On appeal from the Superior Court, Appellate Division, whose opinion is reported at
The opinion of the court was delivered by: Garibaldi, J.
Argued September 27, 1999 -- Decided December 9, 1999
This appeal involves the interpretation of N.J.S.A. 46:10A-6(d) ("Section (d)"), as amended by L. 1993, c. 33. N.J.S.A. 46:10A-6 guarantees borrowers the right to independent legal representation in mortgage transactions. Although Section (d) prohibits lenders from shifting their legal fees to borrowers, it contains an exception allowing lenders to obtain reimbursement for legal fees incurred for the review of loan documents. We must determine the scope of the Section (d) exception. Moreover, because one of the respondent banks is a federally-chartered savings and loan association organized under the laws of the United States, we also must determine whether federal banking regulations preempt Section (d).
This appeal results from the Appellate Division's consolidation of three separate Superior Court actions. The facts in the consolidated matters have been stipulated. Petitioners, residential mortgage borrowers, secured loans from respondents, lenders authorized and licensed under the laws of the State of New Jersey or the United States to engage in the business of making mortgage loans. As a condition to obtaining the loans, the lenders required petitioners to reimburse them for their attorneys' fees incurred to review title and other loan documents submitted by petitioners. Those fees ranged from $100 to $170. In one of the underlying actions, Turner v. First Union Nat'l Bank ("Turner"), the petitioner was unrepresented. In Iversen v. Collective Bank ("Iverson") and Kelly v. Chase Manhattan Mortgage Corp. ("Kelly"), however, petitioners were represented by counsel. The petitioner sued his or her respective lender claiming the lender's fee shifting violated Section (d).
In Turner, the trial court held that the bank could not charge a review fee to an unrepresented borrower. According to the Turner court, Section (d) is "`clear and unambiguous . . . that a lender may only require a fee when the loan documents are prepared or submitted at the direction of the borrower's attorney, but not when they are submitted by the borrower herself [or himself].'" Turner v. First Union Nat'l Bank, 314 N.J. Super. 33, 39 (App. Div. 1998) (quoting decision of the Law Division).
In the Iversen and Kelly matters, tried before the same Judge in the Law Division, the trial court held that the lenders could not charge a review fee unless the borrowers' attorneys prepared or submitted documents, using their legal skills and judgment, that created "extra work" for the lenders' attorneys. Ibid. "Where, however, the borrower's attorney merely undertakes the `ministerial act' of gathering title work and submits it to the lender . . .[,]" the trial court held that the lender could not charge the borrower for any attorney's fees associated with the review of such documents. Ibid. The court further held that federal banking regulations did not preempt Section (d) with respect to Collective Bank, the federally-chartered savings and loan association. Id. at 39-40. Accordingly, petitioners' motions for summary judgment were granted in each case.
The Appellate Division reversed all three decisions with respect to their interpretations of Section (d). The Panel held that Section (d) permits lenders to pass along their attorneys' fees associated with the review of "loan documents" regardless of whether the "loan documents" are submitted by, or at the direction of, the borrower's attorney or the borrower, and regardless of whether "extra work" is involved. Id. at 41, 49. However, the Appellate Division affirmed the holding of the Iverson/Kelly court that Section (d) is not preempted by federal banking regulations. Id. at 53-54. We granted petitioners' motion for leave to appeal, 157 N.J. 538 (1998), and Collective Bank's cross-appeal, 157 N.J. 644 (1999).
N.J.S.A. 46:10A-6 was enacted in 1975 as a consumer protection statute entitled: "An Act with respect to the rights of a borrower to select his own attorney in certain mortgage loan transactions[.]" L. 1975, c. 145. The Legislature's intention was to end the "closed shop" practice, a dominant practice in lending in the 1970's, under which lenders required borrowers to use and pay for the services of the lenders' attorneys. Supplement to Opinion 608, reprinted in, 123 N.J.L.J. 1368, 1369 (June 1, 1989). N.J.S.A. 46:10A-6 barred lenders from requiring borrowers to use an attorney chosen by the lenders, and guaranteed borrowers the right to be represented by attorneys of their own choosing. However, the statute explicitly allowed a lender to obtain reimbursement for attorney review costs when the documents to be reviewed were prepared by borrower's counsel.
In 1978 the Legislature amended N.J.S.A. 46:10A-6. As originally proposed, Assembly Bill A-104 would have prohibited lenders from "requiring borrowers to pay a fee . . . for the bank's attorney to review papers prepared by the borrower's attorney." Turner, supra, 314 N.J. Super. at 44 (quoting Assembly Bill A-104). Assembly Bill A-104, however, was not adopted. Ibid. Instead, the Legislature adopted a bill that primarily extended N.J.S.A. 46:10A-6 to commercial mortgage loans, but did not alter the provision of the statute allowing lenders to charge residential borrowers a review fee for documents prepared by the borrower's attorney. Id. at 45 (citing L. 1978, c. 65, ¶ 2).
The 1978 amendment had little effect on residential loan practices, "[a]ttorneys [continued to] interpret the law to allow the pass-along of fees as long as they were `reasonable.'" Henry Gottlieb, Uproar Over Mortgage Fees Ruling, 124 N.J.L.J. 1, 18 (July 6, 1989). However, in 1987, an attorney representing a lending institution in a mortgage loan transaction asked the Advisory Committee on Professional Ethics ("ACPE") whether the practice whereby a lender's attorney would charge a fee to the lender who, in turn, would bill the borrower, would violate the Rules of Professional Conduct. Opinion 608, reprinted in, 120 N.J.L.J. 1112 (December 10, 1987). Even though the lender planned to disclose to the borrower that the attorney represented the lender, and that the borrower should secure his own attorney as permitted by N.J.S.A. 46:10A-6, the ACPE determined that the proposed fee shifting practice would violate the Rules of Professional Conduct. Ibid. The ACPE reasoned that the practice was a "scheme to avoid the provisions of N.J.S.A. 46:10A-6 . . ." Ibid.
Following a barrage of inquiries regarding Opinion 608, the ACPE issued the Supplement to Opinion 608, supra, 123 N.J.L.J. 1368, in June 1989. Although the Committee adhered to its original Conclusion, it noted:
The comments and questions [received by the Committee] make it abundantly clear that lending institutions and counsel who represent them regard the amended 'Closed Shop Statute' as disruptive of their established lending procedures in commercial transactions. The position of our committee is that any dissatisfaction with the statute will have to be resolved by resort to the Legislature and any questions regarding its interpretation by resort to our Supreme Court.
[Supplement to Opinion 608, supra, 123 N.J.L.J. at 1369 (emphasis added).]
In 1993, in response to Opinion 608, the Legislature enacted the "Attorney Disclosure and Fee Limitation" Act, amending N.J.S.A. 46:10A-6. See L. 1993, c. 33. We then issued a ruling stating that the amended statute superseded Opinion 608 and its supplement. In re Opinion 608 of the ACPE, 133 N.J. 415 (1993). However, no case, until now, has interpreted the meaning of the 1993 Amendment.
The amended version of N.J.S.A. 46:10A-6(d) provides, in relevant part:
d. If a loan is made to a person . . . primarily for personal, family or household purposes and is secured by real property located in this State: (1) on which the principal structure is a one-to-four family residence, . . . the lender shall not require the borrower to reimburse the lender for, or to pay all or any portion of, any fee or expense charged by the lender's attorney except to the extent of a fee for the review of the loan documents prepared or submitted by or at the direction of the borrower's attorney or such other work or services as requested by borrower or borrower's attorney. Any other legal fee or expense of the lender's attorney shall be the sole responsibility of the lender.
For the purposes of the subsection, "loan document" means a promissory note, loan agreement, mortgage, affidavit of title, power of attorney, survey and survey affidavit, title documents and searches and commitments for title insurance and ...