Recently, the State of New Jersey has taken a small step in the direction of less regulation over home mortgage lenders and, virtually at the same time, a potentially more significant step in the opposite direction. Details are set forth below.
NJDOBI Proposes to Eliminate a Regulation
Yes, you read that right! On June 5, 2017, the New Jersey Department of Banking and Insurance (“Department”) published a proposal to repeal a regulation first adopted in 2002 and readopted every 5 years thereafter. See 49 N.J. Reg. 1273-1274. That regulation, N.J.A.C. 3:1-16.2(a)3, required the Department to conduct and publish in the New Jersey Register an annual survey of third party appraisal fees (the “Annual Survey”). The purpose of the Annual Survey was to enable the Department to determine the current “usual, customary and reasonable” fee (“Customary Fee”) that lenders would be permitted to charge their borrowers for the cost of an appraisal, whether “performed and delivered in-house” or obtained from an appraisal management company (“AMC”). The regulation states that for in-house appraisals, “the fee shall approximate the [Customary Fee] for comparable appraisals by third-party appraisers based on the [Annual Survey]”; and for appraisals obtained from AMCs, “the fee shall not exceed the amount charged by the [AMC] and shall approximate the [Customary Fee] for comparable appraisals by third party appraisers based on the [Annual Survey].”
The part of the regulation that addressed appraisals obtained from AMC was prompted by the Department’s desire to protect consumers from lenders who try to pass along inappropriate costs in appraisal fees. The “inappropriate costs” of concern to the Department were what it perceived to be extra fees that AMCs (which were often owned by lenders) would charge lenders over and above the fees the AMCs paid to the independent third party appraisers they hired to perform the appraisals and prepare the appraisal reports. (AMCs generally manage the appraisal process for lenders. They select and hire appraisers, negotiate their fees, review the reports they prepare and submit those reports to the lenders in the form the lender requires.)
The Department has now changed its mind. It explains, in the Summary section of the proposal, that its prior concerns about AMCs “have subsided” and that the Annual Survey “could effectively represent an unwarranted restraint on a free market for appraisal charges, … have a negative impact on the business community, and … constitute an unneeded and burdensome regulatory requirement imposed upon lenders.”
However, despite that the Department’s concerns about AMCs have apparently subsided, its proposal appears to adversely impact AMCs and lenders that choose to use them. The proposal states that lenders may only recover from the borrower “the direct cost of the fee charged by a duly credentialed real estate appraiser for an appraisal in connection with a mortgage loan application.” Whether or not so intended, this provision can be read to limit the amount of an AMC’s fee that a lender may pass through to the borrower to the amount the AMC actually pays to the third-party appraiser it hires to perform the appraisal. We would be pleased to submit comments on the proposed regulation on behalf of industry participants.
One welcome addition in the proposal is its recognition that lenders may occasionally have “good cause” to require a second appraisal and that they should be able to recoup the cost of such a second appraisal from the borrower. Nevertheless, the proposal’s “good cause” requirement leaves lenders at risk of an after-the-fact determination by the Department that no “good cause” existed. The Department attempts to provide guidance by setting forth the factors that it would consider in making such a determination – changed circumstances shown to materially affect value, staleness (not the result of material delay on the part of the lender), the need to comply with Federal regulations, and “such other factors as may reasonably be deemed material to the specific determination.” These guidelines may not be viewed by lenders as particularly helpful, particularly in light of the Department’s authority to order wholesale refunds.
New Jersey Assembly Passes Bill to Amend Fair Foreclosure Act
On June 8, 2017, the New Jersey Assembly, by a vote of 76 to 0, passed a bill (A-4369) which, if enacted into law, would: (1) require persons who make or hold residential mortgages or their assignees (“Lenders”) to send a follow-up Notice of Intent to Foreclose (“NOI”) to the debtor not later than 30 days before filing of a foreclosure action in any situation where more than 90 days has gone by since they sent a prior NOI to the debtor; and (2) give debtors a private right of action for damages against their Lender if the Lender violates any provision of the Fair Foreclosure Act, N.J.S.A. 2A:50-53 et seq.(the “FFA”). Currently, a lender’s failure to comply with the provisions of the FFA may only be used by homeowners as a procedural defense to foreclosure.
The FFA currently requires Lenders to send debtors an NOI at least 30 days before accelerating the debt or filing a foreclosure action. The NOI must disclose 11 specific items of information, including how to cure the default, possible sources of financial assistance, and that the debtor has a right to his/her own attorney. And it must do so in a “clear and conspicuous” manner that is “calculated to make the debtor aware of the situation.”
The bill now goes to the New Jersey Senate for consideration. If the bill is enacted into law in its current form, the additional notice requirement will cause further delays in the filing of some foreclosure actions. Moreover, and more importantly, the inclusion in the bill of a private right of action for damages will provide foreclosure defense counsel with yet another tool with which to fight Lenders’ efforts to foreclose. For example, under the proposed legislation, if a Lender mistakenly files its foreclosure action or accelerates the debt sooner than 30 days or later than 90 days after sending the NOI, does not include in it each of the required items of information, or sets forth the required information in a manner that a court concludes is not “clear and conspicuous” or “calculated to make the debtor aware of the situation,” the debtor could bring an action in Superior Court against the Lender and, if successful, recover “actual damage or $1,000, whichever is greater, attorney’s fees, costs of suit and appropriate equitable relief.”
In sum, there does not appear to be anything in the Department’s proposed regulation that is likely to be received by home mortgage lenders with enthusiasm, and much in the bill to amend the FFA that they will likely view with concern.