• Bulletin on New Jersey Predatory Lending Law Could Spell Trouble for Mortgage Market
  • December 31, 2004 | Author: Audrey D. Wisotsky
  • Law Firm: Pepper Hamilton LLP - Princeton Office
  • On October 28, 2004, the New Jersey Department of Banking and Insurance issued Bulletin No. 04-22 in response questions about the New Jersey Home Ownership Security Act of 2002.

    For the most part, the bulletin clarified non-controversial issues. However, one item in the bulletin has the potential to wreak havoc for originators of mortgage loans and the secondary mortgage market.

    First, the department responded to the issue of what "points and fees" should be used in the interest rate calculation when determining the "rate threshold." The "rate threshold" is one of the two thresholds used to determine whether a mortgage loan is a "high-cost home loan" as defined by the act. The term "rate threshold" is defined to be the annual percentage rate of the mortgage loan "such that the loan is considered a mortgage under Section 12 of the Federal Home Ownership and Equity Protection Act of 1994" (HOEPA). The department has determined that the rate threshold under the act is identical to the determination made under HOEPA. Specifically, the "points and fees" to be used in calculating the "rate threshold" under the act are "points and fees" determined by HOEPA, as opposed to the act's broader definition.

    Another of the department's clarifications should not be a surprise to the industry. The bulletin stated that guarantee fees charged by the Veterans Administration (VA) and mortgage insurance fees charged by the Federal Housing Authority (FHA) should not be included in the "points and fees" calculation under the act. The theory for this is that VA and FHA fees are basically mortgage insurance premiums. Mortgage insurance premiums are not included in the act's definition of "points and fees."

    The most surprising item in the bulletin was the department's view of the industry's general understanding that seller-paid "points and fees" would be excluded from the "points and fees" calculation in determining whether a loan is a "high-cost home loan." The department concluded that if a seller pays a fee that would, if paid by the borrower, be included in the "points and fees" calculation, the seller-paid fee must be included in the "points and fees" calculation. If a contrary conclusion was reached, the department said, it would be too easy for sellers and borrowers to collude to avoid a high-cost home loan by having the seller pay certain "points and fees" and commensurately increasing the purchase price of the home.

    This interpretation has the potential to devastate mortgage lenders and the secondary mortgage market. A significant number of mortgage loans were previously originated which may now be deemed to be "high-cost home loans," but were not originated as such. A second ramification will be the potential for widespread requests for the repurchase of mortgage loans sold either as whole loans in the secondary market or to trusts as part of a mortgage-backed securitization. Our hope is that the department will reconsider its interpretation, or, at a minimum, consider a prospective application of the interpretation.

    The industry also is wrestling with the issue of whether construction loans are covered by the act. The department has clarified several issues about construction loans. First, not surprisingly, loans made to builders to finance the builder's business purpose are not subject to the act. Second, construction loans that either do not automatically convert to permanent financing, or are documented by "separate agreements" from the permanent financing are not subject to the act. Finally, those construction loans that are documented in one loan agreement which automatically convert to permanent financing are subject to the act. The department relied on the fact that, since there is only one loan agreement between the lender and the borrower, essentially only one loan exists between the lender and the borrower and, therefore, the loan should be subject to the act.

    Finally, the department has clarified that for home loans that permit bi-weekly payments, the prohibition against charging late payment penalties before a payment is 15 days or more past due is applicable.

    The department intends to issue proposed rules under the amended act in the near future. The initial rules will likely include certain interpretations included in the bulletin and others previously issued by the department. The industry should provide meaningful comments to the department about many of issues raised in the bulletin and the proposed rules. If you would like further information about the Act or the Bulletin, or other mortgage banking issues, please contact us.