Latest developments in the New Jersey Home Ownership Security Act.
In November 2003, both Fannie Mae and Freddie Mac stated that in an effort to continue their stance against predatory lending practices, they will not purchase high-cost home loans as defined by New Jersey law. In response to the tough assignee liability provisions, they also made other clarifications. Both said that while they would continue to purchase types of loans other than high-cost home loans covered by the act (manufactured loans, home-improvement loans and certain refinances), Freddie Mac will require sellers to submit documentation to establish compliance with the law, such as tangible net benefit analysis and copies of a final Truth-in-Lending statement, while Fannie Mae said it may announce additional restrictions on delivery of such other loans in the future.
Standard & Poor's Corporation, New York, has revised its original position regarding the New Jersey Home Ownership Security Act. The rating agency says it now will rate structured finance transactions that include loans subject to the act, such as "home loans" and "covered home loans," but will not rate structured finance transactions that include "high-cost home loans." In addition, Standard & Poor's will require sellers to represent that their loan pool does not contain "high-cost home loans."
Fitch Ratings, New York, will rate residential mortgage-backed securities (RMBS) containing loans subject to the act, provided it receives a certification from a third party unaffiliated with the originator of the loans that the third party conducted due diligence and determined that no high-cost home loans are in the loan pool. A review of five loans or 10 percent of the loans in the pool, whichever is greater, satisfies the due-diligence requirements.
In response to continued questions over the meaning of many provisions of the act, the Department of Banking and Insurance issued a second bulletin on Nov. 20, 2003, Bulletin 03-30 (the first, Bulletin 03-5, was issued on July 24, 2003). The new bulletin clarifies that the safe harbor provision does not protect an assignee/purchaser against liability if the assignee/purchaser did not reasonably understand that the loan was a high-cost home loan. A written policy prohibiting purchase/receiving assignment of such loans and other requirements listed in the act must be met.
The Department of Banking and Insurance clarified that restrictions applicable to "home loans" also apply to covered loans--e.g., no financing of credit insurance, late-fee restrictions, and so forth.
In response to a question about whether the Department of Banking and Insurance has the authority to issue such bulletins and how authoritative such bulletins are, the department responded that bulletins are the way in which it may provide guidance given that the act does not give the department general authority to issue regulations. The New Jersey attorney general's office issued a letter on Nov. 20, 2003, confirming that the department's bulletins are authoritative and would be given deference by a court, as the department is the agency charged with providing interpretations of the New Jersey Home Ownership Security Act.
Several amendments have been introduced in the state legislature to modify the only two-month-old law. On Dec. 4, 2003, New Jersey State Sen. John H. Adler introduced Senate Bill 2795, which has received considerable attention and which was referred to the Senate Commerce Committee. On that same day, Senate Bill 2795 was reported from the Senate Commerce Committee with amendments. As of this writing, no further action had been taken.
Senate Bill 2795 would revise some provisions of the New Jersey Home Ownership Security Act. For instance, it would permit a borrower to seek damages in an individual capacity only. As enacted, the act does not contain such a restriction. The revisions would also limit the amount of damages recoverable for material violations to the "actual financial burden suffered by the borrower, up to the original face value of the loan." Currently the act allows damages equal to the finance charges plus up to 10 percent of the amount financed.
The revisions would also allow the Department of Banking and Insurance, in conjunction with the Consumer Affairs Division of the Department of Law and Public Safety, to promulgate regulations to effectuate the entire act. At this point, the act directs such departments to implement regulations regarding consumer counseling and awareness of predatory lending activities and nonprofit credit counseling only (proposed regulations have been issued on nonprofit credit counseling).
Needless to say, some consumer advocates have opposed the amendments, and at least one New Jersey newspaper editorial board has urged the governor to reject amendments before seeing whether the original law is as unworkable as critics maintain. At the moment, attempts to amend the act have died down as lawmakers state they wish to see how the law works before they begin to push for changes.
At least one study on the impact of the legislation found that evidence was inconclusive as to whether the law would reduce mortgage availability within New Jersey. Yet numerous lenders have stated the law will result in decreasing credit availability by billions of dollars. The National Home Equity Mortgage Association (NHEMA), Washington, D.C., recently announced that it was commissioning another study to ascertain the statute's impact.
Other recent predatory lending law developments
The provision in New Mexico's Home Loan Protection Act permitting a borrower to assert all affirmative claims and defenses against a creditor or holder of a home loan that the borrower has against a manufactured home seller or home-improvement contractor was recently repealed.
Indiana recently joined the growing list of states adopting subprime lending restrictions. Its statute becomes effective July 1, 2004. Utah has also recently adopted a high-cost home-loan statute.
Heather D. Disque and Paul H. Schieber are member and chair, respectively, of the Consumer Financial Services Group with Blank Rome LLP, Philadelphia. They concentrate their practice on regulatory and business issues surrounding mortgage finance. Disque can be reached at email@example.com and Schieber can be reached at firstname.lastname@example.org.
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|Author:||Disque, Heather D.; Schieber, Paul H.|
|Date:||May 1, 2004|
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