At least one New Jersey lawyer has found a potential chink in the armor of foreclosing lenders. If the borrower paid a discount fee to the mortgage broker at closing without getting a reduction in the interest rate, the mortgage may be invalid and can’t be foreclosed. How is this possible you ask?
It looks like a combination of New Jersey statutes with certain language which - naturally - lenders are now lobbying the legislature to change. In the meantime, though, borrowers have a chance. It doesn’t look like the defense has been around long enough for the New Jersey Supremes to have weighed in on it yet, so go for it while you can.
The defense goes something like this:
New Jersey’s Lender Liability Law states: “A person licensed as a mortgage broker, incidental to the brokering of a first mortgage loan transaction, shall have the right to charge only the following fees: (1) application fee; and (2) discount points.”
“Discount points” are defined as points (or 1 percent of the mortgage) “paid for the express purpose of reducing, and which result in a reduction of, the interest rate” of a mortgage.
So, any payment made by the borrower (either directly or withheld from the proceeds of the loan) to a mortgage broker beyond an application fee and discount points, i.e. a fee that actually results in the reduction of the mortgage interest rate, would be illegal.
The payment by the lender of illegal fees to mortgage brokers out of the borrowers’ funds would, under New Jersey’s Consumer Fraud Law, void the transaction. Without an enforceable mortgage, there is no right to foreclose.
I like to give credit where it is due, so I’ll tell you the lawyer who appears to have taken the lead on this defense, and has asserted it on behalf of several New Jersey homeowners (results pending), is Joshua Denbeaux. Mr. Denbaux has been credited with saying that about 50,000 foreclosures will be filed in New Jersey this year. Of those, more than 30,000 were based on mortgages closed within the last three years, which means they can still be subject to legal challenge. Three-quarters of those, he says, had fees paid by lenders to brokers out of the borrowers’ money. (Source: Blog.nj.net)
Over the next few weeks, we will be looking for statutes in other states similar to the “discount point” provisions of New Jersey’s Lender Liability Law and will share whatever we find. If your clients paid discount points without getting a reduction in interest rate, there is hope!
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