On appeal from the New Jersey Real Estate Commission.
Pressler, Brody and Cohen. The opinion of the court was delivered by Pressler, P.J.A.D. Brody, J.A.D., dissenting.
This appeal raises important questions respecting a real estate broker's involvement in the mortgage financing which a prospective buyer requires in order to purchase residential property from the broker's primary principal, the seller. More particularly, the substantive issue is whether the broker, who will be receiving a commission from the seller for negotiating the sale, is prohibited by N.J.S.A. 45:15-17(i) from also earning a consideration for assisting the buyer in obtaining the necessary financing.
The issue comes to us by way of an appeal by the Mortgage Bankers Association (MBA) of a declaratory ruling by the New Jersey Real Estate Commission which concluded that the cited statutory provision does not bar the broker's double compensation for services rendered in respect of both the sale and the financing. We reverse the ruling. First we conclude that it is contrary to the mandate of N.J.S.A. 45:15-17(i). Even if it were not, we are satisfied that its nature, scope and public import are of a magnitude which would have required the Commission to have acted by an exercise of its rule-making power. We also express considerable concern about the efficacy of the Commission's unilateral action in view of the overlapping jurisdiction of the Commissioner of Banking.
Explanation of the questions raised by this appeal requires reference to the factual, procedural and legislative circumstances culminating in the Commissioner's ruling. MBA is a trade association whose members are mortgage bankers and mortgage brokers licensed pursuant to N.J.S.A. 17:11B-1, et seq. The general business of a mortgage banker is to grant loans secured by a mortgage and then to sell the obligation at a discount. Since the sale is typically to an out-of-state capital
source, the mortgage banker is effectively importing capital into the state. See N.J.S.A. 17:11B-1(c). And see New York Times, March 27, 1985, at D1, D8. The mortgage banker makes his profit by charging the borrower discount points as the consideration for granting the loan. A point is one percent of the loan. He also charges the borrower a variety of additional fees for processing and consummating the loan. See N.J.S.A. 17:11B-13(b). The business of the mortgage broker is to bring together, for a consideration, the primary borrower and a mortgage lender. N.J.S.A. 17:11B-1(d).
Prior to the enactment in 1981 of N.J.S.A. 17:11B-1 et seq. (Mortgage Bankers Act), which places the mortgage, banking and brokerage business under the administrative jurisdiction and regulatory control of the Commissioner of Banking, mortgage bankers and brokers were subject only to the control of the Real Estate Commission pursuant to N.J.S.A. 45:15-1 et seq. See, e.g., George H. Weinrott & Co. v. Burlington Housing Corp., 22 N.J. Super. 91 (Ch.Div.1952). Consequently, mortgage bankers and brokers held only a real estate broker's license, were ordinarily also engaged in the real estate brokerage business either directly or indirectly by way of an affiliate firm, and were unregulated by state law in respect of the amounts and categories of fees and costs which they could charge for granting a mortgage loan.
As interest rates escalated during the last decade, available mortgage funds within the state became scarcer, and the home-buying public found it increasingly difficult to obtain mortgage financing from traditional sources regulated by the Commissioner of Banking, namely, the savings and loan institutions and the savings and commercial banks. Cf. Application of Howard Savings Institution of Newark, 32 N.J. 29 (1960); Suburban S. & L. Assn. v. Comm'r of Banking, 150 N.J. Super. 339 (App.Div.1977). The mortgage banking community responded to the home buyers' need, increasing its share of the home mortgage market and indeed coming to dominate that market even after it was reentered by the depository banks.
These phenomena and the abuses they spawned were well-documented in the joint public hearings conducted by the Senate Labor, Industry and Professions Committee and the Assembly Banking and Insurance Committee on the bills enacted as N.J.S.A. 17:11B-1, et seq. See Public Hearings on S-975 and A-755, A Bill to Provide for the Licensing and Regulation of Mortgage Bankers, Mortgage Brokers and Mortgage Solicitors by the Commissioner of Banking (March 19 and April 3, 1980).
The leitmotif of those hearings was the capacity for abuse and overreaching inherent in the mortgage banking industry's uncontrolled fee structure. While various federal home-financing programs and applicable federal legislation address some of these concerns by limiting specific categories of charges in particular transactions, primarily FHA and VA insured loans, and by requiring disclosure in other transactions, it nevertheless appeared that there were sufficient interstices in the federal regulatory scheme to permit substantial overreaching by mortgage lenders in the absence of state control.
The heart of the bill, and the subject of the most vociferous protest by the mortgage banking industry, which opposed the bill, was section 13b, which accorded the Commissioner the power to establish fee guidelines. As enacted, however, that section imposed even stricter controls on the proposed fee structure by specifying the categories of chargeable fees, prohibiting the charging of any other categories of fees and subjecting to the fee structure loans insured or guaranteed by an agency of the federal government to the extent applicable federal law or regulation does not otherwise require. See N.J.S.A. 17:11B-13(b), (c) and (d).*fn1 Although N.J.S.A. 17:11B-13(b)
authorized the Commissioner of Banking to establish guidelines, by rules and regulations, to determine the reasonableness of permissible fees, the regulations actually promulgated omit any specific monetary guidelines. See N.J.A.C. 3:38-1.1, et seq.
It was also evident to the legislative committees that the vulnerability of the home-buying public to overreaching on the part of the mortgage banker is very much intensified when the borrower relies on the real estate broker, who negotiated the sale in the first instance, to assist him in obtaining his mortgage financing. See, e.g., Public Hearing, supra, March 19, 1980, at p. 6A. It is that perception and its validity which is the crux of the issue here.
By way of general focusing of the problem, it is clear that when a real estate broker functions in his typical role as agent for the seller, he has an obvious self-interest in seeing to it that the prospective buyer can procure mortgage financing. Since the vast majority of home purchases are financed by the mortgage loan obtained by the buyer, the ability of the buyer to obtain that loan is critical not only to the consummation of the sale between buyer and seller but also to the broker's right to payment of his commission by the seller. That, of course, is so because the broker's right to his commission is dependent, if not upon actual consummation of the sale, then at least upon his production of a buyer who is willing, ready and able. See generally Ellsworth Dobbs, Inc. v. Johnson, 50 N.J. 528 (1967). In either case, the buyer's financial ability, ordinarily dependent on the mortgage loan, is the key to the fulfillment of the economic expectations of all three. Thus, if not technically part of the sales transaction itself, the buyer's mortgage transaction is nevertheless an integral, indispensable and contemporaneous functional component of the sales transaction.
To some extent the buyer, seller and broker have a mutuality of interest in the buyer's obtaining of a mortgage loan. The buyer cannot buy without it, the seller cannot sell without it, and the broker cannot realize his commission on the sale without it. But the respective interests of each of these three are not altogether congruent, and to the extent they do not overlap there is a substantial potential for conflict of interest and self-dealing on the part of the broker. That potential is enhanced if the broker is able to profit from the mortgage transaction as well as from the sales transaction. This is true because, irrespective of the broker-seller agency relationship, the buyer ordinarily believes that the broker is acting for him when he assists him in obtaining mortgage financing. As one member of the Assembly Committee expressed it, the buyer is the broker's "captive audience" vis-a-vis his required mortgage financing (Statement of Assemblyman Kosco, March 19, 1980 at 6A).
This "captive audience" characterization proceeded from the assumption, supported by the hearing testimony, that the average home buyer is relatively untutored in the intricacies of the mortgage market, especially the intensely competitive mortgage banking market of recent years. While he may be aware of his opportunity to shop for interest rates, he is ordinarily not aware that the discount points and processing fees charged by the mortgage bankers and which can add significantly to the overall cost of the mortgage loan are also variables to be taken into account in shopping for the loan. In any event, the buyer ordinarily places trust and confidence in the broker and relies on the broker's advice and assistance in the procurement of the mortgage loan because he is led by the broker to believe that the broker is acting on his behalf as a borrower in placing the loan. An insidious variation of this theme is the broker inducing the buyer to believe that in order to complete the sales transaction, he must permit the broker to place his mortgage
loan for him.*fn2 The point, of course, is that the buyer has a reasonable expectation that the broker will assist him in obtaining the financing on terms as advantageous to the buyer as possible, not on terms as advantageous to the broker as possible. The broker, moreover, has an obligation to the seller, whose agent he is in the sales transaction, not to direct the seller into a mortgage arrangement which might require the seller to contribute to the buyer's mortgage loan costs*fn3 or which would unduly delay or complicate the title closing. Clearly, if the broker has a financial interest in steering the buyer to a particular mortgage-banker source, irrespective of the availability of mortgage financing from a different mortgage banker or a depository bank which would better serve the interests of buyer, seller or both, he is sorely tempted and highly motivated to serve his own self-interest to the disadvantage of his principals.
There are two major forms which the broker's pursuit of this self-interest can take. The simplest is the payment to the broker by a lender with whom he is not affiliated of a commission for steering the loan. It is, moreover, likely that the lender will pass on to the borrower his commission costs by way of additional points. More complex is the situation where the real estate broker is affiliated by common ownership with the mortgage banker who grants the loan. In that case the real
estate broker, by steering the loan, places himself in a position to enjoy the profits accruing from the grant of the loan. It is in the context of the real estate broker/mortgage banker affiliation that the controversy before us arises.
In the spring of 1983, a series of letters was addressed to the Real Estate Commission by MBA and intervenor, First Boston Capital Group, Inc. (First Boston). This correspondence arose out of a plan by First Boston, referred to by it as "Shelternet," which was brought to the attention of MBA by an article which appeared in the Wall Street Journal. First Boston wrote to the Commission seeking from it an advisory opinion that the plan did not violate N.J.S.A. 45:15-17(i), and MBA wrote to the Commission seeking an advisory opinion that it did. The essential concept of the plan was for First Boston, as a capital source, to lend money to New Jersey real estate brokers to enable them, upon obtaining the necessary mortgage banking license and establishing an affiliated mortgage-banking business identity, to themselves function as mortgage bankers for the sales transactions they negotiate, then discounting the mortgage loans back to First Boston and assigning to it the mortgage. Apparently, First Boston hoped to garner a substantial share of the mortgage-market by installing sophisticated computer equipment and programs in the offices of each participating real estate broker/mortgage-banker. The Shelternet program and others like it, which were apparently proposed by other capital sources, obviously constituted a serious competitive threat to the established New Jersey mortgage banking community. The basis upon which MBA, which represents that community, sought to counteract these competitive proposals was by reliance on N.J.S.A. 45:15-17(i) which authorizes the Real Estate Commission to take disciplinary action against a real estate broker who is found guilty of
Collecting a commission as a real estate broker in a transaction, when at the same time representing either party in a transaction in a different capacity for a consideration; . . . .
In its correspondence MBA took the position that the purchase money mortgage is part of the sales transaction of which it is in aid and that the real estate broker who places the mortgage for the buyer is representing the buyer for financing purposes even if ostensibly paid by the lender. First Boston's position was that the sales transaction and the mortgage transaction are separate and independent of each other and that in any event the broker does not represent the buyer in the mortgage transaction since he is paid by the lender or enjoys a profit as a lender.
The Commission did not respond to this correspondence for almost a year although it apparently advised its correspondents that it was seeking an opinion of the Attorney General. No opinion, however, was ever forthcoming and in order to obtain a resolution of the controversy, MBA instituted an action in the Chancery Division in February 1984 against the Real Estate Commission and intervenors ERA Mortgage, Inc. and Electronics Realty Associates, affiliated companies in, respectively, the mortgage banking and real estate brokerage businesses (collectively, ERA). The complaint sought an order requiring the Commission to determine the legality of the double compensation practice in the purchase money mortgage/sale situation and to institute proceedings under N.J.S.A. 45:15-17(i) against ERA. It also sought an injunction barring ERA from continuing to earn double compensation by negotiating the sale and lending the mortgage money.
Shortly after the filing of the Chancery action, MBA, ERA and the Attorney General's Office were able generally to agree in principle that the statutory-construction question should be submitted in the first instance to the Real Estate Commission for its determination after a plenary hearing. Before this agreement could be consummated, however, the Commission at its regularly scheduled meeting of March 22, 1984 discussed the pendency of the MBA action. Its minutes reflect the following:
A lengthy discussion among the Commissioners and staff and Deputy Attorney General discuss the entire issue, including the requests for advisory opinions
made by several brokers beginning last Spring. The consensus appeared to be that a policy decision was required. Commissioner Runner moved that the Commission would not consider N.J.S.A. 45:15-17(i) to be violated by a dually licensed broker who receives fees or commissions for rendering services in two or more licensed capacities in the same transaction. Commissioner James seconded. All those in attendance voted affirmatively.
In implementation of the determination made at that meeting, the Commission, by its Director, sent a letter to First Boston's attorney responding to its original inquiry of the year before. The letter advised counsel of the content of the motion made and adopted at its March 22 meeting. ...