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Glukowsky v. Equity One, Inc.

180 N.J. 49, 848 A.2d 747 (2004)

PARITY ACT; PREEMPTION—The federal Parity Act gives federal agencies the authority to promulgate regulations that preempt state laws governing loan prepayment penalties.

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. 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 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 appealed to the New Jersey Supreme Court.

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 Act is 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 conform with federal regulations. Alternative mortgage transactions are defined as loans other than for fixed rates and fixed terms, and includes ARM loans and balloon notes. Until the passage of the Parity Act, many states prohibited state chartered lenders from making alternative mortgage loans. The Act was designed to level the playing field by permitting state chartered lenders to offer these loans. The OTS issued regulations under the Parity Act, one of which regulation permits state chartered lenders to charge prepayment penalties just like federal chartered lenders.

The lower court found that the lender was permitted to charge a prepayment penalty because the Prepayment Law was preempted by the Parity Act and the OTS regulation. The Appellate Division disagreed. It found that the OTS regulation was not a valid exercise of the OTS’s delegated authority under the Act. It noted that the OTS acknowledged, in a Notice of Proposed Rulemaking, 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 authorize all state and federal lenders to offer alternative mortgage transactions. Therefore, the OTS’s authority to issue regulations under the Act was limited to regulations that were essential for parity, which the regulation of prepayment penalties was not. The Appellate Division, having noted that the OTS deemed its regulation not to be intended to preempt state law, found that New Jersey’s laws prohibiting prepayment penalties were not preempted by federal law. As a consequence, it found that the lender in this case 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.

The Supreme Court reversed. It disagreed with the Appellate Division’s conclusion that the OTS exceeded its authority under the Parity Act. Instead, it accepted the OTS’s explanation that the Notice of Proposed Rulemaking was one reasonable interpretation of the Parity Act. The Court gave substantial deference to the OTS as the federal agency responsible for interpretation and enforcement of the Parity Act. It also gave consideration to prior federal court decisions, which concluded that the Parity Act gave federal agencies the authority to promulgate regulations that preempt state laws governing prepayment penalties.

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