N.J. Court Says Lenders May Pass Along Some Legal Fees

Mortgage lenders in New Jersey may charge borrowers "reasonable and modest" legal fees for reviewing loan documents, under a ruling by the Supreme Court of New Jersey.

New Jersey's highest court also ruled that thrifts in New Jersey are effectively immune from state laws that would affect their lending operations and therefore remain under federal regulations handed down by the Office of Thrift Supervision.

Leonard A. Bernstein, a partner with Reed, Smith Shaw & McClay in Princeton, N.J., who represented Chase Manhattan Mortgage Corp., said the Dec. 9 ruling was a victory for mortgage lenders.

The case is "an example of the attacks on fees that plaintiffs' lawyers are making throughout the lending industry and throughout the country," he said. "The lesson here is to try to work with the legislature in this state or any other state to ensure precise drafting of laws regarding fees so that ambiguities don't result in litigation."

The ruling also is a victory for federally chartered thrifts because it gives them "ample authority by virtue of the federal law - both the statute and the regulation - to proceed and impose attorneys fees, irrespective of what New Jersey says," Mr. Bernstein said.

Thrifts may be able to use the case as a legal precedent, he said, because it protects them from suits by plaintiffs "alleging some violation of a state law concerning fees." He said "a court will recognize that a federal savings institution is governed by one entity: the Office of Thrift Supervision." The Office of Thrift Supervision could not be reached for comment Tuesday.

The court ruled that "a federal savings and loan association's ability to extend loans may be seriously compromised" if it is unable to set fees for the legal services.

At issue was the interpretation of a New Jersey law passed in 1993. According to a summary provided in the Supreme Court's opinion, the New Jersey Mortgage Financing on Sales of Real Estate law guarantees borrowers a right to independent legal representation for their mortgage transactions and prohibits lenders from passing on legal fees to borrowers, except when lenders request reimbursement for legal expenses resulting from the review of loan documents.

The plaintiffs, residential mortgage borrowers, filed lawsuits against First Union National Bank, Chase Manhattan Mortgage, and Collective Bank, which is now part of Summit Bancorp. "As a condition to obtaining the loans, the lenders required petitioners to reimburse them for their attorneys' fees incurred to review title and other loan documents submitted by petitioners," according to the court opinion. The fees ranged from $100 to $170.

The cases, first argued as three separate Superior Court actions, were consolidated by the Appellate Division before further appeal brought it before the Supreme Court of New Jersey. The Supreme Court modified and affirmed the ruling of the Appellate Division.

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