Trenton, N.J. – If the saying `you can't make all of the people happy all of the time' is true, then credit unions in New Jersey shouldn't be surprised at the reaction Gov. James McGreevey's signing of the state's predatory lending bill has evoked from concerned parties. While supporters of the bill consider it to be the strongest in the U.S., some sub-prime lenders argue that the legislation is too strong, will make high-rate loan products unavailable for those who lack good credit, and perhaps force certain lenders to leave the state. Though sub-prime lending is not synonymous with predatory lending, the New Jersey Institute for Social Justice says that the increase in predatory lending in the state is a result of sub-prime activity, which has increased ten-fold between 1993 and 2000 and now accounts for almost 42% of all home improvement loans and 27% of all refinancings in the state. The estimated cost of predatory lending to state borrowers is $291 million. "When undertaken responsibly, sub-prime lending offers needed capital to credit-impaired borrowers," said the NJISJ. "However, the sub-prime market is regulated inadequately and permeated by practices that can lead to widespread abuses." The lending community, other than credit unions, thinks this is bad legislation. Robert Jaworski, a partner in the Newark-based law firm of Reed Smith, LLP, said in a recent issue of The New Jersey Record that the law has harsh penalties that will persuade many lenders making high-cost, high-risk loans to steer clear of lending or investing in high-cost mortgages. He said that similar legislation passed in Georgia caused dozens of lenders to leave the state this year, with lawmakers now revising the law. The New Jersey Mortgage Bankers Association (NJMBA) was initially against the bill. In a May 28, 2002 memo, it stated, "There have been isolated instances of predatory lending in New Jersey, but they have never risen to the level of a widespread problem or practice in the state." This month, NJMBA Executive Director Bob Levy was cautious of the approval, saying it was a compromise among several different points of view. Standard & Poor's, the debt rating agency, gave the legislation a bad review a day after the bill was signed. It said it would result in making high-interest rate loans in the state harder to find because buyers of some high-rate loans (Wall Street firms and investors) would be vulnerable to lawsuits. Credit Union Affiliates of New Jersey has been supporting the anti-predatory lending bill in the state. "We have been committed to putting an end to the heinous practice of predatory lending and have been working diligently to see that anti-predatory lending legislation becomes law," said John Passuth, director of government affairs for the league. Ira Oskowsky, president of the Credit Union Mortgage Alliance network (CUMANet), a CUSO owned by three state credit unions, including Affinity FCU, Central Bergen FCU and HLR FCU, says the credit union movement in the state has been following the legislation for a long time. "Credit unions have always believed that lending should be something that does not put lenders into a negative position where they are doing more harm than good. The contents of this bill clearly will make sure that other lenders hold themselves to the same high standards," he says. Prior to being president of CUMANet and vice president of Affinity, Oskowsky was acting executive director of the New Jersey Housing & Mortgage Finance Agency. He said that predatory lending legislation in New Jersey goes back three years, but when Gov. McGreevey took office in 2002, he began supporting legislation at the get-go. Oskowsky, who also sits on the Fannie Mae advisory board in the state, says that there still will be a sub-prime market in the state, but it won't make loans to potential borrowers who can't afford the high-rate terms that will place them in jeopardy. "Everyone wants the American dream of home ownership," he says, "but you shouldn't put people in a tight position." He says that credit unions traditionally do not make sub-prime "B" market loans at high interest rates. Instead, "we do mortgages that don't fit traditional financing capabilities and give them a "A" rating. On the steps of the Trenton Statehouse, accompanied by consumer advocates and members of the AARP, McGreevey said, "I am proud to sign strong and effective pro-consumer legislation that will – once and for all – stamp out predatory lending in New Jersey. This bill is a major step forward to ensure that all New Jerseyans are protected from those who would rob them of what they have worked so hard to earn." The law prohibits financing of credit insurance, penalty interest rates, balloon payments and unfair arbitration standards. It ensures that victims of predatory lending are able to bring claims to defend themselves. It also provides the Attorney General's Division of Consumer Affairs and the Department of Banking and Insurance with sound enforcement provisions to ensure that companies comply with the law. Most of the prohibitions and restrictions in the law apply to high-cost loans. A high cost mortgage is considered one with an interest rate that is 8% over the 10-year U.S. Treasury note. At press-time, this can be an interest rate of 12 percent or higher compared with a current rate of 5 percent. The law also makes buyers of loans on the secondary market open to the same penalties as lenders, if borrowers sue to get their money back. "This would surely discourage assignees from buying high-cost loans in New Jersey," said McGreevey. According to Holly C. Bake, commissioner of the state's Department of Banking and Insurance, however, "The legislation gives us the tools to eliminate loan practices that hurt consumers while allowing us to promote the growth of lenders who provide loans that consumers truly need." McGreevey said the legislation balances protection from predatory lending against preserving the availability of credit or millions of New Jersey residents. "Responsible lenders provide much-needed access to credit and allow residents to achieve their dreams. This legislation ensures that responsible lenders will be able to continue to make legitimate loans," he said. The law, which goes into effect on November 27 of this year, lists the following restrictions: * prohibits mortgage lenders from: wrapping certain credit insurance premiums into the mortgage loan; encouraging a would-be borrower to default on an existing mortgage; charging late fees greater than 5% of the payment due * prohibits "flipping," or refinancing loans at terms that provide no financial benefit for the borrower, with loans whose fees and "points," or upfront interest charges, are above a certain threshold. * for "high-cost" loans with points and fees or interest rates above a certain threshold, lenders are prohibited from: structuring a loan at a "negative amortization" rate, where the loan payments are so low that the principal increases instead of decreases over time; increasing the interest rate after a borrower defaults; wrapping more than two loan payments into the loan proceeds; wrapping points or fees into the loan amount – unless the borrower receives credit counseling; making direct payments of loan proceeds from a lender to a home improvement contractor. -

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