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Volume 65, No. 3 . . . . . .Founded in 1900 - In Our Second Century! . . . . . .December 2002 Newsletter

Consumers League of New Jersey Newsletter
N.J. Predatory Lending Bill A. 75 Flipped to Favor Lenders
Q. Who benefits most from A75? A. Banks which finance fraud.
U.S. House Votes To Legalize Rent to Own Abuse
Bad Bankruptcy Bill Defeated in House


Review of the Year in Congress:
Bad Bankruptcy and Rent to Own Bills Not Enacted by Congress

N.J.'s Chris Smith led a group of anti-abortion representatives who defeated the bad bankruptcy bill, because they objected to one point. The bill would have prohibited the discharge in bankruptcy of debts caused by intentional obstruction, use of force, or violation of court order regarding the provision of lawful services. N.Y. Senator Schumer and Senate included this, and the House leadership wanted to pass the bad bankruptcy bill, to please the credit card banks which paid for it. In a stunning defeat, the Conference Report did not pass, so the law was not enacted. However, many of our N.J. Representatives, including Rep. Smith, then voted for the bad bankruptcy bill (with abortion deleted) see list at www.clnj.org.

On its merits, bankruptcy reform is a cruel kick to consumers and homeowners who are down on their luck in bad times. First the bill would force consumers above the median income into payment plans. Second, the law would make the plans impossible to pay, by requiring higher payments than current law, so many homeowners would be thrown out of Chapter 13 bankruptcy, and lose their homes to foreclosure. Bankruptcy "reform" will come back in 2003, but it should be defeated on its merits.

Rent to Own Roundup:

The full House passed HR 1701, a bill to legalize the rent to own scam nationwide. Not one N.J. representative voted for this monstrosity. The Senate refused to act, so the bill did not become law. H.R. 1701 hurts New Jersey and the states which have good court decisions, or good laws or regulations about rent to own. This bill prohibits the Federal Reserve Board and all state legislatures from requiring RTO stores to disclose the annual percentage rate of interest! Unfortunately, the rent to own industry will try again in 2003.

IPredatory Lending Bill Flipped:
N.J. Bill A.75 Now Favors Lenders

As recently amended in the N.J. Senate Commerce Committee, with the active involvement of Governor McGreevey's office, bill A.75 on predatory mortgage lending has been flipped from pro-consumer to pro-lender. Many leading consumer attorneys, such as Madeline Houston, Bloomfield, now oppose the bill.

Our fundamental principles re predatory lending are: 1) NJ should discourage and eliminate predatory mortgage loans, 2) If predatory loans are made, there should be effective penalties, 3) No homeowner should lose his or her home to foreclosure because of a predatory mortgage loan. 4) NJ's Legislature and Governor should not undermine the excellent decision Troup v. Associates Home Equity Services, 343 NJ Super 254 (NJ Appellate Division 2001), which holds that predatory lending is a defense to foreclosure suit. 5) Any N.J. law should be better than the weak federal HOEPA law (else why bother to enact it?). The amendments to A75 nullify all of those principles.

All a predator has to do to avoid the law is sell the predatory loan to an assignee, who need only do minor due diligence. Then the assignee gets the green light to foreclose on a loan which violates all the requirements of A75 and to take a senior's home equity, built up over years of payments.

The amendments would immunize the assignees from the consequences of flipping. We have seen a case where several predatory mortgage were made to a senior citizens within six months, each with horrendous fees and terms. No assignee should be able to foreclose such loans. Assignees are not innocents. Assignees know by the high interest rates what sort of loans they are buying. The high fees are visible on the papers purchased. (Cont'd p.2)

Consumers League of N.J. Newsletter, Page 2
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Predatory Lending Bill (Continued)

It is the money from assignees which funds the frauds of predatory lending. Without the assignees buying predatory mortgages, then the small brokers and lenders would not be able to make them. If the source of cash to predators dries up, that would be a very good thing. That would protect seniors most of all. If the assignee knew that New Jersey had a strong predatory loan law, then the assignees would check every loan, and reject the predatory ones.

Many, perhaps most, predatory mortgages are made by brokers and small companies which work with larger lenders, or sell to assignees or investment pools. Brokers sold mortgages to the infamous Walsh Securities, Parsippany NJ, which is now out of business because A) the US Attorney convicted several employees of federal crimes, and B) Investors stopped buying Walsh mortgages, which was a good thing for NJ homeowners. Walsh Securities during its prime sold the mortgages to banks out of state. Neither the broker nor Walsh cared whether the senior citizen can actually pay the loan, because they sold it immediately. The loan will become the assignee's problem. The broker falsified the data about the borrower, such as listing her age as 36 instead of 63, falsely inflating the income as well. But it is the out-of-state "investors" which gave Walsh the money to lend. If you immunize the investor/assignees, then the homeowner has no defense to foreclosure.

If a mortgage was predatory on the day it was made, it does not become "clean" by selling it to an assignee. No one should be able to foreclose a predatory loan. If "A" robs a bank, but sells the proceeds to "B" that does not make the initial crime legal. But that is what "holder in due course" doctrines do: such doctrines say that no matter how badly the first creditor cheated a consumer, the second creditor, standing in the shoes of the first, can profit from the fruits of the fraud.

New Jersey has wisely prohibited, since the 1960s, this irresponsible idea, in the NJ Retail Installment Sales Act, and the NJ

 

Home Repair Retail Installment Sales Act. The Federal Trade Commission Rule on Preservation of Consumer Defenses wisely makes it illegal to cheat the consumer out of his valid defenses in the sale of goods and services. For most of NJ's history, mortgages were made with nonnegotiable "bonds". In the Shaw case in Bankruptcy Court, NJ homeowners were allowed to rescind a mortgage due to Truth in Lending Act violation as a recoupment defense, no matter how many years. The amendments want to take away that principle. We want NJ to protect it.

This idea -- that the consumer should always be able to raise as defenses to suit, the fact that she was cheated in the transaction, so that she does not really owe the money which the creditor seeks-- is perhaps the most fundamental principle in consumer law. To take it away from NJ's homeowners in the name of "protecting" them is to protect instead predatory lending.

Amended bill A.75 would let the assignee off the hook, and immunize the assignee from the first lender's fraud, if the assignee claims it exercised "ordinary due diligence" and could not determine the loan was a high cost loan. Again, the best way to clean up predatory lending is simply to make assignees always liable when they finance fraud. That way the assignees would police the lenders, not get into bed with them.

Amended bill A.75 deleted a very good provision which allowed homeowners to rescind via the Truth in Lending Act, after 3 years. Lenders, in contrast, have 20 years to foreclose.

Amended bill A.75 limits the consumer to six years to raise certain defenses based on violations of certain sections of the act, but seems to limit or prohibit class actions for the same violations.

A75 now eliminates liability of individual officers who make high cost loans. The bill also deleted criminal liability (disorderly persons offense). As amended, this bill coddles criminals!

Consumers League of N.J. Newsletter, Page 3
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Q. Who benefits most from A75?
A. Banks which finance fraud.

When Congress enacted the HOEPA law, it defined high cost loans as being fees and points of 8 per cent or more. So the predatory lenders shifted to charging 7.75 % fees and points. That would be $7,750 in fees to get a $100,000 loan.

Is bill A.75 better than HOEPA? A.75 would allow the lenders to charge 2 "bona fide" points plus 5 more "points and fees" before the loan would become "high cost." So that amounts to a big One percent reduction at best.( 8% to 7%) But the reduction is illusory, since the bill excludes from the definition of points and fees most of the third party fees currently charged. So we think A.75 would not lower the fees predators currently charge in New Jersey.

The main effect of A.75 would be negative, to rob homeowners of their rights to raise claims and defenses against the assignees, the financiers of fraud. That is why the lenders currently support the bill more than consumer attorneys do. The attorneys who have actually handled predatory lending cases in Court know that it does not matter whether a law gives a consumer 100 different rights, if the homeowner cannot raise them. The loopholes in A.75 are a mile wide. Most of the law is aimed at so-called "high-cost" mortgages. But predators can easily avoid being high cost by charging only $6,999 points and fees for a $100,000 loan. Then the real financier, the assignee, will claim that he could not possibly have known about any problems, because the predatory promised him no high cost loans, and because his ordinary due diligence is set up to avoid problems, not find them. The net effect of A.75 is to hurt homeowners in foreclosure. A.75 will cause more homes to be lost than saved.

So the Governor must choose: he cannot get a good law enacted without offending the predatory lenders and the Wall Street firms which package predatory loans into "securities." So far the Governor has sided with the banks, and seems intent on signing a bill which pleases banks more than it satisfies consumer lawyers.

Bad Predatory Lending Amendments

Judge for yourself whether A.75 is being changed for better or worse:

Formerly, A.75 said that loans which violated A.75 were void. This was great - it protected the homeowner from foreclosure. But that section was deleted.

The Senate added a section which states that all the cities and towns of New Jersey cannot pass ordinances dealing with predatory lending. This is awful. In some parts of the country, city councils have passed ordinances directing the mayor not to deposit the city's funds in banks with a history of financing fraud and predatory lending. If A.75 passes, no good ordinances will pass in New Jersey. This section rewards banks who finance fraud. In some instances, large banks have been criticized for the following behavior: a) redlining poor areas, so the bank itself made no conventional loans (at low interest) in poorer neighborhoods, b) financing third party home repair fraud and predatory mortgages at high rates in the redlined neighborhoods, causing c) a high rate of foreclosure in cities. CLNJ thinks it a very legitimate goal of government for cities to reward banks which are good citizens, and penalize bad ones. With A.75, the cities of New Jersey will be prohibited from enacting good ordinances.

The twin remedy in the original act of Consumer Fraud Act triple damages and punitives, has been reduced to a choice between the two. This is a way to eliminate any high punitive damage awards.

A section of the original Act prohibiting the making of predatory loans to people who cannot afford them was eliminated.

Who is the legislature protecting? Not New Jersey homeowners, not senior citizens who have a lifetime of home equity stolen with a few strokes of a fountain pen. The Legislature and Governor's Office are basically saying it is OK to charge $6999 for a loan, and hope we believe their press conference when they claim to be protecting consumers.
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RENT TO OWN RAP is available for free as a MP3 song at the Consumers League website: www.clnj.org/rto_rap.htm

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