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As New Jersey goes....

Critical states often set the pattern for the rest of the nation when it comes to drafting legislation or regulations that move into new territory. New Jersey has proven such a state in helping to fashion the crazy quilt of state laws and regulations now governing mortgage lending.

Looking back over the past year in New Jersey from a legislative and regulatory perspective, it is easy to see why New Jersey is a state that is often a bellwether for the rest of the country. Having had licensing for mortgage bankers and mortgage brokers since 1981, the New Jersey Department of Banking (DOB) has promulgated regulations covering a broad range of subjects and, by now, has had the opportunity to evaluate the industry's performance under these regulations. Based upon this experience, the DOB has modified many of its regulations recently, with some proposals still pending at this time.

Legislatively, New Jersey has often been ahead of its sister states on matters dealing with mortgage lending. This past year was no exception. The following summary of legislation is a good example of this.

Legislation on net worth and licensing requirements (still pending)

Assembly Bill 1676 is a recently introduced proposal that would deprive the Commissioner of Banking of the power to establish net worth requirements for mortgage bankers, where such licensed entities have demonstrated the ability to fund loans based upon warehouse lines of credit, table-funding agreements or other relevant means. This proposal is designed to eliminate the net worth requirements already established via regulation by the Department of Banking and would prevent the commissioner from promulgating such regulations in the future.

The proposal would also require the licensing of mortgage solicitors for the first time in New Jersey. In order to qualify for a mortgage solicitor's license, the individual would have to intern for a period of three to six months, engage in a course of study and pass an examination.

The legislation would also impose, for the first time, apprenticeship and educational requirements for mortgage brokers and bankers. A mortgage broker, under the proposal, would have to serve a two-year apprenticeship as a mortgage solicitor, complete a thirty-hour course of study and pass an examination (the exam is currently required for mortgage bankers and brokers). A mortgage banker, in addition to passing an exam, must have served a five-year apprenticeship with at least two years as a mortgage solicitor and three as a mortgage broker and complete a fifty-hour course of study.

This proposal would have a far-reaching impact upon the licensing and regulation of mortgage bankers, brokers and solicitors and is one that the Mortgage Bankers Association of New Jersey is following very closely.

Legislation on foreclosures (still pending)

The Fair Foreclosure Act, Assembly Bill 1217 (A1217), had its inception in a concept developed by the Public Advocate. The Department of the Public Advocate is in the executive brance of state government and has the authority to represent the public interest in matters such as the proposed legislation. Despite the Public Advocate's effort to pass its own Fair Foreclosure Act, a bill which was premised, in part, upon Pennsylvania law, it did not succeed. The Public Advocate called for more time to be given to borrowers during the foreclosure process, to allow them the opportunity to ride out a bad economy until they could afford to make their mortgage payments again.

The Public Advocate's proposal resulted in Assemblywoman Charlotte Vandervalk's (R) introduction of her own version of this legislation--A1217. As vice chair of the Financial Institutions Committee, Assemblywoman Vandervalk worked from the Public Advocate's legislative concept without incorporating all of the provisions of that bill that were sought by the Public Advocate. For example, the Public Advocate would have included a required forbearance procedure, under which every lender would have had to make forbearance available to all delinquent borrowers based upon specific written criteria. This, in our judgment, would have prompted many cases to go to litigation, with borrowers contending that lenders were not applying forbearance criteria appropriately.

The MBA of New Jersey has proposed a modified bill, working together with our allied trade associations. The new proposal provides for notice to a borrower that a foreclosure will be initiated, and notice of the borrower's right to cure (as in the current bill), but it eliminates provisions of the original bill that would have "reversed" the Third Circuit Court of Appeals decision in the famous Perry case. In that case, it was determined that foreclosure judgments could not be modified in bankruptcy proceedings pursuant to Section 1322(b) of the Bankruptcy Act. The proposed amendments also would provide for an optional foreclosure alternative where, for the first time in New Jersey, a lender could obtain a deed through foreclosure without the need for the traditional sheriffs sale, unless the borrower objects.

Legislation on points: secondary mortgage loans (enacted)

New legislation was recently signed into law that for the first time, permits a maximum of 3 points to be charged on secondary mortgage loans (seconds and other subsequent liens) in New Jersey. Previously, points were not permitted in connection with such loans. The law also increases the net worth for secondary mortgage lenders from $100,000 to $150,000. An existing licensee has five years to increase its net worth to this level. The bill also provides for periodic reports to the legislature by the Banking Department regarding the impact of points on secondary mortgage lending in New Jersey.

The history of the new law may be of interest, as a precursor of possible future developments. The initial proposal contained a $250,000 net worth provision and would have allowed unlimited points to be charged in connection with secondary mortgage loans. A series of compromises followed, after meetings between trade groups and legislators, resulting in a point ceiling, originally 5, being decreased to 3 points. The net worth requirement was dropped to $150,000. A major, national, secondary mortgage lender fought the bill, arguing that points were unnecessary and would cause abuses in the industry that would harm all secondary mortgage lenders. If they were to be allowed, the party argued that a much higher net worth was needed.

It would seem logical that if the marketplace functions without any significant abuses, there may be a free market for points on secondary mortgage loans in the future. There has also been some discussion about parity between first and second mortgage lending in New Jersey, requiring only one license for first and second mortgage lending.

Legislation on legal fees charged to borrowers (still pending)

Assembly Bill 1194, was drafted by the MBA of New Jersey, together with representatives of the New Jersey Bankers Association and several sections of the bar association. The bill would remove commercial loans from the current prohibition of a lender charging a borrower for legal fees other than for its attorney's review of those mortgage loan documents prepared by a borrower's attorney.

The bill also would require that a real estate-secured lender must disclose, on commercial or residential loans, either with its loan commitment or within 10 days thereafter, the basis for any legal fees that a borrower will be required to pay to lender's counsel. A good faith estimate of any charges the borrower will be expected to pay to the lender's attorney would also be required. If the good faith estimate will be materially exceeded, the lender must notify the borrower of this fact at the time the lender becomes aware of the change. The failure to give a good faith estimate or to advise the borrower of changes doesn't affect the validity of the loan itself, but does prevent the lender from collecting the fees involved in the required notices.

On one- to four-family residential mortgage loans, the present statutory limitation, as interpreted by the ethics committee, prohibits lenders from charging borrowers anything other than a review fee, limited to those attorney fees imposed for review of documents prepared by a borrower's attorney. The bill would modify this restriction to permit a lender to charge for the review of the loan, title documents and other documents directly related to the loan transaction.

The bill would also require notice that the interests of the borrower and lender may be in conflict and that the borrower is advised to employ an attorney of his/her choice to represent the borrower's interest.

Proposed regulation NJAC 3:38-1.9 and 5.2 (Department of Banking)

NJAC 3:38-1.9 deals with branch office requirements and identifies those activities that will result in a particular location being considered a branch office, thereby requiring a license.

NJAC 3:38-5.2 deals with the MBA of New Jersey suit against the state Real Estate Commission. The proposed language exempts a real estate broker or salesman from licensure by the Department of Banking even if he/she receives additional compensation for brokering a mortgage loan. The exemption applies only if the broker or salesman receives $250 or less in addition to his/her real estate commission, and then, only if the $250 is to reimburse the real estate broker or salesperson for actual expenses incurred in connection with the mortgage loan.

Proposed regulation NJAC 11:5-1.38 and 11:5-1.9 (Real Estate Commission)

A companion regulation to that proposed by the Department of Banking regarding the $250 cap relating to real estate brokers and salespersons, would prohibit a real estate broker from soliciting or receiving compensation of more than $250 to offset expenses without becoming licensed as a mortgage banker or broker.

The Real Estate Commission's proposal would also permit a real estate licensee to be employed as a mortgage solicitor by a licensed mortgage banker or broker, and accept compensation from the employer for providing mortgage-related services, notwithstanding that the realty agent is also receiving a sales commission for the subject property. There would be no dollar limit in a real estate broker's or salesperson's fees under this scenario.

Adopted regulation NJAC 3:38-5.3 on solicitor registration

Regulations have been adopted by the Department of Banking requiring the registration of loan solicitors with the department. Solicitors can only be employed by one mortgage banker. Under the regulation, no person can be employed as a solicitor for more than two licensees in any calender year without approval from the state banking department.

E. Robert Levy is executive director and counsel for the Mortgage Bankers Association of New Jersey.
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Title Annotation:state laws and regulations governing mortgage lending in New Jersey
Author:Levy, E. Robert
Publication:Mortgage Banking
Article Type:Cover Story
Date:Sep 1, 1992
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