On appeal from the Superior Court of New Jersey, Law Division, Gloucester County, L- 872-01.
Before Judges King, Wefing and Lisa.
The opinion of the court was delivered by: King, P.J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Submitted: February 5, 2003
This case presents a question of federal preemption of state law respecting prepayment fees for residential mortgages. We find no federal preemption, reverse and remand for further proceedings.
In 1999, plaintiff secured a residential mortgage from defendant in the amount of $72,000. This was a so-called "balloon loan," meaning that the debt matures at the end of an interval shorter than the terms of the amortization schedule. At the maturity date, in 2009, plaintiff would still owe $62,021.25. This is considered an alternative mortgage transaction (AMT) under federal law. AMTs are all residential mortgages other than traditional, fixed-term, fixed-rate mortgages.
In 2001, plaintiff sold the mortgaged property. At that time, plaintiff prepaid the remaining loan balance plus a prepayment fee amounting to two percent of the principal balance of the loan ($1,427.97). The prepayment fee was calculated under the terms of a "Prepayment Rider" to the mortgage contract.
Plaintiff then filed suit alleging that prepayment fees, regardless of their amount, violate New Jersey law, relying upon the Prepayment Law, N.J.S.A. 46:10B-1 to -11.1; the Market Rate Consumer Loan Act, N.J.S.A. 17:3B-4 to -27; and the Consumer Fraud Act, N.J.S.A. 56:8-1 to -2.13. Upon defendant's motion, the Law Division judge dismissed the complaint, under R. 4:6- 2(e), for failure to state a claim upon which relief can be granted, holding that the state law claims were preempted by federal law.
The questions presented on this appeal are: (1) whether the complaint states a claim for which relief may be granted under New Jersey law, and (2) whether any valid state law claims nevertheless must be dismissed because they are preempted by federal law.
Plaintiff also contends that he should be permitted to amend the complaint to assert claims under: (1) a federal due-on-sale regulation, 12 C.F.R. § 591.5(b)(2)(i), which prohibits housing lenders from collecting prepayment fees where they have demanded prepayment of the mortgage under the mortgage contract's due-on- sale clause (A due-on-sale clause is "a contractual provision that permits the lender to declare the entire balance of a loan immediately due and payable if the property securing the loan is sold or otherwise transferred." Fid. Fed. Sav. and Loan Ass'n v. de la Cuesta, 458 U.S. 141, 145, 102 S. Ct. 3014, 3018, 73 L. Ed. 2d 664, 670 (1982)); (2) the Licensed Lenders Act, N.J.S.A. 17:11C-1 to -49, and one of the regulations adopted thereunder, N.J.A.C. 3:15-10.1, which prohibits prepayment fees; and (3) general contract law principles which prohibit unconscionable contract terms, such as the Prepayment Rider to the mortgage contract. Plaintiff does not explicitly request permission to amend the complaint to assert these claims. Instead, he argues as though these claims are pled in the complaint. Since they clearly are not, we treat plaintiff's arguments as requests for permission to amend the complaint.
As to the preemption issue, the central issue on appeal, there clearly exists a direct conflict between state and federal law regarding whether prepayment penalties may be charged in alternative mortgage transactions. New Jersey explicitly prohibits state-chartered housing creditors from collecting prepayment penalties, with respect to any residential mortgage transaction. See N.J.S.A. 46:10B-2. On the other hand, a 1996 federal regulation, issued by the Office of Thrift Supervision (OTS), permits state-chartered housing creditors to charge prepayment fees in alternative mortgage transactions. See 12 C.F.R. § 560.220 (incorporating 12 C.F.R. § 560.34, which permits federally chartered housing creditors to collect prepayment penalties, and applying it to state-chartered housing creditors with respect to AMTs). The OTS adopted 12 C.F.R. § 560.220 pursuant to authority delegated to it by Congress, under the Alternative Mortgage Transactions Parity Act (Parity Act), 12 U.S.C.A. § 3801 to § 3806. Furthermore, in adopting 12 C.F.R. § 560.220, the OTS expressly stated that this regulation was intended to preempt state law to the contrary.
Thus, we must hold that 12 C.F.R. § 560.220 preempts plaintiff's state law claims challenging the prepayment fee unless we find that in issuing this regulation the OTS acted arbitrarily, or exceeded the authority delegated to it by Congress. This is the nub of the preemption issue. Plaintiff contends that 12 C.F.R. § 560.220 is invalid because, in issuing it, the OTS exceeded the authority delegated to it by Congress under the Parity Act. We agree.
In finding federal preemption, and dismissing the complaint, the Law Division judge primarily relied upon two published federal court decisions in which the courts held that 12 C.F.R. § 560.220 was a valid exercise of the OTS's delegated authority, and that 12 C.F.R. § 560.220 preempted state laws regulating prepayment fees )) at least to the extent those state laws are applied in the context of alternative mortgage transactions. See Nat'l Home Equity Mortgage Ass'n v. Face (Face) 239 F.3d 633 (4th Cir.), cert. denied, 534 U. S. 823, 122 S. Ct. 58, 151 L. Ed. 2d 26 (2001); Shinn v. Encore Mortgage Serv., Inc., 96 F. Supp. 2d 419, 422 (D.N.J. 2000).
Since the Law Division judge entered judgment, however, there has been a significant, albeit unusual, development, which casts doubt on these federal decisions and subjects them to closer scrutiny. Specifically, in April 2002, the OTS published a Notice of Proposed Rulemaking in which it repudiated 12 C.F.R. § 560.220 and put forth a number of arguments which support a conclusion that, in adopting 12 C.F.R. § 560.220 in 1996, the OTS acted arbitrarily and exceeded the authority delegated to it by Congress. Alternative Mortgage Transaction Parity Act; Preemption, 67 Fed. Reg. 20,468 (Apr. 25, 2002). Subsequently, the OTS adopted that Proposed Rulemaking as final. Alternative Mortgage Transaction Parity Act; Preemption, 67 Fed. Reg., 60,542 (Sept. 26, 2002). We agree with the arguments advanced by the OTS and find they are supported by a recent case from the California Court of Appeals, in which that court discussed the limited nature of the Parity Act's preemption clause, although in a context different than presented in this case. See Black v. Fin. Freedom Senior Funding Corp., 112 Cal. Rptr. 2d 445, 457 (Cal. Ct. App. 2001), cert. denied sub nom., ULLICO, Inc. v. Black, __ U.S. __, 122 S. Ct. 2662, 153 L. Ed. 2d 837 (2002).
We reverse the rulings of the Law Division judge, in part. We hold that plaintiff's state law claims are not preempted by 12 C.F.R. § 560.220 because this regulation was adopted arbitrarily, and exceeds the scope of authority Congress delegated to the OTS under the Parity Act. We remand for further proceedings on plaintiff's claims under the Prepayment Law and the Consumer Fraud Act. We affirm dismissal of plaintiff's claim under the Market Rate Consumer Loan Act because defendant is not an entity covered by this statute. Finally on remand, plaintiff is permitted to amend the complaint to assert claims under the federal due-on-sale regulation, 12 C.F.R. § 591.5(e)(2)(i); N.J.A.C. 3:15-10.1(b) and general contract principles; defendant may raise the issue of retroactivity.
This is the procedural context. On May 17, 2002 plaintiff filed a complaint alleging that in collecting a prepayment fee with respect to the prepayment of his mortgage defendant violated New Jersey's Prepayment Law, N.J.S.A. 46:10B-2, and the Market Rate Consumer Loan Act, N.J.S.A. 17:3B-22. Plaintiff also alleged that collection of a prepayment fee constituted an unconscionable business practice, in violation of the Consumer Fraud Act, N.J.S.A. 56:8-2. Plaintiff also sought class certification.
In lieu of an answer, defendant filed a motion to dismiss, under R. 4:6-2, for failure to state a claim upon which relief may be granted. Plaintiff opposed that motion, and filed a cross-motion for summary judgment, which defendants opposed. After hearing oral argument on January 18, 2002 the judge issued an oral decision, granting defendant's motion, and denying plaintiff's cross-motion.
Defendant is a Delaware corporation, which maintains an office in Mount Laurel, Burlington County. Defendant is licensed under New Jersey's Licensed Lenders Act, and engages in the business of residential mortgage lending.
On October 29, 1999 plaintiff and a co-borrower financed the purchase of a residence, located at 133-135 Route 530 (Pemberton Road), Southampton, Burlington County, with a mortgage loan secured from defendant. The total amount of the mortgage was $72,000, and the maturity date was November 1, 2009. The mortgage contract provided for federal and New Jersey law to control the transaction.
The mortgage is considered a "balloon loan." At maturity, plaintiff would still owe $62,021.25 of the principal and would be obligated to repay that entire amount, or obtain refinancing from defendant or another mortgage lender. Under the terms of the mortgage, defendant reserved the right not to refinance the loan.
Of particular relevance to this case is the Prepayment Rider to the mortgage's "Balloon Note." The Prepayment Rider imposes a prepayment fee if the mortgage is prepaid in full during the first three years of the loan term. Specifically, the Prepayment Rider states:
4. BORROWER'S RIGHT TO REPAY
I have the right to make payments of principal at any time before they are due. A payment of principal only is known as a "prepayment". When I make a prepayment, I will tell the Note Holder in writing that I am doing so.
I may make a partial prepayment without paying the prepayment charge. If I make a full prepayment within one (1) year of the date of this Note, I agree to pay a prepayment charge of 3.0000% of the amount being prepaid; If I make a full prepayment more than one (1) year but within two (2) years of the date of this Note, I agree to pay a prepayment charge of 2.0000% of the amount being prepaid; if I make a full prepayment more than two (2) years but within three (3) years of the date of this Note, I agree to pay a prepayment charge of 1.0000% of the amount being prepaid. If I make full prepayment more than three (3) years after the date of this Note, there will be no prepayment charge. The Note Holder will use all of my prepayments to reduce the amount of principal that I owe under this Note. If I make a partial prepayment, there will be no changes in the due date or in the amount of my monthly payment unless the Note Holder agrees in writing to those changes. My partial prepayment may reduce the amount of my monthly payments after the first Change Date following my partial prepayment. However, any reduction due to my partial prepayment may be offset by an interest rate increase. [(emphasis added).]
The Prepayment Rider amended language in the "Balloon Note," under which no prepayment penalties could be imposed.
Also relevant is Section 17 of the mortgage contract, the so-called due-on-sale clause, which states, in pertinent part, as follows:
17. Transfer of the Property or a Beneficial Interest in Borrower. If all or any part of the Property or any interest in it is sold or transferred . . . without Lender's prior written consent, Lender may, at its option, require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if exercise is prohibited by federal law as of the date of this Security Instrument.
If Lender exercises this option, Lender shall give Borrower notice of acceleration. The notice shall provide a period of not less than 30 days from the date the notice is delivered or mailed within which Borrower must pay all sums secured by this Security Instrument. If Borrower fails to pay these sums prior to the expiration of this period, Lender may invoke any remedies permitted by this Security Instrument without further notice or demand on Borrower.
On or about April 11, 2001 defendant provided a payoff statement to plaintiff, stating that the mortgage was in default and if not brought current, could be referred to an attorney for foreclosure. The Payoff Statement reflected the amount needed to prepay the mortgage in full, which included the remaining principal balance, interest, various fees and late charges, plus a prepayment fee of $1,427.97. Plaintiff sold the property, and on April 19, 2001 paid the amount indicated in the Payoff Statement, including the prepayment fee.
SUMMARY OF APPLICABLE LAW
This case involves a spider's web of federal and state statutes and regulations governing mortgage transactions. To complicate things, the parties dispute which statutes and regulations actually apply in the context of this case.
We provide summaries of the statutes and regulations at issue in this case. We also summarily resolve some of the parties' more specious arguments, regarding the applicability of the various statutes and regulations, in our attempt to narrow the issues presented.
State Statutes and Regulations
The complaint alleges violations of three New Jersey statutes: (1) the Prepayment Law; (2) the Market Rate Consumer Loan Act; and (3) the Consumer Fraud Act. On appeal, plaintiff also essentially requests permission to amend the complaint, to assert a claim under the New Jersey Licensed Lenders Act, N.J.S.A. 17:11C-1 to -49, and N.J.A.C. 3:15-10.1, a regulation adopted under N.J.S.A. 17:11C-49.
New Jersey's Prepayment Law provides that "[p]repayment of a mortgage loan may be made by or on behalf of a mortgagor at any time without penalty." N.J.S.A. 46:10B-2. The statute defines "prepayment" as "payment in full of the balance owing on a mortgage loan at any time prior to the time limited for the final payment of such loan in an instrument evidencing such loan." N.J.S.A. 46:10B-1(c).
The Prepayment Law also provides for a limited right to make partial prepayments of mortgage principal, without incurring a prepayment fee. Specifically, N.J.S.A. 46:10B-3 provides as follows:
A mortgagor shall have the right, during any 6 month period beginning with the date of the mortgage loan, to pay, without charge or penalty, an additional sum of $50.00, or multiples thereof, on account of the principal amount owing on a mortgage loan, provided that the additional sums so paid and the principal payments required to be made by the terms of such mortgage loan during such 6 month period do not together exceed in any such 6 month period 33 1/3% of the face amount of such mortgage loan. The right to make additional payments as provided by this section shall not be cumulative, and to the extent that it is not exercised during any 6 month period, shall lapse.
In addition, the Prepayment Law provides that no provision of a mortgage which denies the rights conferred by the above sections [N.J.S.A. 46:10B-2 and N.J.S.A. 46:10B-3] shall be enforceable, N.J.S.A. 46:10B-4, and that any prepayment fees collected in knowing violation of the statute must be repaid, with interest calculated at six percent per annum. N.J.S.A. 46:10B-5.
Finally, the Prepayment Law provides that:
This act shall not apply to loans secured by a mortgage on real property the prepayment of which is governed by any other statute of this State or of the United States, nor 11 shall it apply to any loans, secured by mortgage on real property, made pursuant to any statute of this State or of the United States expressly authorizing interest charges in excess of 6% per annum. [N.J.S.A. 46:10B-9.]
The Market Rate Consumer Loan Act
As its name implies, the Market Rate Consumer Loan Act regulates consumer loan transactions. N.J.S.A. 17:3B-4 to -27. It applies to loans offered by "lenders," with "lenders" defined as: (1) "banking institutions" (defined as banks, out-of-state or out-of-country banks having a branch office in New Jersey, savings banks, and national banking associations having a principal or a branch office in New Jersey); (2) federally chartered savings banks; and (3) "associations" (defined as state associations, federal associations having a principal or a branch office in New Jersey, and out-of-state associations having a branch office in New Jersey). N.J.S.A. 17:3B-5(d); N.J.S.A. 17:9A-1(2); N.J.S.A. 17:12B-5(3). The Market Rate Consumer Loan Act prohibits lenders, as defined above, from charging prepayment fees, as follows:
a. An individual borrower may prepay a loan in full at any time without payment of any prepayment charge. b. If a borrower wishes to prepay a loan, a lender shall not use the "rule of 78's" to calculate the amount of interest owed by the borrower. The lender shall use a simple interest basis to calculate the amount of interest owed by the borrower. [N.J.S.A. 17:3B-22.]
The Consumer Fraud Act prohibits "unconscionable commercial practices." N.J.S.A. 56:8-2. It also provides for a private right of action, to recover monies lost as a result of such practices, N.J.S.A. 56:8-2.12, and states that the rights protected under the Act are cumulative of other rights and remedies under New Jersey law. N.J.S.A. 56:8-2.13.
New Jersey Licensed Lenders Act
Defendant is licensed as, among other things, a "mortgage banker," under the New Jersey Licensed Lenders Act (Licensed Lenders Act). N.J.S.A. 17:11C-1 to -49. A regulation adopted, in part, under the Licensed Lenders Act, N.J.S.A. 17:11C-49, provides that: "[a] borrower may repay a first mortgage loan, second mortgage loan or consumer loan at any time without penalty." N.J.A.C. 3:15-10.1(b). See also N.J.A.C., Title 3, Ch. 15, References and Annotations.
Federal Statutes and Regulations The Parity Act
The only federal law of significance to this litigation is: (1) the Parity Act, 12 U.S.C.A. § 3801 to § 3806, which was adopted in 1982; and (2) a regulation adopted by the OTS, under the Parity Act, in 1996, 12 C.F.R. § 560.220. It is 12 C.F.R. § 560.220 which allegedly preempts plaintiff's state law claims. Purpose of the Parity Act Prior to passage of the Parity Act, federal regulations permitted federally chartered housing lenders to engage in AMTs. Many states, however, prohibited state-chartered housing lenders (also referred to as "non-federally chartered housing lenders") from engaging in AMTs. Shinn, 96 F. Supp. at 422.
The purpose of the Parity Act was to provide parity between federally chartered and state-chartered housing lenders, "by authorizing all housing creditors to make, purchase and enforce alternative mortgage transactions so long as the transactions are in conformity with the regulations issued" by the relevant federal agencies. 12 U.S.C.A. § 3801(b) (emphasis added). The relevant federal agencies, issuing regulations under the Parity Act, are: (1) the Comptroller of the Currency, which issues regulations applicable to national banks; (2) the National Credit Union Administration, which issues regulations applicable to national credit unions; and (3) the OTS, which issues regulations applicable to all other housing creditors, for example, savings and loan associations, mutual savings banks, and savings banks. 12 U.S.C.A. § 3801(a)(3), § 3803(a). Shinn, 96 F. Supp. 2d at 422-23. (As originally worded, the Parity Act referenced ...