Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Glukowsky v. Equity One

May 26, 2004

MARK GLUKOWSKY, PLAINTIFF-RESPONDENT,
v.
EQUITY ONE, INC., A DELAWARE CORPORATION, DEFENDANT-APPELLANT.



On certification to the Superior Court, Appellate Division, whose opinion is reported at 360 N.J. Super. 1 (2003).

SYLLABUS BY THE COURT

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

The issue in this appeal is whether the Office of Thrift Supervision (OTS) exceeded its regulatory authority by issuing the 1996 version of 12 C.F.R. § 560.220, authorizing state housing lenders to charge prepayment penalties in alternative mortgage transactions (AMT), thereby preempting the New Jersey Prepayment Law prohibiting housing lenders from charging such penalties.

In 1999, plaintiff Mark Glukowsky secured a $72,000 "balloon loan," also known as an AMT under the Alternate Mortgage Transaction Parity Act of 1982, 12 U.S.C.A. §§ 3801-06 (Parity Act), from defendant Equity One, to mature in 2009. As part of the mortgage contract, Glukowsky agreed to pay a prepayment fee to Equity One if he repaid the loan in full during the first three years of its term. The contract also provided that the loan would become due in full if the mortgaged property was sold or transferred without Equity One's prior written consent. In 2001, Glukowsky sold the property and Equity One exercised its right to demand full payment and a two-percent prepayment fee in the amount of $1,427.97, which Glukowsky paid under protest.

Glukowsky later filed a complaint alleging that Equity One had violated New Jersey's Prepayment Penalty Law, N.J.S.A. 46:10B-2, in addition to other state laws. Equity One moved to dismiss the complaint on the ground that New Jersey's Prepayment Penalty Law was preempted by 12 C.F.R. § 560.220, which barred enforcement of any state law that prohibited a state-chartered lending institution from charging a prepayment fee on an AMT.

Before the promulgation of 12 C.F.R. § 560.220 by OTS in 1996, federal lenders were free to charge prepayment fees on AMTs pursuant to 12 C.F.R. § 560.34, while state lenders, such as Equity One, were subject to state laws, many of which prohibited prepayment fees in real estate transactions. The adoption of 12 C.F.R. § 560.220 placed state-chartered housing creditors on an equal footing with their federal counterparts by extending 12 C.F.R. § 560.34 to state lenders and preempting any state law that forbid charging a prepayment fee on an AMT.

The Law Division found that 12 C.F.R. § 560.220 barred enforcement of New Jersey's Prepayment Penalty Law and dismissed the complaint on the basis of federal preemption. The Appellate Division reversed and held that OTS exceeded the scope of its authority under the Parity Act. Glukowsky v. Equity One, Inc., 360 N.J. Super 1 (2003). The panel concluded that Congress did not intend the Parity Act to preempt state consumer protection laws that prohibited the imposition of prepayment fees on real estate transactions in general, and on AMTs in particular.

The Supreme Court granted Equity One's petition for certification. In addition, the Court granted the motions of the American Bankers Association, et al., the National Home Equity Mortgage Association, the Mortgage Bankers Association of New Jersey, and Legal Services of New Jersey for leave to participate as amici curiae.

HELD: The 1996 regulation of the federal Office of Thrift Supervision (OTS) that authorized state housing lenders to charge prepayment penalties in alternative mortgage transactions preempted the New Jersey Prepayment Law, which prohibited housing lenders from imposing such penalties.

1. The Parity Act, enacted as part of an overhaul of the residential mortgage market, allowed state-chartered housing creditors to offer alternative mortgages if they agreed to operate in accordance with federal regulations. To achieve the goals of the Parity Act, the main goal being achieving parity between state-and federally-chartered housing creditors, rulemaking authority was granted to the Federal Home Loan Bank Board (FHLBB), the predecessor to OTS (in 1989 the statute was amended to substitute OTS for the FHLBB). States were given the opportunity to optout of the Act's preemption provisions, but they had to certify their intention to do so within three years of its passage. Otherwise, states agreed to follow all applicable federal regulations, those in existence then and those to be adopted in the future. In 1996, OTS adopted 12 C.F.R. § 560.220, giving state-chartered housing lenders the same authority to impose prepayment penalties on AMTs already possessed by their federal counterparts under 12 C.F.R. § 560.34. By applying 12 C.F.R. § 560.34 to state lenders issuing AMTs, 12 C.F.R. § 560.220 clearly preempted enforcement of New Jersey's Prepayment Penalty Law. When OTS decided to regulate prepayment fees in 1996, it did so believing that Congress intended to remedy the disadvantage to state-chartered institutions that flowed from differing federal and state laws regulating AMTs. By 2002, however, OTS had knowledge that widespread use of prepayment penalties in sub-prime loans promoted predatory lending practices. The 1996 OTS regulation also had the unintended consequence of creating an incentive for state lenders to favor AMTs over traditional fixed-interest mortgages that still were subject to state prepayment penalty laws. In July 2003, OTS eliminated § 560.34 from the list of federal regulations applicable to state-chartered housing creditors. Nevertheless, OTS concluded in the 2002 Final Rule that the 1996 regulation was a permissible interpretation at the time. (Pp. 6-14)

2. We disagree with the conclusion reached by the Appellate Division that OTS exceeded the authority Congress delegated to it in the Parity Act. We accept, instead, OTS's explanation that the 1996 rulemaking represented one permissible interpretation of the Parity Act. OTS is the agency responsible for enforcing the Parity Act and its interpretation of that Act is entitled to substantial deference. Federal courts uniformly have concluded that OTS in 1996 acted within the authority delegated to it by Congress and comity instructs state courts to give due regard to a federal court's interpretation of a federal statute. (Pp. 15-17)

3. The power of a federal statute to preempt a state law is derived from the Supremacy Clause of the United States Constitution. A federal regulation will have preemptive effect provided the agency intended to preempt state law and acted within the scope of its authority. A court generally must defer to a regulatory agency's decision, unless the agency acts outside the scope of its authority or arbitrarily. Moreover, an agency's statutory interpretation is entitled to deference even when that agency has changed its interpretation over time. Final interpretation, however, is the prerogative of the courts, and there is no doubt that OTS intended its 1996 regulation to preempt states' prepayment penalty laws. (Pp. 18-21)

4. Regulatory law has elasticity that permits it to adapt to changing circumstances and conditions. Real-world experience has shown OTS that a regulation that appeared eminently reasonable in 1996 is not necessary to achieve the paramount objectives of the Parity Act in 2003. That OTS altered its direction to better effectuate the purposes of the Parity Act does not require the conclusion that its 1996 interpretation of that Act was impermissible. Unless there are compelling indications that OTS is wrong in concluding that there are two permissible interpretations of the Parity Act, we should exercise restraint before rushing to invalidate the 1996 regulation. (Pp. 21-25)

5. In deciding whether OTS exceeded the scope of its authority in promulgating 12 C.F.R. § 560.220, we give due consideration to the interpretation of the Parity Act by the federal courts. Federal courts uniformly have concluded that the Parity Act allowed federal agencies to promulgate regulations preempting state laws governing prepayment penalties. Those federal court decisions, while not binding on New Jersey courts, are entitled to respectful consideration in the interests of judicial comity. Judicial comity helps to ensure uniformity and discourage forum shopping. Moreover, OTS's opinion is entitled to great weight and is a substantial factor in our interpretation. We cannot conclude, based on the language of the Parity Act or its legislative history, that Congress would not have sanctioned OTS's interpretation of the Act, and therefore cannot declare invalid OTS's decision to adopt the 1996 regulation. ((Pp. 25-29)

6. This case has brought to our attention a gap in our court rules. Our rules do not require that notice be given to the attorney or chief legal officer of a federal department or agency when its laws or regulations are challenged in our courts. We, therefore, submit to the Civil Rules Practice Committee consideration of an appropriate revision to our rules that will require notice to be given to the appropriate federal officer and agency when a federal law or regulation is challenged in a New Jersey court. (Pp. 29-30)

The judgment of the Appellate Division is REVERSED. The decision of the trial court dismissing plaintiff's complaint for failure to state a claim upon which relief can be granted is REINSTATED.

JUSTICE ZAZZALI filed a separate, dissenting opinion, in which JUSTICES VERNIERO and WALLACE join, stating that he would affirm the judgment of the Appellate Division substantially for the reasons expressed by Judge King, adding that during the three-year opt-out period from 1982 to 1985, no state legislature could have predicted that the OTS, or any other regulatory agency, someday would turn the salutary congressional goal of ensuring the availability of alternative mortgages on its head by sanctioning what arguably amount to predatory lending practices by state-chartered institutions.

CHIEF JUSTICE PORITZ and JUSTICES LONG and LaVECCHIA join in JUSTICE ALBIN's opinion. JUSTICE ZAZZALI filed a separate, dissenting opinion, in which JUSTICES VERNIERO and WALLACE join.

The opinion of the court was delivered by: Justice Albin

Argued February 3, 2004

In 1996, the federal Office of Thrift Supervision (OTS) issued a regulation authorizing state housing lenders to charge prepayment penalties in alternative mortgage transactions (AMT). Alternative Mortgage Transaction Parity Act, 12 C.F.R. § 560.220 (1996). That regulation would preempt our state laws that prohibit housing lenders from charging prepayment penalties. Plaintiff contends that OTS exceeded the scope of authority delegated to it by Congress under the Alternative Mortgage Transaction Parity Act of 1982, 12 U.S.C.A. §§ 3801-06 (Parity Act), when it issued 12 C.F.R. § 560.220. In determining whether that federal regulation is valid, we address principles concerning the scope of authority granted to a regulatory agency, preemption, and comity.

I.

In 1999, plaintiff Mark Glukowsky secured a $72,000 mortgage loan from defendant Equity One to finance the purchase of a home in Mount Laurel. The financing arrangement provided a fixed-interest rate over a ten-year term at the end of which the loan, though not fully amortized, would mature. On the maturity date in 2009, plaintiff would owe $62,021.25 of the principal and have the choice to pay the entire principal or refinance the loan with Equity One or another lender. This method of financing a residential mortgage is commonly referred to as a "balloon loan" and constitutes an AMT under the Parity Act. An AMT is a loan with an interest rate or finance charge that may be adjusted or renegotiated; a loan with a fixed-interest rate that matures before it is fully amortized, thus implicitly permitting rate adjustments; or a loan with other variations "not common to traditional fixed-rate, fixed-term transactions." 12 U.S.C.A. § 3802(1).

As part of the mortgage contract, plaintiff agreed to pay a prepayment fee to Equity One if he repaid the loan in full during the first three years of its term.*fn1 The mortgage contract also contained a "due on sale" clause, providing that if the mortgaged property was sold or transferred without Equity One's prior written consent, the full amount of the loan would be due on demand. In 2001, plaintiff sold the Mount Laurel residence subject to the mortgage and "due on sale" clause. Equity One exercised its right to demand full payment of the loan and sent plaintiff a pay-off statement. That statement included a two percent prepayment fee in the amount of $1,427.97 because the outstanding balance on the loan was to be paid within the second year of the mortgage term. Plaintiff paid the prepayment fee under protest.

Plaintiff later filed a complaint alleging that Equity One had violated New Jersey's Prepayment Penalty Law, N.J.S.A. 46:10B-2, Market Rate Consumer Loan Act, N.J.S.A. 17:3B-22, and Consumer Fraud Act, N.J.S.A. 56:8-2, by collecting the prepayment fee. Equity One moved to dismiss the complaint on the ground that it was preempted by 12 C.F.R. § 560.220, which barred enforcement of any state law that prohibited a state chartered lending institution from charging a prepayment fee on an AMT.

Before the promulgation of 12 C.F.R. § 560.220 by OTS in 1996, federal lenders were free to charge prepayment fees on AMTs pursuant to 12 C.F.R. § 560.34, while state lenders, such as Equity One, were subject to state laws, many of which prohibited prepayment fees in real estate transactions. The adoption of 12 C.F.R. § 560.220 placed state-chartered housing creditors on an equal footing with their federal counterparts by extending 12 C.F.R. § 560.34 to state lenders and preempting any state law that forbid charging a prepayment fee on an AMT. The Law Division found that 12 C.F.R. § 560.220 barred enforcement of New Jersey's Prepayment Penalty Law and dismissed the complaint on the basis of federal preemption.

The Appellate Division reversed and held that OTS exceeded the scope of its authority under the Parity Act when it applied 12 C.F.R. § 560.34 to state lending institutions engaged in AMTs. Glukowsky v. Equity One, Inc., 360 N.J. Super. 1, 12 (2003). The panel concluded that Congress did not intend the Parity Act to preempt state consumer protection laws that prohibited the imposition of prepayment fees on real estate transactions in general, and on AMTs in particular. Id. at 37-39. The panel reinstated the claims that alleged violations of New Jersey's Prepayment Law and Consumer Fraud Act, but affirmed the dismissal of the claim arising under the Market Rate Consumer Loan Act because that statute did not apply to defendant. Id. at 48. Plaintiff was allowed to amend his complaint to allege other claims arising under federal and state law.*fn2 Ibid. The panel did not address whether to apply its decision retroactively, leaving that issue to be developed on remand. Ibid.

We granted Equity One's petition for certification. 177 N.J. 575 (2003). We also granted the motions of the American Bankers Association, et al.,*fn3 the National Home Equity Mortgage Association, the Mortgage Bankers Association of New Jersey, and Legal Services of New Jersey for leave to participate as amici curiae.

The central issue in this case is whether the Parity Act gave OTS the authority to adopt the challenged regulation. To determine whether 12 C.F.R. § 560.220 is a valid expression of legislative authority, we first turn to the history of the Parity Act and the rule adopted by OTS.

II.

...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.