O n May 1, 2003, New Jersey Governor James E. McGreevey signed into - - PDF document

NEW JERSEY PREDATORY LENDING LAW PASSED

MICHAEL J. LUBBEN AND JOHN J. HANLEY The recently adopted New Jersey Home Ownership Security Act of 2002, which takes effect on November 27, 2003, is intended to protect consumers in New Jersey from predatory mortgage lending practices. The implications of the Act extend not only to mortgage finance companies, but also will affect the secondary mortgage market, financial institutions, community banks, mortgage loan brokers, home contractors and others doing business in New Jersey, including companies that may make occasional mortgage loans to officers or employees.

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n May 1, 2003, New Jersey Governor James E. McGreevey signed into law the New Jersey Home Ownership Security Act of 2002.1 The Act, which takes effect on November 27, 2003, is intended to protect consumers in New Jersey from predatory mortgage lending practices. The implications of the Act extend not only to mortgage finance companies, but also will affect the secondary mortgage market, financial institutions, community banks, mortgage loan brokers, home contractors and others, including companies that may make occasional mortgage loans to officers or employees. The Act potentially exposes creditors which are covered by the Act, including an assignee of the creditor, to an unknown and possibly unlimited amount of damages. Because of the risks associated with the potential damages, on May 2, 2003, Standard & Poors announced that when the Act takes effect it will not permit certain

• f the loans which are governed by the Act to be included in its rated structured finance transactions. Fitch

Ratings soon followed suit with a similar announcement of its own on June 5, 2003. When a similar predatory lending law was passed in Georgia in the fall of 2002, rating agencies similarly refused to rate the creditworthiness of Georgia’s mortgage pools. Since many institutional investors will not trade unrated securities, the action of the rating agencies threatened the secondary market in residential mortgage loans originated in Georgia, and, therefore the credit available to subprime mortgagors lending in

• Georgia. As a result, the Georgia law was amended to remove the risks associated with uncapped damages.

Although the New Jersey legislature attempted to take preemptive measures to ensure that the Act would not create the same adverse consequences as Georgia’s initial version of the law, based on Standard & Poor’s and Fitch Ratings’ responses it appears that these measures may not have gone far enough. It remains to be seen whether the legislature will amend the Act to address the rating agencies concerns. Nor is it clear exactly what impact this will have on the secondary residential mortgage market for loans originated in New Jersey. What is clear is that creditors involved in consumer mortgage lending, or in buying mortgage portfolios in the secondary market, must become familiar with the Act and the safe harbors that are available therein.

Michael J. Lubben is a director of the regional law firm Gibbons, Del Deo, Dolan, Griffinger & Vecchione, P .C., and a member of the firm’s Financial Services Practice. John J. Hanley is an associate with the firm and also a member of its Financial Services Practice. The authors would like to thank David J. Pascrell of the firm’s Government Affairs Practice in Trenton, New Jersey for his contributions to this article. Reprinted from the October 2003 issue of The Banking Law Journal.

An A.S. Pratt & Sons Publication October 2003

PRIMARY DEFINITIONS

The Act applies to covered home loans, high-cost home loans, and a creditor making a home loan. A “creditor,” for purposes of the Act, includes a person who extends consumer credit that is subject to a finance charge, and any person brokering a home loan. Licensed title insurers who do not fund the loan and are not affiliated with the creditor making the loan are specifically excluded from the definition of “creditor.” The term “home loans” includes extensions of credit primarily for personal, family or household purposes which are secured by real estate in New Jersey and upon which there is located or there is to be located a one to six family dwelling which is or will be occupied by a borrower as the borrower’s principal dwelling. Security interests in manufactured homes are also covered. A “covered home loan” includes a home loan which is considered a “high-cost home loan” under the Act, and a home loan which the total points and fees payable in connection with such loan, excluding either a conventional prepayment penalty or not more than two bona fide discount points, exceed: (A) 4 percent of the total loan amount, or (B) 4.5 percent of the total loan amount if the loan is $40,000 or less or is a home loan insured by the Federal Housing Administration or guaranteed by the federal Department of Veterans Affairs. A “high-cost home loan” is a home loan for which the principal amount does not exceed $350,000 (adjusted annually), in which the terms of the loan meet or exceed certain thresholds set forth in the Act (a rate threshold tied to the federal Home Ownership and Equity Protection Act of 1994 (“HOEPA”) and a points and fees threshold with parameters set forth in the Act).

CREDITOR RESTRICTIONS

Under the Act, creditors (including assignees) are prohibited from, among other things, the following when making home loans:

• financing credit life and other forms of insurance (except that insurance premiums calculated and paid
• n a monthly basis are not considered financed by the creditor).
• “flipping” a home loan; i.e., making covered home loans to a borrower that refinances an existing home

loan that was consummated in the last 60 months when the new loan does not have reasonable, tangible net benefit to the borrower considering all of the circumstances, including the terms, the purpose and the cost of the loan.

• recommending or encouraging default on an existing loan or other debt prior to and in connection with the

closing or planned closing of a home loan that refinances all or any portion of that existing loan or debt.

• including a provision in its loan documents that permits the creditor, in its sole discretion, to accelerate

the indebtedness (acceleration of the loan in good faith due to the borrower’s failure to abide by the material terms of the loan is not prohibited).

• charging a fee for providing a pay-off quote or to provide a release upon prepayment. Payoff balances

must be provided within seven business days after the request.

LATE FEES AND APPLICATION TO ALL HOME LOANS

The Act also provides rules for late payment fees that creditors can charge in relation to home loans. Most significantly, these restrictions apply in the case of any home loan, not just high-cost home loans. The Act provides that no creditor shall charge a late payment fee in relation to a home loan except according to the following rules:

• The late payment fee may not be in excess of five percent of the amount of the payment past due.
• The fee may only be assessed on a payment past due for 15 days or more.
• The fee may not be charged more than once with respect to a single late payment.
• No fee shall be charged unless the creditor notifies the borrower within 45 days following the date the

payment was due that a late payment fee has been imposed for a particular late payment.

• The creditor shall treat payments as posted on the same date received by the creditor, servicer, creditor’s

agent, or at the address provided to the borrower by the creditor, servicer, or the creditor’s agent for making payments.

Reprinted from the October 2003 issue of The Banking Law Journal.

HIGH-COST HOME LOANS

The Act provides a long list of limitations and prohibited practices regarding high-cost home loans; following are several which may be of particular interest:

• No high cost home loan shall contain a provision that increases the interest rate after default.
• No high cost home loan shall include terms under which more than two periodic payments required

under the loan are consolidated and paid in advance from the loan proceeds provided to the borrower.

• Any provision of a high-cost home loan agreement that allows a party to require a borrower to assert any

claim or defense in a forum that is less convenient, more costly, or more dilatory for the resolution of a dispute than a judicial forum established in New Jersey if the borrower may otherwise properly bring a claim

• r defense or limits in any way any claim or defense the borrower may have is unconscionable and void.
• Creditors making high-cost home loans must provide a statutory notice to the borrower, encouraging the

borrower to consult an attorney and “shop around” for the best deal on their loan and, in the case of a high-cost home loan where the borrower is financing points and fees, the creditor must obtain a third- party certification that the borrower has received counseling on the advisability of the transaction.

• A creditor shall not charge a borrower any fees or other charges to modify, renew, extend, or amend a

high-cost home loan or to defer any payment due under the terms of a high-cost home loan.

HOME IMPROVEMENT LOANS

If a home loan is made, arranged, or assigned by a person selling either a manufactured home, or home improvements to the dwelling of a borrower, or was made by or through a creditor to whom the borrower was referred by such seller, the borrower may assert all affirmative claims and any defenses that the borrower may have against the seller or home-improvement contractor. Such claims and defenses are limited to amounts required to reduce or extinguish the borrower’s liability under the home loan, plus the total amount paid by the borrower in connection with the transaction, plus amounts required to recover costs, including reasonable attorney’s fees against the creditor, any assignee or holder in any capacity. Most importantly, as with late fees, this provision covers all home loans, not just high-cost home loans.

ASSIGNEE LIABILITY AND SAFE HARBORS FOR ASSIGNEES

Any person who purchases or is otherwise assigned a high-cost home loan is subject to all affirmative claims and any defenses with respect to the loan that the borrower could assert against the original creditor or broker

• f the loan. However, the Act provides a safe harbor in the form of an affirmative defense to the assignee if it

demonstrates, by a preponderance of the evidence, that a reasonable person exercising reasonable due diligence could not determine that the mortgage was a high-cost home loan. A purchaser or assignee shall be presumed to have exercised such due diligence if it:

• demonstrates by a preponderance of evidence that is has in place, at the time of the purchase or

assignment of the loan, policies that expressly prohibit its purchase or acceptance of assignment of any high-cost home loan;

• requires by contract that a seller or assignor make certain representations and warranties (specified in

the Act); and

• exercises reasonable due diligence at the time of the purchase or assignment of home loans or within a

reasonable period of time thereafter intended to prevent the purchaser or assignee from purchasing or taking assignment of any high-cost home loan.

PENALTIES AND REMEDIES

The failure to comply with the Act can result in significant penalties to creditors and their assignees. The Act authorizes the New Jersey Department of Banking and Insurance to do any combination of the following (among other things) with respect to any person it determines has violated the Act: impose a penalty of up to $10,000 for each offense; suspend, revoke or refuse to renew any license it issued; prohibit any person responsible for a violation from working in any capacity related to activities regulated by the Department of Banking and Insurance; and make restitution for actual damages to borrowers. Violations of the Act are also deemed to be unlawful practices under the New Jersey Consumer Fraud Act,2 and a borrower may seek damages under certain provisions of that act, or under the Act, but not both. The

Reprinted from the October 2003 issue of The Banking Law Journal.

Consumer Fraud Act allows the court to impose any appropriate legal or equitable relief including treble

• damages. The Act provides for damages equal to the finance charges agreed to in the home loan plus up to ten

percent of the amount financed plus costs and attorneys’ fees. Punitive damages may be awarded under certain

• circumstances. The Act makes clear that the remedies provided in the Act are not the exclusive remedies

available to borrowers and are in addition to and cumulative of any other right or remedy.

CURRENT EVENTS AND FEDERAL PREEMPTION

North Carolina, South Carolina, California, New York and Georgia all have passed similar predatory lending laws. About 25 other states have introduced or are considering similar bills. A bill has been introduced in Congress which would amend HOEPA and preempt the growing number of state and local laws. In addition, the Office of Thrift Supervision (“OTS”) has issued legal opinions concluding that federal law preempts application of various provisions of the Georgia Fair Lending Act and the New York Predatory Lending Law to federal savings associations and their operating subsidiaries. On July 22, 2003, the OTS issued a similar opinion with respect to the Act. The Office of the Comptroller of the Currency (“OCC”), which regulates national banks, is also expected to weigh in on the Act’s applicability to national banks. On July 31, 2003, the OCC issued an order holding that the Georgia Fair Lending Act does not apply to national banks, and proposed a new regulation that would establish a strong anti-predatory lending standard with respect to national banks.

SUMMARY

In sum, anyone involved in any aspect of residential mortgage lending in New Jersey will have to pay careful attention to the provisions of the Act and the limitations and restrictions imposed thereby. Even those lenders not making “high-cost home loans” or “covered loans” will need to review their policies and form documents to ensure that they comply with the terms of the Act, including late fees and acceleration provisions. Simply put, all those involved in or making home loans are strongly encouraged to review the complete text of the Act and to discuss their particular circumstances with legal counsel.

NOTE

1 N.J.S.A. 46:10B-22, et. seq. 2 N.J.S.A. 56:8-1, et. seq.

Reprinted from the October 2003 issue of The Banking Law Journal.

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