May a lawyer take part in a mortgage loan where the borrower pays 'points' to the lender, when those points may push the effective interest above the legal limit?

Plain-English summary

An attorney asked whether it is ethical to participate in a mortgage loan involving the payment of "points" by the mortgagor to obtain the loan, where "points" can mean a premium measured in percentage points of the principal paid to the lender, to a broker, or to both, and where charges ranging from two to fifteen percent were said to be common. The Committee said the answer turns on whether the particular transaction involves usury, that is, taking a greater sum for the use of money than the maximum interest the law allows, which in New Jersey was fixed at six percent except as otherwise provided (N.J.S.A. 31:1-1).

The Committee held that if the loan is in fact usurious and the attorney knows or has reason to know it, he must refrain from participating. It cautioned that courts will scrutinize all fees and charges to see whether they reflect services rendered or are spurious charges to exact excess interest, will look to substance over form, and that the attorney cannot escape responsibility for determining the loan's true nature merely because of the form it takes (citing In re Greenberg, 21 N.J. 213 (1956)). It distinguished the recipients of points: brokerage fees or commissions paid by the borrower to a broker acting as the borrower's agent, or to an independent broker, for obtaining the loan are payments for a service and are not interest, so they do not render the loan usurious; but commissions paid to the lender or the lender's agent, if not based on bona fide service to the borrower, will ordinarily infect the transaction with usury where interest and commissions together exceed the legal limit.

Applying that test, the Committee said the controlling question is whether the extra charge (however labeled, "points," commitment or origination fees, discounts, premiums, and the like) is a proper charge for a real service and benefit to the borrower, or a cloak to yield the lender excess interest. If the attorney knows or reasonably should know the points bear no reasonable relation to a service and represent a device to obtain usurious interest, he may not participate, and doing so invites disciplinary proceedings. The Committee noted that the usury prohibition is made inapplicable by statute (R.S. 17:2-7) to FHA-insurance-eligible loans, so points even to a lender on such loans appear valid within federal maximums. It expressly declined to opine on the separate question of points charged where the yield over the mortgage's life does not exceed an average of six percent, since New Jersey courts had not yet decided it.

Currency note

This opinion was issued in March 1965, before New Jersey's September 13, 1971 adoption of the Disciplinary Rules (Code of Professional Responsibility), and well before the 1984 Rules of Professional Conduct and all later revisions. It construed the State's usury statutes and the lawyer's responsibility not to assist a usurious transaction. The scope of a lawyer's permissible assistance to a client is now treated under RPC 1.2. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific statute, rate, or requirement mentioned here.

Common questions

Q: Can a lawyer handle a mortgage loan that charges the borrower points?

A: It depends. The Committee held that if the lawyer knows or reasonably should know the points bear no reasonable relation to a service and are a device for usurious interest, he may not participate; otherwise the points may be legitimate.

Q: Do points paid to a broker make the loan usurious?

A: No. The Committee said brokerage fees or commissions the borrower pays to his own or an independent broker for obtaining the loan are payments for a service, not interest, and do not render the loan usurious.

Q: What about points on an FHA-insured loan?

A: The Committee noted that by statute (R.S. 17:2-7) the usury prohibition does not apply to FHA-insurance-eligible loans, so points even to a lender on such loans appear valid so long as the charge does not exceed federal maximums.

Q: Did the Committee resolve points where the average yield stays at six percent?

A: No. It expressly declined to opine on points charged where the yield over the life of the mortgage does not exceed an average of six percent, because New Jersey courts had not yet decided the question.

Background and rules framework

The opinion construed New Jersey's usury statutes (N.J.S.A. 31:1-1; the FHA exemption in R.S. 17:2-7) and case law (In re Greenberg) under the principle that a lawyer must not knowingly assist a usurious transaction, distinguishing genuine service charges from disguised excess interest. In current New Jersey terms, a lawyer's permissible assistance to a client is governed by RPC 1.2.

Citations and references

Statutes:

• N.J.S.A. 31:1-1 (maximum interest rate of six percent except as otherwise provided)
• R.S. 17:2-7 (usury prohibition inapplicable to FHA-insurance-eligible loans)

Cases:

• In re Greenberg, 21 N.J. 213 (N.J. 1956), disciplinary proceeding; courts look to the substance of a loan, not its form

See also

• NJ ACPE Op. 83: Handling the Foreclosure of a Usurious Mortgage
• NJ ACPE Op. 289: An Attorney's Participation in a Usurious Loan
• NJ ACPE Op. 133: Mortgage Points, Usury, and a Savings and Loan
• NJ ACPE Op. 176: Usury and the Purchase of an Inactive Corporation to Obtain a Mortgage

Source

• Landing page: https://law.justia.com/cases/new-jersey/advisory-committee-on-professional-ethics/2004/acp71-1.html

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

88 N.J.L.J. 170
March 18, 1965

OPINION 71

Mortgage Charges Usury

An attorney has inquired whether it is ethical to participate in a mortgage loan transaction involving the payment of "points" by the mortgagor in order to obtain the loan. The term "points" refers to a premium or bonus charged for obtaining the loan measured in percentage points of the principal. In some real estate transactions the term is used to refer to a bonus paid to the lender or his agent. In others, a bonus paid to a broker. In not a few, to both. The attorney asserts that it is common practice to make such charges ranging from two percent to as high as fifteen percent of the total amount of the loan and, in some cases, lenders make so-called "service charges" in such substantial amounts as to be clearly usurious or involve unconscionable charges.

The answer to this inquiry turns on whether the particular loan transaction involves usury, that is, the taking upon contract, directly or indirectly, of a greater sum for the use of money than the maximum interest rate allowed by law. In New Jersey the maximum interest rate is fixed at six percent except as otherwise provided by law (N.J.S.A. 31:1-1). If, in fact, the loan is usurious and the attorney knows or has reason to know it, he must refrain from participating in the transaction. He should be aware that if the propriety of the transaction is questioned, our courts will carefully scrutinize all fees and charges incidental to a loan to ascertain whether such additional amounts are based on services rendered or whether they are simply spurious charges to exact more interest than the law allows. He should also know that the courts will look to the substance of the transaction and not to the form. Consequently, he cannot escape the responsibility of determining whether the particular transaction involves the payment of interest in excess of the permitted maximum merely because of the form the loan transaction takes. See In re Greenberg, 21 N.J. 213 (1956) (disciplinary proceeding involving formation of a corporation for the sole purpose of receiving loan which, if made to an individual, would be usurious).

Because the term "points" is frequently used in more than one context, it is first necessary to determine who receives such points or bonus and for what, if any, consideration.

Brokerage fees or commissions paid by the borrower to a broker who is acting as agent for the borrower, or to an independent broker for his services in obtaining a loan, although sometimes described as "points," will not render the transaction usurious. Such payments are clearly made by the borrower in return for a service rendered, bargained for by the borrower, and do not represent a payment to the lender. Consequently, they cannot be considered interest and, therefore, the loan is not violative of the usury statute.

But commissions or payments, however described, paid to the lender himself or to an agent of the lender, if not based on bona fide service rendered to the borrower, will ordinarily infect the transaction with usury where the interest and commissions in the aggregate exceed the legal limit.

In considering whether the payment of "points" to a lender is proper in a particular case, it is necessary to determine whether the extra payment required is a proper charge by the lender for a service rendered or is a cloak or disguise intended to yield him a return in interest in excess of that allowed by law. The same test applies whether the charge is labeled "points," commitment fees or origination fees, loan expenses, brokers' fees, discounts, premium charges or the like. The general rule is that charges for services performed by or expenses incurred by the lender are not held to be interest either in name or in fact, and will not be deemed usurious. When such charges assessed to the borrower, in addition to the interest charged on the loan, are reasonable in amount and are backed by specific services actually rendered, and the conferment of a real benefit upon the borrower, they are legitimate. When the extra charge bears little or no relation to the services rendered, if not actually fictitious, it is obviously a subterfuge and in fact should be regarded as improper and usurious.

Therefore, if in a mortgage loan transaction the attorney knows, or reasonably should know, that the points charged by the lender to the borrower incidental to the loan bear no reasonable relation to a service rendered by the lender to the borrower, and in fact represent a device to obtain usurious interest, he may not properly participate in the transaction. Such participation falls short of the standard of high professional responsibility required of an attorney. He must recognize that by doing so, he invites disciplinary proceedings.

In this connection, it should be pointed out that by statute the usury prohibition is made specifically inapplicable to loans, discounts, advances of credit or credit obligations representing loans or credit advances eligible for insurance by the Federal Housing Administration (R.S. 17:2-7). The payment of "points" even to a lender in connection with the latter type of loan would, consequently, appear to be valid so long as the charge does not exceed maximums prescribed by federal regulation.

One situation requires special consideration. This involves the propriety of a bonus or charge of "points" by a lender in a mortgage transaction where the yield over the life of the mortgage does not exceed an average of six percent. It has been contended by various lenders that the practice of taking points in such cases is necessary from an economic standpoint and is entirely legal. In 1960 a New Jersey legislative commission made a report of a hearing on alleged abuses of this practice in connection with mortgage transactions, but no legislation has been adopted on the subject. It may well be argued that such a charge comprises usury in any event because in reality the lender who receives points in addition to the interest return receives at the outset a rate in excess of the legal rate for the use of money. However, since there has been, as yet, no judicial consideration of this question by the courts of this State, this Committee feels that it should express no opinion at this time on this phase of the usury problem.