Department gratified with Standard and Poor's
positive outlook on consumer home loan protection law

TRENTON - The Department of Banking and Insurance is pleased to announce that Standard and Poor's joins Moody's and Fitch rating services in giving a positive review of the New Jersey Home Ownership Security Act.

"Standard and Poor's positive outlook as well as Moody's, Fitch and Fannie Mae is clear evidence that this administration has a balanced approach to protecting consumers from home lending scams while ensuring capital for the lending industry," Banking and Insurance Commissioner Holly C. Bakke said. "New Jersey consumers will receive significant new protections when the law goes into effect Thursday."

In its announcement, Standard and Poor's said it now admits home loans, "covered" home loans, "home improvement" loans and "manufactured housing" loans as defined by the new law into its rated structured transactions.

"The Standard and Poor's announcement confirms that the secondary market can manage New Jersey loans subject to the new predatory lending law," Banking Director H. Robert Tillman said. "It bolsters our view that this law not only offers unparalleled protections from unscrupulous lenders, but it also ensures that a variety of loan options remain available."

In order to rate the loans, Standard and Poor's will rely on the representation and warranty that the loans included in the pool were originated in compliance with all applicable laws, including New Jersey's predatory lending law. Standard and Poor's also will require issuers to demonstrate that their compliance procedures are effective to identify which loans are home loans, covered home loans, home improvement loans and manufactured housing loans under the Act, and that they do not violate the Act.

Standard and Poor's will continue to exclude high-cost home loans because of the risks involved. Standard and Poor's will require that sellers of loans into the securitization structure must provide representation that loans in the rated pools are not high cost.

The predatory lending law prohibits only a few practices for all "home loans" and all "covered loans," such as financing credit insurance, encouraging default, charging late payment fees in excess of 5 percent, accelerating debt at the creditor's sole discretion, and charging for payoff information.

For "high-cost" loans, the law prohibits a long list of additional practices, including most balloon payments, negative amortization, increasing rates after default, inconvenient arbitration standards, charging modification fees, and financing points/fees in excess of 2 percent.

In an effort to help lenders comply with the law, and to monitor the potential impact on the residential lending market, the Department met with industry leaders to discuss critical elements of the law, and held six workshops for licensed lenders. It also issued two bulletins to assist lenders with their efforts to comply with the new law. The bulletins are available on the Department Web site.

If the law is properly followed, the Department is confident that most lending will not be adversely affected for a number of reasons:

• New Jersey is one of the hottest real estate markets in the country;
• evidence from North Carolina, which has a similar law, shows that it is having its intended effect, substantially reducing loans with predatory terms while increasing loans to borrowers with impaired credit by 31 percent;
• the portion of loans on which the Act will have the greatest impact is approximately 5 percent, based on 2002 data;
• lenders are becoming more knowledgeable of the Act and understand how to navigate the rules by being more competitive, and
• lenders that choose to stop making certain types of loans will leave great business opportunity to lenders who have already indicated plans to expand in New Jersey.