This appeal involves an attack on a regulation of the Commissioner of Banking, N.J.A.C. 3:18-8.1.
The Secondary Mortgage Loan Act, N.J.S.A. 17:11A-34 et seq. (the act), directed at potential abuses of borrowers by second mortgage lenders, subjects the lenders to licensing and other rigid supervision by the State Commissioner of Banking (Commissioner). Oxford Consumer Dis. Co. of No. Phila. v. Stefanelli, 102 N.J. Super. 549 (App. Div. 1968), suppl. on other grounds 104 N.J. Super 512 (App. Div. 1969), aff'd as mod. on other grounds 55 N.J. 489 (1970), app. dism. 400 U.S. 808, 91 S. Ct. 45, 27 L. Ed. 2d 38 (1970); Crescent Invest. Co. v. Comm'r of Bank. & Ins. of N.J., 103 N.J. Super. 11 (Ch. Div. 1968).*fn1 The Commissioner has the authority to make "rules and regulations to effectuate the purposes of this act and to establish and maintain ethical, fair, equitable and honest business standards for persons who are subject to any provision of [the] * * * act." N.J.S.A. 17:11A-54(a). The regulation here challenged was adopted pursuant to this statutory provision.
It is undisputed that savings and loan associations and other banking institutions may not make directly the kind of second mortgage loans with the rate of return permitted by the act. Both federal and state chartered savings and loan associations may only engage in this kind of secondary mortgage loan business through separate service corporations. 12 U.S.C.A. § 1464 (c); 12 C.F.R. § 545.9-1; N.J.S.A. 17:12B-165(7) (b), 17:12B-152, 17:12B-153; N.J.A.C. 3:27-4.6, 3:27-4.2.
Second mortgage loans by licensees under the statute may carry a 15% per annum interest rate and by regulation of the Commissioner may have a maximum rate of 18%. N.J.S.A. 17:11A-44(a). Generally, savings and loan associations and other banking institutions, by regulation of the Commissioner, may make real estate mortgage loans with an interest rate not exceeding 9 1/2% per year. N.J.S.A. 31:1-1.
The use of a service corporation by a savings and loan association (association) is thus of benefit to it. The rate of return on loans that may be secured by second mortgages is higher than that otherwise permitted and the ultimate profits to the association that owns the corporation is correspondingly increased. On the other hand, this profit motive may contain the seed of the very kind of potential danger to borrowers that the act was designed to forestall.
Plaintiff City Consumer Services, Inc. (Consumer) was formed as a wholly-owned subsidiary service corporation of City Federal Savings and Loan Association (City Federal) pursuant to 12 U.S.C.A. § 1464(c). In January and February 1974 Consumer applied for and obtained secondary mortgage loan licenses under the act to be used at City Federal's principal place of business in Elizabeth and at City Federal's 37 branch offices. Consumer claims to have expended $4,100 in acquiring these licenses and $45,000 in initial outlay in order to engage in the secondary mortgage loan business.
Subsequent to the acquisition of the licenses, the Commissioner, after due notice and an opportunity for submission of views, adopted the regulation here involved, N.J.A.C. 3:18-8.1, on June 6, 1974. It appears that Consumer and one private citizen filed statements opposing the regulation when it was proposed. The New Jersey Mortgage Council supported the proposal.
No hearings were held prior to or subsequent to the notice of the proposed regulation;*fn2 nor have there been reports by the Commissioner setting forth the reasons for the proposed or final regulation. These reasons, however, are embodied in the Commissioner's brief and argument on this appeal.
(a) A licensee is prohibited from engaging in the secondary mortgage loan business at a location which is utilized by a banking institution or savings and loan association as a main, branch or any other office; except that, no licensee shall be prohibited from engaging in the secondary mortgage loan business at a location utilized by a banking institution, or savings and loan association, where the office and operations of the licensee are separate, apart and distinct from the offices and operations of the banking institution or the savings and loan ...