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Shinn v. Encore Mortgage Services, Inc.

96 F. Supp.2d 419 (D. N.J. 2000)

MORTGAGES; PREPAYMENT—The federal Alternative Mortgage Transactions Parity Act of 1982 preempts New Jersey’s Prepayment Law, permitting certain residential prepayment fees.

A residential variable rate note and mortgage included a prepayment penalty addendum, which provided for a prepayment fee during the first thirty-six months of the loan term. Approximately forty-five days after closing, the homeowners refinanced the mortgage, paying a prepayment fee. They then filed a complaint alleging that the prepayment fee violated N.J.S. 46:10B-1, the Prepayment Law, which generally prohibits residential mortgage lenders from charging prepayment fees. The lender asserted that its contractual right to collect the prepayment fee was not affected by the Prepayment Law. Specifically, it argued that the Prepayment Law was preempted by the express provisions of the federal Alternative Mortgage Transactions Parity Act of 1982. It also cited N.J.S. 46:10B-9, arguing that the Prepayment Law did not apply to “any loan the prepayment of which is governed by any other New Jersey or federal law which expressly authorizes interest charges in excess of 6% per year.” Finally, it argued that the Prepayment Law permits the charging of a prepayment fee on loans that are repaid in full within the first 18 months of the loan term. The Court disagreed with the lender’s interpretation of the Prepayment Law. The Court determined that if it were to read the law as the lender suggested, then, because a “mortgage loan” was defined as a loan secured by an interest in real property upon which the interest rate is in excess of 6%, the Prepayment Law would have no application. “It is unlikely, to say the least, that the New Jersey Legislature would draft a statutory provision that was void from the moment it was written.” Consequently, the Court interpreted the law to exclude only loans that were not actually mortgage loans on residential property, such as those for an apartment complex containing more than six units. Nonetheless, the Court held that the Prepayment Law was, in fact, preempted by the Alternative Mortgage Transactions Parity Act. That Act expressly preempts state laws which seek to regulate “alternative mortgages,” i.e., ones which are not traditional, fully amortized, fixed rate loans. Lenders under alternative mortgages must comply with the Office of Thrift Supervision’s (OTS’s) regulations governing federal savings and loans associations. The OTS “has clearly expressed its intent to preempt state laws which limit state creditors’ ability to charge prepayment penalties in connection with” alternative mortgage transactions. The Court then examined whether the OTS had the authority to issue the regulations at issue. Under the Parity Act, Congress delegated to the Director of the OTS broad authority to regulate such transactions. The homeowners argued that the OTS’s authority to issue regulations was limited to a 60-day period immediately following passage of the Parity Act. States were given three years to opt out of the Parity Act. Consequently, the homeowners argued that when the OTS did not issue its regulations within 60 days, it, in effect, “sandbagged” New Jersey into accepting the Parity Act without realizing its true effects. The lender argued that the 60-day limitation on the OTS’s rule-making authority would defeat the purposes of the Parity Act because regulations applicable to the state would diverge over time from those applicable to federally chartered housing creditors, thereby eliminating the parity created by the Act. The Court accepted that reasoning and rejected the homeowners’ argument that New Jersey was “sandbagged.” In agreeing to the Parity Act, New Jersey accepted not only that state housing creditors would be governed by OTS’s regulations, but that the OTS would have the power to issue regulations in the future.


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