Thursday, October 23, 2014

NJ's Consumer Fraud Act: Non-Objective Law in Action

In the fictional person of Atlas Shrugged’s Judge Narragansett, Ayn Rand labeled non-objective law “humanity’s darkest evil.” Elsewhere, she wrote:

When men are caught in the trap of non-objective law, when their work, future and livelihood are at the mercy of a bureaucrat’s whim, when they have no way of knowing what unknown “influence” will crack down on them for which unspecified offense, fear becomes their basic motive, if they remain in the industry at all—and compromise, conformity, staleness, dullness, the dismal grayness of the middle-of-the-road are all that can be expected of them. Independent thinking does not submit to bureaucratic edicts, originality does not follow “public policies,” integrity does not petition for a license, heroism is not fostered by fear, creative genius is not summoned forth at the point of a gun.

Non-objective law is the most effective weapon of human enslavement: its victims become its enforcers and enslave themselves.

Keep this in mind when you read the following.

The fallout from the Great Recession continues, and the scapegoating of the mortgage lending industry continues apace. In Court brightens homeowners’ hope, lawyer Adam Deutsch hailed a recent court ruling against a mortgage lender:

New Jersey’s Legislature has always been at the forefront in drafting laws to protect the consumers of this state from foreseeable and unanticipated harms put in place by commercial enterprises in the state. The apex of consumer protection regulation is the New Jersey Consumer Fraud Act.

Note the term “unanticipated harms.” Deutsch continues:

Broadly speaking and with few exceptions, the CFA prohibits any company from engaging in an unconscionable commercial practice.

The housing crises in New Jersey is far from resolved, and now is the time for a sea change brought on by the recent judicial decision in Freedom Mortgage Corporation v. Major.

The quintessential finding of this recent decision is that it is an unconscionable business practice to sell a home­owner a refinance loan when there is little to no net benefit to the consumer.

Deutsch goes on to cite two alleged “unconscionable commercial practices”:

Arguably any loan that contained a negative amortization provision where the home­owner was instructed to make payments that did not even cover the full interest payment is unconscionable.

Likewise, any home­owner who was the target of a loan-flipping scheme, where they were induced to refinance two or more times within one or two calendar years is also unconscionable.

Consider the market conditions pre-crash. Housing prices were rising rapidly, inflated by government policies—a process that had been going on in varying degrees for so long that people believed housing prices would always keep rising. And for those who understood the process and the risks, how were they to know whether the music would stop in a year or ten or 25 years? Financial bubbles are inherently unpredictable. Under these conditions, many negative amortization loans may have seemed to make sense to both borrower and lender. If your home value is rising faster than your mortgage balance, your net worth is rising. If your pay rises over time, you could pay down the balance or refinance out of your negative amortization loan. If not, you could always sell, cashing in on the home appreciation even as you pay off your inflated loan balance.

Hindsight is 20/20. What seemed like a good deal pre-crash became, in retrospect, a bad deal—an “unconscionable commercial practice.” Is it fair to demonize lenders for failing to see the crash coming? Most of the distressed homeowners could have sold at a profit if home values kept rising, as had typically been the case for decades. If that were the case, would lenders have been entitled to the profits? After all, they put the homeowners into the loans that enabled the homeowner to profit. No? Then why are they responsible for the “unanticipated” losses resulting from the home price crash? Are homeowners not responsible for loans they voluntarily took out?

I left these comments:

Non-Objective law is law that is so vague that no one can be sure what, exactly, is unlawful until after one acts; law that, essentially, is up to the momentary whims of lawyers, judges, and juries. It amounts to ex-post-facto law. It is an essential facet of tyranny.

The banning of “unconscionable commercial practice” is just such non-objective law. It is so undefinable that virtually any business practice can be declared illegal after the fact, including actions believed to be legal and ethical at the time of implementation, and the two examples presented here prove it.

How is a lender who helped a borrower that wanted to take advantage of tumbling interest rates “refinance two or more times within one or two calendar years” to know that he would be subsequently accused of “inducing” that borrower into a “loan-flipping scheme.” That, in fact, was my wife and I. If we now have an underwater mortgage, and are in “distress,” is that the lender’s fault? How is a lender to determine whether or not the home loan sought by the consumer is of “little to no net benefit” to every individual consumer that voluntarily walks through its doors—especially considering the utter unpredictability of government housing, monetary, and regulatory policies? How is a lender to determine what some future judge or jury will declare to be an  “unconscionable commercial practice”? It would require omniscience on the part of the lender.

This is not to say that businesses shouldn’t consider the best interests of their customers. Good businessmen know that harming their customers is not the path to long-term profitability. Nor is it to say that fighting fraud is not a proper focus of the law. It is. But the fraud must be precisely and objectively defined, such as deliberately misrepresenting or hiding relevant loan terms. Businessmen should know precisely what is illegal before acting.

The NJ Consumer Fraud Act is, at least as described here, non-objective law dressed up in anti-fraud packaging. Any borrower that gets into trouble is another opportunity for some shyster lawyer to manufacture a new “unconscionable commercial practice” with which to prey on innocent lenders, most of whom were as much victims of the housing boom and bust brought on by government policies as consumers. The CFA is a law that inverts the fundamental American principle of “government of laws and not of men”; is another bailout for irresponsible or unlucky borrowers at the expense of lenders; and creates lush hunting grounds for predatory law firms.

The definition of non-objective law given above is not a complete definition. Ambiguous language and ex post facto (retroactive) law are the parts most directly relevant to the article. For the record, I quote Tara Smith’s more comprehensive definition:

Essentially, non-objective law is law that does not serve the legitimate purpose of government. It exercises coercive power to accomplish ends other than the protection of citizens’ rights. Whether intentionally or unwittingly, non-objective law transgresses the boundaries that the [proper] function of government imposes on the government’s activities. (p. 343)

“That which cannot be formulated into an objective law,” Ayn Rand observed, “cannot be made the subject of legislation—not in a free country, not if we are to have ‘a government of laws and not of men.’ An undefinable law is not a law, but merely a license for some men to rule others.”

Related Reading:

“Humanity’s Darkest Evil”: The Lethal Destructiveness of Non-Objective Law—Tara Smith, chapter 18, Essays on Ayn Rand’s Atlas Shrugged

What is Objective Law?, by Harry Binswanger

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