An A.S. Pratt & Sons Publication October 2003 N EW J ERSEY P REDATORY L ENDING L AW P ASSED 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. O 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 of 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.
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 on 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.
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