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.