New Jersey Act Sets Forth Financial Institution Obligations on Mortgage Payments

New Jersey recently enacted an act that requires financial institutions to allow borrowers in good standing to make biweekly and semi-monthly mortgage payments and, regardless of standing, to pay additional amounts to the mortgage loan principal without any penalty.  Under the act, a financial institution is defined as a State charted bank, savings bank, savings and loan association, or credit union, licensed lender, or mortgage servicer subject to the laws of New Jersey.  The new law supplements the New Jersey Residential Mortgage Lending Act and becomes effective on November 1, 2025, (which is the first day on the sixth month after enactment) for mortgage agreements entered into on or after that date.

For biweekly payments, with respect to borrowers in good standing on the mortgage, financial institutions must apply to the mortgage loan principal any amount paid by the borrower in excess of the annual total of the contractual mortgage payments.  Under the act, contractual mortgage payment is defined as the total of the monthly mortgage loan payment, which includes the principal debt, interest, and any additional amounts being collected and held in escrow for charges such as property tax and homeowners insurance.  In the context of biweekly payments, financial institutions are not required to apply any additional payment to the mortgage loan principal until a borrower has made payments totaling all amounts due annually under the contractual mortgage payment. 

In addition, financial institutions are required by the new law to allow borrowers in good standing to make semi-monthly payments for half of the total monthly contractual mortgage payment due.  However, the act does not require these payments to be applied to the mortgage loan principal only that the borrower is entitled to conveniently break up their payments.  Regardless of the standing on the mortgage, borrowers are also entitled by the new law to pay any additional amounts to the mortgage loan principal without the financial institution imposing a penalty.

However, the new law specifies that the above requirements on financial institutions are subject to the findings of escrow analyses.  If an escrow analysis projects a shortage or otherwise results in an increase to the escrow amount payments, defined under the act as the amount of any additional funds that are collected by a financial institution pursuant to a mortgage loan and set aside in an escrow account to cover future expenses, including property taxes and homeowners insurance, then the financial institution must notify the borrower of the new contractual mortgage payment and the financial institution must adjust the amount of the borrower’s recurring monthly payment amount. Thereafter, the financial institution is entitled to apply any additional amounts paid by the borrower first to unsatisfied escrow payments and if any amounts remain, then to the mortgage loan principal without any penalty.

Under the act, borrowers are entitled to submit payment(s) to financial institutions to reduce or eliminate an escrow shortage.  However, a borrower must notify the financial institution of their intent to make an additional escrow payment so that the financial institution can treat the additional escrow payment separately and independently from any payments to be applied to the mortgage loan principal.