No Action on New Jersey
Predatory Lending Bills

The N.J. Legislature has to date taken no action on bills to reform predatory lending. In response, the ACORN group picketed Assemblyman Neil Cohen to protest the slow progress of the bill, and brought along a couch from a foreclosed homeowner. The tactic illuminated the problem, but did not make a friend in the Legislature for ACORN: the Assemblyman then made remarks to American Banker about upholding the "200-year-old holder in due course rule" which disturbed all consumer groups. The Assemblyman is wrong- for most of the last 200 years, N.J. mortgages came with a "bond" and there was no holder in due course, because there was no "negotiable" note, and so consumers could raise their defenses, such as fraud.

The "holder in due course" rule, for certain "negotiable" notes, but not all mortgages, makes it very difficult for those defrauded to complain in Court. So if lender A defrauds the homeowner, but is able to make its note "negotiable," and then lender A sells the note and mortgage to lender B, then the consumer cannot do anything to protest A's fraud when lender B forecloses and takes away the home. The rumor is that the banks intend to "turn" bills to their purposes, to make it harder for homeowners to complain about acts of predatory lending.

Eliminating the holder in due course rule from mortgage lending is an absolute necessity - else lenders can laugh at any laws enacted. N.J.'s Courts must be free to exercise their traditional equity powers, to refuse to foreclose fraudulent mortgages. For 1000 years, courts of equity required lenders to have "clean hands" before a mortgage could be foreclosed. Eliminating consumer defenses would be a radical change.

For more information about predatory lending, and a how to get a new book which explains it, see below.

US Attorney Convicts Two More
Re Land Flips Financed by Mortgages from Walsh Securities

Alain Liebman, of the U.S. Attorney's Office, Newark, recently obtained two more convictions arising out of the Monmouth County "land-flipping" scam. Two realtors joined apx. a dozen others convicted since the 1997 scandals. The Asbury Park Press, in an award-winning 1997 series "House of Cards" turned the spotlight on a network of realtors, appraisers, developers who bought run-down properties in Asbury Park, then with the help of phoney appraisals, sold the house for double their worth to first time home buyers. The land-flips, in which the property values doubled overnight, were financed by mortgages from Walsh Securities, Inc., a Parsippany mortgage lending firm, which seems to have gone out of business. The homeowners were left with large mortgages on rundown properties, too overvalued to sell. Some Walsh Securities employees have pleaded guilty too.

What did Walsh Securities do with these mortgages? While predatory lending is unsound lending, predatory lenders prosper by taking, for example $8,000 of upfront points and fees, then selling the loan to another lender or investor. Predatory lenders always get rid of the loan. You can see why applying a "holder in due course" rule to mortgages would mean that homeowners couldn't complain about being swindled. Walsh Securities often packaged loans into mortgage securities, and sold them to investors with the help of Wall Street firms. On the West Coast, Lehman Brothers has been sued because of its involvement with First Alliance Mortgage, another predatory lender. A Federal Judge in California says Lehman Brothers is potentially liable for its alleged involvement in financing the predatory loans of FAMCO. Can you believe that some lenders are still trying to foreclose Walsh mortgages?

How can New Jersey stop predatory lending? Make it unprofitable. Make the assignees and financiers of fraud liable to pay damages. Then Wall Street will stop financing fraud.

Bill S.1200 to Stop Predatory Lending

N.J. bill S.1200 (Buono) has many excellent ideas to curb predatory lending. The bill holds the financiers of fraud liable to all claims and defenses which the homeowner has in a high cost mortgage against the original lender or home repair contractor. The bill clarifies that a homeowner may use the Truth in Lending right of rescission at any time to stop a foreclosure. A high cost mortgage is defined as one in which: the interest rate is 6 points above Treasury rate, or more than 5 points of fees/points are charged, or has a prepayment penalty exceeding 2%.

S.1200 prohibits predatory lenders from financing the points and fees. These fees are the reason lenders repeatedly refinance loans from debtors in default. It prohibits the financing of credit insurance, an abuse when large premiums are financed over 30 years. The bill prohibits "flipping," i.e. the refinancing of a loan where there is no "tangible net benefit" to the consumer. The bill prohibits balloon payments, as these are inserted to force refinancing (and another round of fees). The bill prohibits negative amortization and mandatory arbitration clauses. Before making a high cost loan, the homeowner would be advised by a HUD-certified counselor. The loan must not be made to persons who cannot pay them back. Currently lending to the poor, who are certain to default, is a favorite tactic- it causes the homeowner to pay points repeatedly with each loan. Loans are often based solely on the amount of equity (poor seniors with paid-off mortgages, for example), disregarding that the homeowner cannot possibly pay a loan equal to her entire monthly income.

There are several penalties in S.1200. Loans violating the act would be void. New Jersey had this same "void" penalty in the Secondary Mortgage Loan Act until the 1980s. There would be a penalty of finance charge plus 10%, Consumer Fraud Act penalties, and punitive damages if the violation were malicious or reckless. So the question remains: is New Jersey serious about stopping predatory lending?