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Glukowsky v. Equity One, Inc.

360 N.J. Super. 1, 821 A.2d 485 (App. Div. 2003)

MORTGAGES; PREPAYMENT—If the State applies mortgage prepayment rules to all lenders, state and federal, the federal Parity Act does not prohibit such prepayment rules.

A borrower gave a secured balloon note to a lender. Several years later, he sold the mortgaged residential property and repaid the loan. As a condition for repayment, the lender required the borrower to pay a prepayment penalty of two percent of the outstanding principal balance of the note. The borrower sued the lender under the New Jersey Prepayment Law, the Market Rate Consumer Loan Act, and the Consumer Fraud Act. He claimed that under New Jersey state law, a lender is not permitted to charge a prepayment fee for payment of a loan in full. The borrower also argued that by requiring a prepayment fee in violation of the Prepayment Law, the lender was guilty of deceptive business practices in violation of the Consumer Fraud Act. The lender moved to dismiss the case. It claimed that state law was preempted by federal law dealing with alternative mortgage transactions. The lower court agreed and dismissed the case. The borrower appealed. The Appellate Division reversed and remanded.

The lender’s claim of preemption was based on the Parity Act, 12 U.S.C.A. 3801 and a regulation adopted by the Office of Thrift Supervision (OTS) under the Act, 12 CFR 560.220. The purpose of the Parity Act was to provide parity between federally chartered housing lenders and state chartered housing lenders by authorizing all housing lenders to make, purchase, and enforce alternative mortgage transactions so long as they conformed with federal regulations. Alternative mortgage transactions were defined as loans other than for fixed rates and fixed terms, which included ARM loans and balloon notes. Until the passage of the Parity Act, many states prohibited state chartered lenders from making alternative mortgage loans. The Parity Act was designed to level the playing field by permitting state chartered lenders to offer these loans just as federally chartered lenders were permitted. The OTS issued regulations under the Parity Act. One regulation permitted state chartered lenders to charge prepayment penalties just like federal chartered lenders. The lower court found that under the Parity Act and the OTS regulation, the lender was permitted to charge a prepayment penalty and that the Prepayment Law was preempted by the Parity Act and OTS regulation. The Appellate Division disagreed. The Court found that the OTS regulation was not a valid exercise of its delegated authority under the Parity Act. It noted that the OTS, in a Notice of Proposed Rulemaking, acknowledged that it overstepped its authority in authorizing all lenders to charge prepayment penalties regardless of state law to the contrary. The OTS recognized that states that restrict prepayment penalties applied that restriction to all loans, regardless of whether they were fixed rate-fixed term loans or alternative mortgage transactions. The intent of the Parity Act was to level the playing field by authorizing all lenders, whether state or federally chartered, to offer alternative mortgage transactions. The OTS’s authority to issue regulations based on the Parity Act is limited to regulations that are essential for parity, which did not include the regulation of prepayment penalties. Here, the Court, having noted that the OTS deemed its regulation to be overreaching and not intended to preempt state law, found that New Jersey’s laws prohibiting prepayment penalties were not preempted by federal law. It found that the lender violated the Prepayment Law which prohibits prepayment penalties on prepayments in full or on payments made when the lender exercises a due on sale provision in the mortgage. It also rejected the borrower’s Market Rate Consumer Loan Act claims as inapplicable, and remanded as to the Consumer Fraud Act claim.

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