New Jersey Law Journal

On July 6th, 2004, Governor McGreevey signed S-279, which, effective immediately, amends the New Jersey Homeownership Security Act of 2002 [the original law is referred to as the "Act" and the changes are referred to as the "Amendments"]. The Amendments contain much needed improvements to what had been perhaps the most restrictive so-called "predatory lending law" in the country. It is anticipated that the Amendments will permit many "non-prime" lenders to resume their business activities in New Jersey after having stopped when the Act first became effective. The Act set forth limits applicable to almost all residential mortgage loans, but established new disclosures, tough restrictions, and substantial penalties and assignee liability for borrowers, lenders and assignees of "high-cost" mortgage loans.

"Covered Home Loans" removed. A key element of the Amendments is the removal of the "covered home loan" definition and the prohibition associated with it. Under the Act, a "covered home loan" was defined to include a residential mortgage loan with points and fees exceeding 4 percent of the total loan amount for loans of over $40,000 [with certain exceptions and complications]. A substantial number of nonprime loans fell within that definition. In connection with such "covered home loans," the Act prohibited the practice of "flipping." Flipping, under the Act, was defined to occur when a creditor made a covered home loan, the proceeds of which where used to refinance an existing home loan made within the prior 60 months where the new loan did not provide a "reasonable, tangible net benefit" to the borrower. This imprecise and arbitrary standard [the Act included no definition of "reasonable tangible net benefit"] made it almost impossible for responsible lenders to make refinance "covered home loans" with any degree of comfort.

The Amendments delete the "covered home loan" concept and the prohibition against "flipping." This is extremely welcome news to the nonprime lending industry as a huge uncertainty that could have triggered substantial liability has been removed. Nevertheless, the Amendments contain a reminder that these deletions should not be read by a court to create a presumption that any refinance loan that suggests "flipping" is exempt from the prohibitions of New Jersey's Consumer Fraud Act.

"High-Cost Home Loan" scope broadened. To obtain the improvements that the Amendments represent to the lending industry, a major concession was made to consumer advocates. The body of nonprime loans now deemed "high-cost home loans" under the Act is broadened by the Amendments. Specifically, the "total points and fees threshold" which under the Act determines whether or not a loan is a "high-cost mortgage loan," has been lowered from 5 percent to 4.5 percent of the total loan amount [when the loan is $40,000 or more]. This change will increase the pool of loans subject to the Act's "high-cost" provisions. Since the Amendments are effective immediately, lenders should be careful to review loan applications in their pipelines that previously were determined not to be high home loans to make sure that they are still not high cost under the Amendments. Some industry players deeply regret the expansion of the high-cost loan category.

No class action enforcement. Observers have debated whether or not a class action is permitted as an enforcement mechanism under the Act. For example, the Act allows a borrower to seek damages under the state's Consumer Fraud Act or under the Act, but not both. The Consumer Fraud Act allows class actions.

The Amendments clarify that class actions are prohibited in connection with any "defense, claim or counterclaim" brought by a borrower under section 6[c] of the Act in connection with a high-cost loan. In other words, the defense, claim or counterclaim may only be asserted in an individual capacity. That is certainly a welcome clarification.

A borrower may argue that this change to the Act contains the negative implication that a borrower seeking to enforce a violation of the original Act by employing New Jersey's Consumer Fraud Act may indeed do so on a class action basis. We would hope to convince a court that such is not the intent of the original Act or the Amendments and class actions are not intended or permitted.

Expanded corrective action. Under the Act, a lender had a 90-day period after loan closing but prior to receiving any notice of the error from the borrower to correct any unintentional bona fide error. The Amendment expands this period to 365 days after loan closing [but, again, prior to receiving notice from the borrower].

Department of Banking and Insurance interpretations. One of the Act's key weaknesses as viewed by the lending industry was the Act's extremely narrow delegation of interpretative authority to a regulator. The Department of Banking and Insurance [DOBI] had very limited authority to interpret any part of the Act. Notwithstanding the DOBI's issuing of several helpful interpretive rulings, a borrower could have argued that the DOBI's pronouncements were of no effect and a court could have chosen to ignore them.

The Amendments now empower the Commissioner of Banking and Insurance, in consultation with the Division of Consumer Affairs in the Department of Law and Public Safety, to promulgate regulations to effectuate any provisions of the Act and Amendments. It can be expected that the DOBI will now reissue those interpretations as duly promulgated regulations.

Points and fees definition clarified. Under the Act, all prepayment fees incurred in a refinance of a previous loan made or held by the same creditor were to be included in the "points and fee" threshold calculation. The Amendments made a small change by stating that a prepayment fee is not to be included in "points and fees" when the new loan refinances a previous loan originated by the same broker but funded by a different creditor. This change appears to mean that a correspondent lender refinancing a loan that it closed in its name with funds from a table-funding investor would not have to count in "points and fees" any prepayment fee that the borrower would be required to pay in connection with the payoff of the prior loan if a different table-funding investor were funding the new loan. Further clarification may be needed by the DOBI.

Conclusion

There are still confusing aspects to the measurement of "points and fees" and lenders should consult counsel to make sure that their calculation method is correct. Hopefully, the DOBI will use its newly expanded regulatory authority to clarify the items that count as "points and fees" and those that do not.

New Jersey's enforcement and litigation environment for lenders in the "non-prime" residential mortgage industry continues to be challenging. We are gratified that recently the New Jersey Supreme Court upheld federal pre-emption of state law in the Glukowsky v. Equity One, 848 A.2d 747 [N.J. 2004], prepayment fee decision, for example. However, given this environment, lenders that expect to make or buy loans covered by the Act as amended should be careful as they re-enter the market to confirm that all procedures and disclosures comply with New Jersey law.

This article is presented for informational purposes only and is not intended to constitute legal advice.