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Turner v. First Union National Bank

162 N.J. 75, 740 A.2d 1081 (1999)

MORTGAGES; LOANS—Federal law preempts a New Jersey law that would otherwise bar federally chartered banks from passing along their attorney’s fees to mortgage loan borrowers.

N.J.S. 46:10A-6(d) prohibits lenders from shifting their legal fees to borrowers, except where the lenders seek reimbursement for legal fees incurred for the review of loan documents. That statute was the cause of the underlying dispute in three matters that were consolidated before the New Jersey Supreme Court. In each, the borrowers secured bank loans for residential properties and their lenders required them to reimburse them for the lender’s attorneys’ fees incurred to review title and other loan documents. Those fees ranged from $100 to $170. In one case, “the trial court held that the lender could not charge a review fee to an unrepresented borrower, finding that Section (d) made it clear that a lender could require a fee only when the loan documents were prepared or submitted at the direction of the borrower’s attorney, but not when they are submitted by the borrower herself or himself.” In the other two matters, “the trial court held that the lenders could not charge a review fee unless the borrowers’ attorneys prepared or submitted documents, using their legal skill and judgment that created ‘extra work’ for the lenders’ attorneys.” In each of those two cases, the trial court held that the lender could not charge the borrower for any attorney’s fees associated with the review of documents that were merely collected by the borrower’s attorney as a “ministerial act.” Further, in one of the cases, where the lender was a federally chartered savings and loan association, the trial court held that federal banking regulations did not preempt Section (d). The Appellate Division reversed all three decisions with respect to the trial court’s interpretations of Section (d). However, it affirmed the trial court’s holding that “Section (d) is not preempted by federal banking regulations.” All three matters were appealed to New Jersey Supreme Court, which upheld the Appellate Division’s reading of the applicable statute, but reversed the Appellate Division’s holding that federal banking regulations did not preempt the application of Section (d) to federally-chartered banks. In doing so, the Court noted that the Act was a consumer protection statute that guaranteed certain borrowers the right to select their own attorneys by prohibiting lenders from requiring them to use and pay for the services of the lenders’ attorneys. Its amendment in 1978 merely extended the statute to commercial loans and “did not alter the provision of the statute allowing lenders to charge residential borrowers a review fee for documents prepared by the borrower’s attorney.” A 1993 amendment “did address the standing practice of lenders of charging borrowers for attorney fees incurred by the lender,” but no case had interpreted the meaning of that amendment. Amendments to the statute had been proposed to bar lenders from imposing their own attorneys’ fees on borrowers for the review of documents, but they were never adopted. The committee statement accompanying the 1993 amendment specifically noted that “[t]he bill provides that banks and other lenders may not charge borrowers of loans secured by one-to-four family structures any fees or expenses charged by the lender’s attorney except to the extent of a fee charged for the review of the loan documents ... or services as requested by the borrower… .” Since these were exceptions to a statute designed for consumer protection, the Court sought to construe them narrowly. Nonetheless, even though “[r]ead literally, the exceptions would be limited to instances where the loan documents are prepared or submitted only by a borrower’s attorney, ... . [t]hat interpretation contradicts the statutory purpose of [the statute] and the public policy of the State.” The public policy of the State is to encourage the borrowers to seek legal counsel. If borrowers who were not represented by legal counsel were exempt from reimbursing their lender for certain attorney’s fees, those borrowers would be encouraged to consummate their loan transaction without representation. Substantially for this reason, the Court found that the exception in Section (d) relating to the review of loan documents, applies to both represented and unrepresented borrowers.

As to the lower courts’ holdings that review fees could not be charged unless the borrower’s attorneys submitted documents that created “extra work” for the lender’s attorney, the Court found that interpretation to be flawed, holding that it ignored the plain language of Section (d), “specifically the terms ‛submit’ and ‛loan documents.’” The definition of “loan documents” includes documents not prepared by the borrower’s attorney, such as title commitments. Further, the Court believed that the term “submit” should be given its natural meaning. Under that reasoning, Section (d) allows a fee whenever an enumerated “loan document” is turned over to lenders’ counsel. To limit reimbursement to situations where only “extra work” has been created, would “eviscerate” the statute’s requirement that a lender disclose “a good faith estimate of any charge which the borrower will be expected to pay the lender’s attorney for ... services. ” prior to obtaining a commitment from the borrower.

Absent explicit pre-emptive language, Congress’ intent to totally supersede state law altogether may be inferred when “[t]he scheme of federal regulations [is] so pervasive as to make reasonable inference that Congress left no room for the States to supplement it,” because “the Act of Congress [] touch[es] a field in which the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject,” or because “the object sought to be obtained by federal law and the character of the obligations imposed by it [] reveal[s] the same purpose.” When Congress passed the Home Owners’ Loan Act, which “provided for the creation of a system of federal and loan associations” to finance residential home purchases, it created a board with broad power to “promulgate rules and regulations to govern the lending practices of federal savings and loan associations.” Case law states “it would have been difficult for Congress to give the Bank Board a broader mandate,” and the Code of Federal Regulations specifically provides that home borrowers may be required to pay certain attorney’s fees. The applicable Federal Regulation also states that the regulations are “preemptive of any state law purporting to address the subject of the operations of a Federal savings association.” Earlier federal case law had been overturned where the lower courts reasoned that when a federal rule is merely permissive, state laws could override the rule. In fact, the United States Supreme Court has rejected the “permissive”/“mandatory” distinction, specifically holding that the fact that a federal regulation is “permissive” does not eliminate a preemptive conflict. Consequently, the court found it abundantly clear that federal law had always preempted state regulation of federal savings and loan associations.


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