United States: NJDOBI Issues Bulletin Addressing Mortgage Loan Commitments And Proposes Revisions To Dedicated Funding Assessment Rules

This Reed Smith Bulletin summarizes two recent pronouncements of the New Jersey Department of Banking and Insurance (the "NJDOBI"). The first is NJDOBI Bulletin No. 07-12 (the "Bulletin"), which was issued June 13, 2007. The Bulletin addresses the subject of "commitments" issued in connection with New Jersey residential first mortgage loans and can be found at http://www.state.nj.us/dobi/bulletins/blt07_12.pdf. The second is a proposal by the NJDOBI to revise its regulations that implement L. 2005, c. 199 (the "Dedicated Funding Act"). See 39 N.J.R. 2299(a) (June 18, 2007). The revisions are necessary because of recent changes made to the Dedicated Funding Act by L. 2007, c. 81 (the "Amendment").

Details concerning both of these developments are set forth below:

The New Jersey mortgage processing regulation (the "Processing Regulation") governs the application and commitment process of New Jersey residential first mortgage lenders. Among other things, it requires that certain disclosures be provided to borrowers at various stages of the loan process and prohibits lenders (and brokers) from charging fees other than those specifically listed in the Processing Regulation. Among the allowable fees is a "commitment fee." Questions have arisen as to what constitutes a "commitment" and under what circumstances the issuance of a commitment will justify the charging and collection of a commitment fee. The Bulletin attempts to answer some of these questions, as well as questions pertaining to prepayment fees on loans for which a licensee has issued a commitment but which will be closed by another lender.

The Bulletin indicates, first, that in order to justify the collection of a commitment fee, a commitment must meet all of the following conditions:

• It must be in writing.

• It must be signed by a duly authorized representative of the lender.

• It must be accepted by the borrower.

• It must disclose all of the terms of the loan as required by the Department’s mortgage processing regulation.

• It may not be subject to an underwriting analysis of an appraisal or credit report or investor approval.

• It must be issued to the borrower at least three business days prior to closing.

If any of these conditions is not met, the NJDOBI may order refunds of any commitment fees collected. Previously, it was not clear that collection of a commitment fee was contingent on all of these conditions being met. For example, some lenders issued commitments that were not signed by a duly authorized representative of the lender or that were not provided to the borrower until the day of closing. Lenders who continue such practices following issuance of the Bulletin may find themselves having to refund substantial amounts of money to their customers.

The Bulletin also deals with the issue of prepayment penalties on loans for which a licensee has issued a commitment. A New Jersey law prohibits charging prepayment penalties in connection with all residential firstand second-mortgage loans, but national banks, federal savings associations, and state-chartered banks and thrifts may nevertheless charge prepayment penalties. (The state prepayment prohibition is preempted as to federally chartered banks and thrifts, and state banks and thrifts are permitted also to take advantage of this federal preemption by operation of New Jersey State Bank Parity Act.) Several months ago, the NJDOBI obtained an opinion from the Attorney General of New Jersey indicating that, while New Jersey Licensed Lenders Act ("LLA") licensees may not make loans that provide for prepayment penalties, they may legally broker such loans to any of the above entities.

The Bulletin goes one step further. It states that an LLA licensee may not issue a loan commitment to a borrower in its own name and assign that commitment to one of the above entities for closing, if the loan that is closed is going to include a prepayment penalty provision. If an LLA licensee does issue a commitment for a New Jersey residential first- or second-mortgage loan and that loan is closed with a prepayment penalty feature, the NJDOBI will likely require the licensee to take corrective action. This could be done by perhaps forcing the licensee to refund any prepayment fee that the borrower is required to pay in order to pay off his/her loan, or to take whatever action may be necessary to remove the prepayment feature from the loan.

The Bulletin also reiterates that licensed mortgage brokers may not issue loan commitments.

Effective July 1, 2006, institutions regulated by the NJDOBI’s Division of Banking (state-chartered depositories and licensees) were relieved of responsibility to pay license- or charter-related fees and examination fees to the NJDOBI, except that (1) licensees would have to pay an application fee when applying for an initial corporate or individual license; (2) licensed mortgage bankers and mortgage brokers would have to pay initial solicitor registration fees and fees to renew solicitor registrations ($100 per solicitor); (3) applicants for new depository charters would have to pay an initial charter fee; and (4) foreign and out-of-state depositories would have to pay an initial entry fee. All other fees were eliminated. The initial application fee for licensees was set at: (1) $700 for one authority plus $300 for each additional authority for NJ Licensed Lenders Act ("LLA") license applicants, or $300 for each authority to be added to an existing LLA license; (2) $700 for money-transmitter and check casher applicants; and (3) lesser amounts for other license applicants (ranging between $60 for home repair salesmen to $500 for pawnbrokers).

In place of these fees, beginning Sept. 15, 2007, all regulated institutions will receive an assessment from the NJDOBI, which they will be required to pay within 30 days thereafter. The amount of each year’s assessment is supposed to represent each institution’s fair share of the operating expenses of the Banking Division unit that regulates them, plus that unit’s portion of the Banking Division’s centralized expenses for the previous fiscal year. That share will be determined according to a formula developed by the NJDOBI and will include a "base assessment" and a pro rata "volume assessment." The base assessment for a particular type of regulated institution will be calculated by multiplying a published dollar amount (not more than $300) by a "complexity factor" (greater than zero and not more than five that will be assigned by the NJDOBI to each particular license or depository type, depending upon the amount and complexity of regulatory oversight and administration that it requires.

For lending licensees, the "volume assessment" will depend upon the amount of business engaged in by the licensee during the prior calendar year, as reported in its Annual Report for that year, as compared to the total reported amount of business engaged in during this same period by all licensees. (Licensees’ Annual Reports must be filed, electronically, by April 1, or, in hard copy [if the NJDOBI grants permission to do so], by March 1, of the next calendar year.) Consistent with the above, the September 2007 volume assessment will be based on data reported in the licensee’s Annual Report for 2006.

For depositories (except credit unions), the volume assessment will be determined by subtracting the total base assessments of all depository institutions from the Banking Division’s total expenses of supervising depositories, and multiplying that number by the percentage of the depository’s total assets under supervision in relation to the total assets under supervision for all depositories as of the prior year end. Credit unions with assets of less than $40 million will only have a base assessment. Other credit unions will have both a base assessment and a volume assessment, with the latter being calculated essentially as if the credit union were a regular depository.

Regulated institutions should have already budgeted for their assessments or, at the very least, should do so now. Licensees who do not pay their assessments will be subject to significant penalties and possible revocation or non-renewal of their licenses. Moreover, penalties for filing Annual Reports late or that contain material errors can also be substantial.

The Dedicated Funding Act provided a mechanism for regulated institutions to file objections to their assessments and to have those objections decided at a hearing. The Amendment clarifies that, while this right exists, it does not relieve the institution of the obligation to pay the assessment in full within 30 days after receipt. Consistent with this change, the Amendment also states that if an assessment is not paid within this 30- day period, as opposed to within 30 days of the date of mailing a notice disallowing objections, the Department will forward the matter to Treasury for collection.

Another change concerns the aggregate amount that may be assessed by the Department against all regulated institutions. In the Dedicated Funding Act, that amount was supposed to be the lesser of (1) the total amount of expenses incurred by the state in connection with the administration of the special functions of the Banking Division during the preceding fiscal year, or (2) .00015 times the sum of the total assets held by all New Jerseychartered depositories, plus the total volume of loans made by licensees, during the preceding calendar year. The new law reduces the multiplying factor in the above formula from .00015 to .0001084, and changes the number to which this multiplying factor is applied from assets held and loans made during "the preceding calendar year," to an average of assets held or loans made during "the preceding five calendar years…, excluding the two most recent calendar years."

The Amendment also clarifies that the same application fees required for initial corporate and individual applications are also required for initial branch office applications, and allows the Department to establish the same license expiration date (every two years) for all licensees.

Finally, the Amendment removes a requirement that the Department examine state savings and loan associations at least once every two years; and makes the various existing penalties that the Department can impose upon regulated institutions for failing to file required reports the same for all institutions (not more than $100 for each day’s failure).

The NJDOBI’s proposed regulation, if adopted, will implement the above changes. Comments to the proposal will be accepted by the NJDOBI until Aug. 17, 2007.

Reed Smith is acknowledged as a leading advisor to the financial services industry, providing clients with sophisticated retail operational and compliance counsel, and representing them across a diverse spectrum of litigation matters. Our Financial Services Regulatory Group is one of the largest multi-office, interdisciplinary practices of its kind, helping clients interpret and respond to new laws and regulations that impact consumer retail lending and deposit functions related to items such as credit and debit cards, mortgage loans, deposit and insurance products, and automobile and other retail finance products. Our Financial Services Litigation Group has been involved in precedent-setting cases and has produced impressive results in major class actions and individual suits on behalf of major banks, brokerage firms, finance companies and insurers.

Members of our Financial Services Regulatory Group include former New Jersey Banking Commissioner, Geoffrey M. Connor, and former New Jersey Deputy Commissioner of Banking, Robert M. Jaworski, who are available to assist clients in obtaining lending licenses and new bank charters, and with other matters involving the New Jersey Department of Banking and Insurance, including licensing, examination, bank application and enforcement matters. Messrs. Connor and Jaworski, along with Leonard A. Bernstein, are active members of the New Jersey State Bar Association’s Banking Law Section and are former Chairs of the Section’s Consumer Financial Services Committee.

This article is presented for informational purposes only and is not intended to constitute legal advice.