New Mortgage Application Disclosure Form
The Processing Regulation applies on its face to all lenders and brokers doing business in New Jersey. This includes all New Jersey- and federally chartered banks, savings banks, savings and loan associations, and credit unions, as well as all nonbank mortgage lenders, correspondent mortgage lenders and mortgage brokers, that make or broker residential (1-4 family), consumer purpose, mortgage loans secured by New Jersey properties.2 It requires lenders, among other things, to give loan applicants a written disclosure containing specified items of information before requiring the applicant to pay any loan-related fee.3 Lenders are given flexibility under the rule to design this disclosure in any way they like so long as it contains the required information.
The Department has now decided to create a model form disclosure and to require its use by all New Jersey mortgage lenders beginning with applications that they take on or after January 1, 2018. This decision, however, was not preceded by any published notice of proposed rulemaking or opportunity for public comment, as seemingly required by the Administrative Procedures Act (since it effectively amends the Processing Regulation). It was simply posted on the Department’s website, with a link to the form itself. The Department’s announcement stated:
[Department] Rules at N.J.A.C. 3:1-16.3 provide for the disclosure of fees charged in connection with a mortgage loan application. Beginning on January 1, 2018, the "NJ Application Disclosure Form" must be used for such disclosures, preferably in a two-sided single sheet format. A copy of the completed form must be provided to the applicant(s) and maintained in the loan file.
Compounding the apparent deficiency in administrative process, the form itself appears to be inconsistent in several regards with the Processing Regulation and, as a result, raises implementation issues. First, the form tells the consumer that “You must be given a NJ Application Disclosure Form when you receive your Loan Estimate.” The Processing Regulation, however, only requires the application disclosure to be given to the consumer “[b]efore a lender or broker accepts any application fee in whole or in part, any credit report fee, appraisal fee or any fee charges as reimbursement for third party fees.”4 If a lender or broker does not require the consumer to pay any upfront fees before giving him/ her a Loan Estimate,5 the lender should not have to provide the consumer with an application disclosure at the same time. Alternatively, if the lender or broker requires payment of a credit report fee before giving a Loan Estimate, the lender would violate the Processing Regulation if it waited until it gave the Loan Estimate to give the New Jersey application disclosure.
Second, the form tells the consumer that lenders and brokers are permitted under New Jersey law to charge only certain fees, and then lists the fees that are permitted. This list, however, does not include a credit report fee, an appraisal fee, or any of the other third-party fees that the Processing Regulation specifically permits lenders or brokers to charge.6 Consumers reading the form may well question lenders or brokers when they seek to charge such fees.
Third, the form includes the following Note:
A “Correspondent Mortgage Lender” may hold a loan for only 90 days before selling it to a third party. Your lender is a “Correspondent”:
Yes: ____; No:____.
Every lender, even ones that are not correspondent mortgage lenders, are apparently required to check one of the two boxes, despite that the Processing Regulation on its face only requires correspondent mortgage lenders to disclose their status as such, and the limitations attached to that status.7
Fourth, the form indicates that Application Fees, Lock-in Fees and Commitment Fees are “non-refundable,” except in the specified circumstances listed on the form. The Processing Regulation, however, is more consumer friendly than the form in this regard. It generally allows lenders to establish more liberal refundability policies than are stated on the form. Lenders may, for example – consistent with the Processing Regulation – disclose that appraisal fees are non-refundable except in the specified circumstances OR if the consumer withdraws his/her application before the appraisal has been conducted.
Finally, the form seemingly requires disclosure of a description and the amount of every fee that the lender or broker will charge the consumer (along with information concerning its refundability), including fees that are not required to be paid by the consumer upfront. The Processing Regulation, however, seems to require the application disclosure to include this information only about fees the lender collects at or before the disclosure is given. It states: “Before a lender or broker accepts any application fee in whole or in part, any credit report fee, appraisal fee or any fee charges as reimbursement for third party fees, the lender or broker shall [include on the application disclosure]: 1. A description and the amount of each such fee; 2. Whether all or any part of such fees are refundable; [and] 3. The terms and conditions for the refund...."8
Hopefully, the Department will consider postponing the form’s mandatory implementation date to give itself time to take a fresh look at it and clarify these inconsistencies, or better yet, consider publishing a proposed rule requiring use of the new form and inviting industry comments.
The second action taken by the Department was its adoption, on December 18, 2017, of a final rule amending the Processing Rule’s definition of a permissible appraisal fee (“Final Rule”).9 The Final Rule became effective immediately upon publication.
The prior definition had three prongs. It defined a permitted appraisal fee essentially as follows:
- For appraisals obtained directly from a third-party appraiser, a fee not in excess of the amount charged by the third-party appraiser.
- For appraisals performed by an in-house appraiser, a fee that approximates the usual, customary and reasonable fee for comparable appraisals performed by third-party appraisers based on an annual Department survey of such fees (the “Comparable Third Party Appraisal Fee”).
- For appraisals obtained from an appraisal management company (an “AMC”), a fee not in excess of the amount charged by the AMC, and that approximates the Comparable Third Party Appraisal Fee.10
The new definition is simply “a fee charged to a borrower by a lender or broker to recover the direct cost of the fee charged by a duly credentialed real estate appraiser for an appraisal.”
On its face, this new definition suggests that a lender that obtains an appraisal from an AMC may charge the consumer no more than the amount the AMC paid to the third-party appraiser who conducted the appraisal. However, in response to a commenter’s concern in this regard, and while declining to make any change in the Final Rule to alleviate this concern, the Department stated in the preamble to the Final Rule:
The Department has issued a letter dated September 23, 2016, pursuant to N.J.A.C. 3:1-16.2(a)7xv authorizing an AMC fee pass through [“AMC Letter”]. Others in the industry may rely on [the AMC Letter], and it will be made available by the Department upon request. Therefore, the Department sees no delay to lenders seeking AMC fee approval. The Department also anticipates posting [the AMC Letter] online in the near future.11
The Department was probably referencing the AMC Letter when it indicated, in the rule proposal that led to the Final Rule, that “its concerns about [AMC] charges have subsided” and it has in fact “approved the pass-through to a borrower of a reasonable AMC fee as a separate third-party fee deemed permissible pursuant to the process afforded under N.J.A.C. 3:1-16.2(a)7xv.”12 Unfortunately, the AMC Letter does not appear to have been posted yet on the Department’s website.
The Final Rule also clarifies that (1) an appraisal fee can be charged by either a lender or a mortgage broker (but not both in the same transaction), and (2) additional appraisal fees may be charged under certain conditions, for example, where changed circumstances are shown to materially affect the property’s value, or the initial appraisal report becomes stale through no material fault of the lender.
The good news here is that consumers do not have a private right of action to sue mortgage lenders for violations of the Processing Regulation.13 Nevertheless, it is conceivable that a court could construe written disclosures required by the Processing Regulation as establishing enforceable contract rights.
As indicated, the new form is inconsistent with the Processing Regulation in several regards. The decision facing lenders is whether to use the form as is and as directed, or to modify the form to make it consistent with policies and procedures they already have in place to comply with the Processing Regulation. Either choice creates a compliance risk, and the Processing Regulation does not appear to give lenders any safe harbor in this regard. As an alternative, lenders may wish to ask the Department to postpone or stay its directive in this regard and revisit the form. We would be happy to assist any lender that wishes to pursue this alternative.
The amendment concerning appraisal fees also creates a compliance risk, specifically for lenders and brokers that obtain appraisals through AMCs. The risk is that any “appraisal fee” they collect from the borrower in excess of the “direct cost” of the fee charged by the appraiser who performs the appraisal, or any AMC add-on fee, could be deemed to be impermissible. In light of the Department’s comment in the rule proposal concerning the permissibility of AMC add-on fees, it seems unlikely that the Department would challenge such fees. Nevertheless, if the AMC Letter states only that an AMC add-on fee is permissible (as a separate fee, in addition to an appraisal fee), the Department could challenge “appraisal fees” that include AMC add-on costs. Moreover, a court could conclude that charging an appraisal fee that includes an AMC add-on cost, or charging both an appraisal fee and an AMC add-on fee, is not authorized by the terms of the contractual agreement between the lender and the borrower. The Department can eliminate these risks by clarifying in the Processing Regulation that AMC add-on fees and/or appraisal fees that include AMC add-on fees are permissible. Again, we would be happy to assist any lenders wishing to petition the Department to take such action.
- N.J.A.C. 3:1-16.1 et seq.
- N.J.A.C. 3:1-16.1 (definitions of “lender” and “broker”). Its applicability to federally chartered depositories, however, is likely preempted.
- The disclosure must include a description and the amount of any upfront fees and whether or not and under what circumstances they are refundable, the specific circumstances set forth in N.J.A.C. 3:1-16.3(e) under which lenders are required to make fee refunds (or a citation to that provision), the estimated time it will take the lender to process the application, applicable lender contact information, and information concerning a correspondent mortgage banker’s authority to hold and service loans. N.J.A.C. 3:1-16.3(a).
- N.J.A.C. 3:1-16.3(a).
- Regulation Z only permits creditors to collect a credit report fee before giving a Loan Estimate. See 12 CFR 1026.19(e)(2)(i).
- See N.J.A.C. 3:1-16.2(a).
- See N.J.A.C. 3:1-16.3(6).
- N.J.A.C. 3:1-16.3(a)(1) (emphasis added).
- See 49 N.J.R. 3817(a) (December 18, 2017).
- N.J.A.C. 3:1-16.2(a)(3), prior to its amendment by the Final Rule.
- 49 N.J.R. 3817(a).
- See 49 N.J.R. 1273(a) (June 5, 2017).
- See N.J.A.C. 3:1-16.9.
Client Alert 2018-002