United States: New Jersey Civil Union Act: Lending Compliance Challenges

The New Jersey Civil Union Act

The New Jersey Civil Union Act, P.L. 2006, c. 103 (the "Act") was signed into law Dec. 21, 2006, and took effect on Feb. 20, 2007. The Act arose in response to the New Jersey Supreme Court’s October 2006 decision in Lewis v. Harris, 188 N.J. 415, which mandated that same-sex couples have the same rights as married couples, and ordered the New Jersey Legislature to enact implementing legislation. The Act left to the Legislature whether to label such a union a "marriage" or a "civil union" and the Legislature chose the latter label.

Under the Act, partners in a civil union have essentially all of the rights of married couples under state law. The Act has no effect on federal law, which under the Defense of Marriage Act, 28 U.S.C. §1738C, defines marriage as the union of one man to one woman and provides that a state is not required to give legal effect to a same-sex marriage solemnized in another state.

Under the Act, civil union partners may own residential real estate in the same manner as a married couple, including the holding of title as tenants by the entirety. A "tenancy by the entirety" is created when a "husband and wife together take title to an interest in real property or personal property under a written instrument designating both of their names as husband and wife." N.J.S.A. 14:3-17.2. To create a valid lien on property held as tenants by the entireties, both spouses must sign the mortgage. When the husband or wife dies, the surviving spouse owns the residence outright by operation of law and without the need to probate. Any creditor of the deceased holding a mortgage on the residence would at that point be unsecured unless the surviving spouse was a party to the mortgage. Civil union partners have the same rights as married couples with respect to the home ownership rights of a surviving spouse, N.J.S.A. 37:1-32.5.p., as amended by the Act. Indeed, all New Jersey laws relating to title to land, descent and distribution, inheritance and estate taxes, intestate succession, etc., apply to partners in a civil union in the same manner as to a married couple.

Another New Jersey law, N.J.S.A. 3B:28-3, limits the alienation of property jointly occupied by a married couple as their principal matrimonial residence. That statute provides that every married person shall be entitled to joint possession of the principal matrimonial residence with his or her spouse during their marriage, which right of possession may not be released, extinguished or alienated without the consent of both spouses except by judgment of a court of competent jurisdiction.

Affidavits of title delivered at closing require the borrowerhomeowner to recite the date of all marriages so that a lender and a title insurance company can determine if any person other than the borrower-homeowner has an interest in the property. If a married person is the sole borrower and qualifies individually for the loan, only the borrower may be required to sign the note but, if the property is the couple’s principal marital residence or jointly owned, lenders may ask both spouses to sign the mortgage so that the lender can foreclose without question in the event of default. As a result of the Act, there would be a need for a lender to obtain the signature of both parties to a civil union under similar circumstances. The affidavit of title also requires borrowers to recite all names which have been used by them so that a judgment search can be performed. Married couples can change their surname to the spouse’s surname without court order and, under the Act, so may partners to a civil union.

For these reasons, obtaining information about a borrower’s marital or civil union status is important to the lender. However, a lender must consider the impact of both New Jersey and federal law on its ability to obtain this important information from a borrower.

Obtaining Information on Marital and Civil Union Status

Federal and state statutes prohibit discrimination based on marital status and, in the case of New Jersey, sexual orientation and "gender identity or expression" (New Jersey Law Against Discrimination, N.J.S.A. 10:5-1 et seq.), and now civil union status, as added to N.J.S.A. 10:5-12 by the Act. The federal prohibition against lender discrimination based on marital status is set forth in Federal Reserve Board Regulation B, 12 C.F.R. Part 202, which implements the Equal Credit Opportunity Act, 15 U.S.C. §1691 et seq. Regulation B provides that "marital status" means "the state of being unmarried, married or separated" and that "unmarried" includes "persons who are single, divorced or widowed." 12 C.F.R. §202.2. Under federal law, civil union partners would be considered "unmarried" since they are neither "married" nor "separated." Regulation B further states that: "Except as otherwise permitted or required by law, a creditor shall evaluate married and unmarried applicants by the same standards; and in evaluating joint applicants, a creditor shall not treat applicants differently based on the existence, absence, or likelihood of a marital relationship between the parties." 12 C.F.R. §202.6(b)(8).

In connection with an application for credit secured by real property, Regulation B permits lenders to inquire about an applicant’s marital status but provides that a lender "shall use only the terms married, unmarried, and separated." 12 C.F.R. §202.5(d)(1). In addition, in the case of secured credit, Regulation B permits a lender to require the signature of a spouse or other person on the mortgage or other instrument as necessary to create a valid security interest.* 12 C.F.R. §202.7(d)(4). Moreover, under Regulation B, a lender is required to inquire as to marital status for monitoring purposes where the primary purpose of the mortgage loan is to purchase or refinance property occupied or to be occupied by the applicant as a principal dwelling. 12 C.F.R. §202.13(a)(1)(iii).

As a result of the federal law requirement and the spousal rights that exist under state law which could impair a lender’s security interest, home loan application forms typically contain a question as to "marital status" and give the loan applicant the choice of "unmarried," "married" or "separated" as permitted under Regulation B. However, marital status cannot be a factor used by a lender to determine whether or not or on what terms to make a mortgage loan.

As stated above, for purposes of Regulation B, New Jersey civil union partners would be considered "unmarried." However, as a result of the Act, partners in a civil union have the same property rights as a married couple. Thus, while lenders must assure that loan applicants are not discriminated against based on their status as "civil union partners," lenders must similarly be able to identify applicants who are in a civil union so that they can adequately protect their interest in the real property collateral. This can only be accomplished through a change to current loan application procedures.

One approach would be to directly add a new "civil union partner" category to the Regulation B "marital status" inquiry. Another approach would be to leave the Regulation B "marital status" inquiry unchanged and add to the application, or put on a separate form, a new question inquiring about an applicant’s civil union status and seeking all names used by both partners. This approach was recommended by the Federal Reserve Board staff in a telephone conversation. (A request to put the recommendation in writing was declined.) The staff also indicated that an amendment to Regulation B to expand the categories that may be used when inquiring about marital status to include a civil union was unlikely.

However, inquiring as to civil union status raises questions under state law. The New Jersey Law Against Discrimination not only forbids discrimination based on civil union status but can also be read to prohibit inquiries about civil union status on a loan application. N.J.S.A. 10:5-12(i)(2), as amended by Section 88 at (i)(2) of P.L. 2006, c. 103. The New Jersey Attorney General, in an opinion issued in 1983, addressed a similar concern which then existed as to whether inquiries as to marital status were prohibited by the Law Against Discrimination and concluded that such inquiries were permissible where made by the lender to enable it to protect its interest in the loan collateral. Formal Opinion No.7-1983. The same rationale should apply to inquiries as to civil union status and, accordingly, such inquiries should arguably not be deemed to violate the Law Against Discrimination. While clarification from the New Jersey Department of Banking and Insurance ("NJDOBI") would be helpful, clarification should also be sought from the Division of Civil Rights within the New Jersey Department of Law and Public Safety, as it administers the New Jersey Law Against Discrimination. In view of these concerns, a cautious lender fearing allegations of discrimination and perhaps even a class action lawsuit might decline to inquire as to civil union status until clarification is received.

The practical problem remains for lenders that, whether or not an applicant owns a residence individually or jointly, a lender’s security interest will be at risk unless both partners in a civil union having an interest in real property collateral expressly, or by operation of law (in the case of their principal residence), have signed the mortgage. For this reason, it appears that title insurance companies will now request civil union status information on affidavits of title. If this information is only requested after a decision to lend has been made, arguably the request cannot be the basis of a discrimination claim. Indeed, specific authority to inquire as to civil union status would be consistent with safe and sound banking principles, since a lender’s collateral could be at risk without such information. Whether or not the NJDOBI and the Civil Rights Division clarify that an inquiry as to marital and civil union status is permitted on a residential mortgage loan application, we hope they would confirm that it is acceptable on an affidavit of title since it seems necessary to protect the lender’s interest in the collateral and for the title to be properly insured. At this point, in the absence of official guidance, the safest course to follow may be not to inquire as to civil union status on the residential loan application, but to wait for the affidavit of title to uncover this information.

Under New Jersey law, a transfer of real property between a husband and wife is exempt from the realty transfer fee, N.J.S.A. 46:15-10(j). Therefore, pursuant to the Act, a transfer of real property between a civil union couple should arguably be exempt from the realty transfer fee as well.

One final note of caution: since a transfer of title can trigger an event of default, a same-sex couple that enters into a civil union and owns property already subject to a mortgage should consult with the lender before transferring title to themselves as tenants by the entirety, or to be held in some other manner not reflected in the current deed.

Footnotes

* One of the most perplexing aspects of Regulation B involves deciding when a spousal signature may be required, see "Guidance on Avoiding Violations of the Spousal Signature Provisions of Regulation B," FDIC Financial Institution letter FIL-9-2002, Feb. 4, 2002, Federal Guide, Para. 57,199.012

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