previous seller or assignor to that effect, and (h) increase charge points and fees if the proceeds are used to refinance an existing (c) exercised reasonable due diligence at the high-cost home loan held by the same lender. time of purchase or assignment of home loans or within a reasonable period of time As was the case in Georgia in 2002 when it thereafter intended by the purchaser or passed (and subsequently substantially modified) assignee to prevent the assignee from the country’s strictest predatory lending law, purchasing or taking assignment of any high- industry response to the Act has been immediate, cost home loan. and secondary market purchasers have raised concerns over assignee liability. Proponents of the In a subsequent bulletin, the Department of Act are quick to point out the explicit assignee Banking of New Jersey clarified that a 100% review liability protection provisions, as such provisions of the loans being purchased is not required and were not included in the initial Georgia law. While that the amount of random sampling that is the Act allows the borrower to assert against an commonplace in the secondary market should be assignee all affirmative claims and any defenses the benchmark for review. with respect to the loan that the borrower could assert against the original lender, the amounts The OTS and Rating Agencies Weigh In recoverable are more limited than under the The OTS, Standard & Poor’s (“S&P”), original Georgia law. In addition, with respect to Moody’s Investors Service (“Moody’s”) and Fitch high-cost home loans, such claims and defenses will Ratings (“Fitch”) have taken specific action with not be available against an assignee if the assignee respect to the Act. The OTS, repeating its actions demonstrates by a preponderance of the evidence with respect to Georgia and New York, issued an that a reasonable person exercising reasonable due
G NJ Regulator Addresses Key Issues opinion exempting thrifts from the Act’s provisions that regulate the terms of credit, loan-related fees, In a response to the rating agencies and as an disclosures and the origination, servicing, attempt to allay the fears of secondary market refinancing and funding of mortgages. S&P has players that New Jersey loans may be difficult to announced that after the effective date of the Act, securitize on the secondary market, New Jersey’s it will not permit high-cost home loans or covered bank and insurance regulator issued an home loans to be included in its rated structured interpretation of the Act on July 25, 2003 (the finance transactions. Moody’s has announced that “Bulletin”). The Bulletin, among other things, loans that are neither high-cost nor covered home addressed the following issues: loans can be included in securitization pools (1) The application of the New Jersey Consumer without penalty, provided that the issuer can show Fraud Act (“Consumer Fraud Act”) to that it has adequate compliance procedures in assignee liability in predatory lending cases. place. Moody’s will allow up to 2% of the The Bulletin points out that although an securitization pool to be high-cost home loans and individual can seek damages against an up to 5% of the securitization pool to be covered assignee under the Act or the Consumer home loans provided that such loans “fit neatly Fraud Act, only in “rare circumstances” will a within clear objective standards for compliance.” borrower have separate claims that can be However, in order to include high-cost or covered brought simultaneously under both acts. In home loans in its securitizations, the issuer must any case, however, damages awarded under agree to repurchase any loans which are in the Consumer Fraud Act with respect to violation of the Act and indemnify the trust against predatory lending are subject to the same cap any losses with respect to such loans. Fitch has as damages awarded under the Act. Further, announced that after the effective date of the Act, individuals cannot reap a “double recovery” (a) it will not permit high-cost home loans to be under both acts for the same loss. included in its rated residential mortgage (2) Whether escrow payments for tax and backed securities (“RMBS”) transactions, and insurance charges are included as points and (b) in order to rate any RMBS transactions fees when determining whether a loan is a which contain any loans originated in New covered home loan or high-cost home loan Jersey after the effective date of the Act, Fitch under the Act. The Bulletin clarifies that must receive an acceptable certification from such escrow-related payments are excluded if a third party unaffiliated with the originator of they are “reasonable” and paid to a person the loans that such third party has conducted other than the lender or a broker, or their due diligence on the New Jersey loans with affiliates. respect to the relevant interest rates, points (3) Whether the “flipping” restrictions of the and fees of such loans and that such due Act apply to all home loans. The Bulletin diligence is in compliance with the Act and clarifies that such restrictions only apply to Fitch’s requirements. high cost home loans with respect to which the refinance occurs within five years of the closing of the prior loan.
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