US Bank, N.A. v. Hough

Justice LaVECCHIA,

dissenting.

In a sensible and straightforward opinion, the Appellate Division adopted and applied the Housing and Mortgage Finance Agency’s (HMFA) interpretation of a rule enforcing fair housing statutes, for which it is responsible. The Appellate Division’s analysis employed established principles of construction that call for judicial deference to an administrative agency’s construction of regulations implementing a statutory scheme for which it bears executive responsibility, unless the interpretation is “plainly unreasonable.” Substantially for the reasons expressed in the Appellate Division decision, I would affirm the panel’s judgment and add only the following additional comments.

I.

In my assessment, HMFA’s interpretation of N.J.A.C. 5:80-26.18(e) is consistent with the statutory authority granted to HMFA to promulgate uniform housing affordability controls. As HMFA explained, the regulatory enforcement provision was added after lesser enforcement means, which were limited to traditional remedies at law, were viewed as insufficient to deter improper encumbrancing of low-income housing stock. The regulation must be understood and implemented with related regulations generally addressing secured interests in low-income housing stock. If the regulation is fairly read in its entirety and in the overall context in which it operates, there is no “plain language” dissonance with *206 HMFA’s explanation of its intended effect, notwithstanding the majority’s contrary assertion.

More to the point, I am not persuaded to join the majority’s conclusion that HMFA’s interpretation is “plainly unreasonable,” an intentionally difficult standard to overcome. See, e.g., In re Election Law Enforcement Comm’n Advisory Op. No. 01-2008, 201 N.J. 254, 262 , 989 A.2d 1254 (2010) (“We will defer to an agency’s interpretation of both a statute and implementing regulation, within the sphere of the agency’s authority, unless the interpretation is ‘plainly unreasonable.’ ”). Our starting premise is that we give “great deference to an agency’s interpretation and implementation of its rules enforcing the statutes for which it is responsible.” In re Freshwater Wetlands Prot. Act Rules, 180 N.J. 478, 488-89 , 852 A.2d 1083 (2004). The majority’s repetitive refrain that the agency’s interpretation of its regulation’s language is “plainly unreasonable” hardly makes it so.

As I see it, the majority’s interpretation of N.J.A.C. 5:80-26.18(e) suffers from three defects. First, in focusing on the final sentence of the regulation, the majority ignores other language in the regulation that evinces an intent to regulate security interests in affordable housing stock, not the underlying indebtedness undertaken by owners of affordable housing units. Second, the majority overlooks HMFA’s statutory authority to develop and administer controls to ensure the continued availability of affordable housing, which undergirds HMFA’s regulation. The agency’s choice in how to accomplish its statutory charge through this enforcement mechanism guarding the continued availability of affordable housing stock is entitled to deference. The agency’s choice of enforcement is not in competition with another policy-laden course of action that this or another court might find preferable. Third and finally, the majority’s reading of N.J.A.C. 5:80-26.18(e) as voiding only the portion of the illegal security interest in excess of ninety-five percent of the resale price is not dictated by the majority’s “plain language” re-interpretation of HMFA’s regulation. The majority’s remedy is, in essence, simply *207 a revision of the regulatory enforcement approach chosen by HMFA

II.

The controversy in this case began in 2007, when defendant Nikia Hough defaulted on a loan secured by an affordable housing condominium unit. The secured loan on which Hough defaulted was issued in violation of N.J.A.C. 5:80-26.8(b), which prohibits loans secured by affordable housing units that exceed ninety-five percent of the maximum allowable resale price of the unit. In the ensuing foreclosure proceeding, the central issue became how the court should apply the enforcement mechanism provided for in N.J.A.C. 5:80-26.18(e), which states:

Banks and other lending institutions are prohibited from issuing any loan secured by owner-occupied real property subject to the affordability controls set forth in the subchapter, if such loan sold be in excess of amounts permitted by the restriction documents recorded in the deed or mortgage book in the county in which the property is located. Any loan issued in violation of this subsection shall be void as against public policy.

Before the Appellate Division, Hough initially argued that the final sentence of N.J.A.C. 5:80-26.18(e) should be read so as to void the security interest held by the bank, but conceded that the underlying debt should remain. Later, during reargument, Hough contended that the underlying debt should be declared void as well. Plaintiff US Bank argued that although N.J.A.C. 5:80-26.18(e) voids the legal mortgage, it does not affect the underlying indebtedness and does not bar a court from imposing an equitable mortgage to replace the voided legal mortgage.

Faced with those competing interpretations of the regulation, the Appellate Division invited the Attorney General, on behalf of HMFA, to explain the intended operation of N.J.A.C. 5:80-26.18(e). Specifically, HMFA was asked to address the final sentence in the regulation that states that “[a]ny loan issued in violation of this subsection shall be void as against public policy,” and advise the panel whether it is meant to void the property owner’s entire indebtedness, or whether it is limited to voiding *208 only the underlying mortgage, thereby converting the debt into an unsecured one.

HMFA’s response explained the history to the Uniform Housing Affordability Controls (UHAC) of which the disputed regulation is now a part, and set into context the statutory purpose of the regulations. The explanation, rooted in the history to the Fair Housing Act (FHA), N.J.S.A. 52:27D-301 to -329, and the regulations enacted to secure compliance with the FHA, bears repeating so that the regulatory language is not interpreted myopically, but rather is construed with due regard for the context in which the provision operates.

As summarized by HMFA, the FHA, which established the Council on Affordable Housing (COAH) to implement an administrative process governing municipal compliance with fair share obligations for affordable housing, simultaneously charged HMFA with responsibility

“to develop and administer controls to ensure the continuing affordability of housing constructed pursuant to the [FHA].” 33 N.J.R. 233; 5[2]:27D-321(f). This includes affordable housing that received credit pursuant to COAH regulations and housing receiving funding from the Neighborhood Preservation Balanced Housing Program Fund in the Department of Community Affairs. N.J.S.A. 52:27D-321(f). In this way, the Legislature ensured that the three State entities involved with affordable housing coordinate their efforts. In accordance with N.J.S.A 52:27D-321(f), HMFA adopted N.J.A.C. 5:80-26 et seq. At that time, N.J.A.C. 5:80-26 did not include an enforcement provision.

In 2001, HMFA repealed the original regulations at N.J.AC. 5:80-26 and adopted new regulations entitled the Uniform Housing Affordability Controls (UHAC), 33 N.J.R. 230(a) and 3432(b); N.J.A.C. 5:80-26. The expressed purpose of the UHAC regulations was “to ensure that housing units designated as affordable units under the Fair Housing Act are actually occupied by low- and moderate-income families.” Ibid. HMFA noted that the original regulations did not include any enforcement provision that would ensure the necessary continued occupancy. 33 N.J.R. 232. Accordingly, HMFA adopted N.J.A.C. 5:80-26.17 which provided that “[t]he Agency, COAH and the Division hereby reserve, for themselves and for each administrative agent appointed pursuant to this subchapter, all of the rights and remedies available at law and in equity for the enforcement of this subchapter.” N.J .A.C. 5:80-26.17.

In 2004, HMFA amended its UHAC regulations. 36 N.J.R. 3655(a) and 5713(a). As part of its amendments, HMFA re-codified and amended its enforcement provisions. In explaining the 2004 proposal, HMFA noted that the original enforcement provision was insufficient as it “does nothing more than reserve all *209 rights and remedies currently available at law or in equity for the purpose of enforcing compliance with UHAC.” 36 N.J.R. 3658. As evidenced by the expanded enforcement provisions, experience had shown HMFA that it was not enough simply to reserve rights and remedies under the law. Accordingly, HMFA re-codified its enforcement section from N.J.A.C. 5:80-26.17 to 5:80-26.18 and, in addition to retaining the language of section 17 as N.J.A.C. 5:80-26.18© and setting forth municipal responsibilities, added the section at issue. N.J.A.C. 5:80-26.18(e) provides:

Banks and other lending institutions are prohibited from issuing any loan secured by owner-occupied real property subject to the affordability controls set forth in [this] subchapter, if such loan would be in excess of amounts permitted by the restriction documents recorded in the deed or mortgage book in the county in which the property is located. Any loan issued in violation of this subsection shall be void as against public policy.

Through this provision, HMFA made it clear that it is against public policy for a lending institution to issue a loan secured by an affordable unit for an amount in excess of the restricted price. The focus of the regulation is the use of an affordable unit to secure an excessive loan. The deed restrictions are recorded as public documents and, therefore, lending institutions can easily determine whether a unit has a restricted price. Accordingly, if a mortgage secured by an affordable unit is given in excess of the permitted amount set forth in the restriction documents, the purpose of the regulation is met by voiding the mortgage as against public policy. If lending institutions are permitted to issue loans in excess of the value of the unit with affordable units as security, foreclosure could result in the loss of affordable units. This is against the enunciated public policy of ensuring that affordable units remain affordable and occupied by lower income households. 36 N.J.R. 3655. Thus, it is the mortgage secured by the affordable property that offends the regulation and is void as against public policy. The regulation does not affect the underlying debt as that does not undermine the regulation’s purpose.

III.

HMFA’s account of the history and context of N.J.A.C. 5:80-26.18(e) reveals that the purpose of the regulation is to deter mortgages on affordable housing units that place at risk the pool of affordable housing stock. The regulation provides an enhanced enforcement mechanism that goes beyond its predecessor regulation’s mere preservation of available remedies at law. HMFA’s enforcement regulation’s concern is not with the unsecured indebtedness of owners of affordable units. An owner of such a unit can take out unsecured loans in any amount. But what the unit owner is prevented from doing through this regulation is to provide a security interest in a low-income housing unit through a bank loan *210 in an amount in excess of ninety-five percent of the value of the unit. According to HMFA, the regulation deters banks from issuing such loans by rendering the security interest void as against public policy.

That understanding of N.J.A.C. 5:80-26.18(e) is in keeping with the statutory grant of authority to HMFA to promulgate regulations “to insure the maintenance of housing assisted under [the FHA] as affordable to low and moderate income households----” N.J.S.A 52:27D-321(f). The FHA gives HMFA authority to act in respect of secured loans on affordable housing units, and not to police loans generally taken out by owners of affordable housing units. It is the taking of a secured loan on the basis of the affordable housing unit that the regulations proscribe and that is what the agency, appropriately, says it addresses in N.J.A.C. 5:80-26.18(e). Under a claim of “plain meaning,” the majority affords the language in that regulation a reading that fails to take into account the statutory setting for this enforcement regulation.

HMFA’s interpretation is not only consistent with its statutory grant of authority, but also accords with related regulations promulgated by HMFA under the FHA and with the language of N.J.AC. 5:80-26.18(e) as a whole. The subchapter of the regulations in which N.J.A.C. 5:80-26.18(e) appears begins with the following statement of purpose: “This subchapter is designed to implement the [FHA] by assuring that low- and moderate-income units created under the Act are occupied by low- and moderate-income households for an appropriate period of time.” N.J.AC. 5:80-26.1. The regulations that follow only discuss owner indebtedness insofar as that indebtedness is secured by an interest in an affordable housing unit. N.J.AC. 5:80-26.8(a), for example, requires an owner of an affordable housing unit to submit notice to a designated agent, “[p]rior to incurring any indebtedness to be secured by an ownership unit,” and subsection (b) of that regulation prohibits an owner or lender from “causing] or permitting] the total indebtedness secured by an ownership unit to exceed 95 percent of the maximum allowable resale price of the unit.” *211 (Emphasis added). Indeed, the administrative agent to whom enforcement responsibility is delegated must send annual notices to owners reminding them of the proscription against incurring any “refinancing, equity loan, secured letter of credit, or any other mortgage obligation or other debt secured by the unit” unless prior written approval is obtained from the agent. N.J.A.C. 5:80-26.18(d)(4) (iii).

Turning to the language of N.J.A.C. 5:80-26.18(e) itself, the first sentence of the regulation prohibits “[blanks and other lending institutions” “from issuing any loan secured by owner-occupied real property subject to the affordability controls set forth in this subchapter, if such loan would be in excess of amounts permit-ted____” (Emphasis added). The regulation’s second and final sentence, which voids as against public policy “[a]ny loan issued in violation of this subsection,” is clearly intended to refer only to those loans prohibited in the first sentence of the regulation, that is, loans secured by affordable housing units that exceed the maximum allowable amount for such loans. In other words, the reference in the final sentence to “[a]ny loan” should reasonably be read, as it reads expressly in the first sentence, as “such loan,” meaning that only the secured interest in a loan issued in the prohibited excessive amount is void as against public policy. As HMFA has explained, voiding the security interest held by the bank serves a deterrent purpose. It deters banks from issuing such loans. Reducing the secured interest to an amount not exceeding ninety-five percent, as the majority would do, neuters the deterrent effect that HMFA sought for the regulation to accomplish.

The majority’s intense interest in the last sentence of the regulation leads it to ignore that the focus of the regulation as a whole is on the security interest in an affordable housing unit, not the underlying indebtedness itself. The underlying unsecured indebtedness never was within the purview of HMFA, through the FHA, to begin with. In my view, far from proving HMFA’s interpretation as plainly unreasonable, the majority’s reading of *212 the language of the last sentence loses sight of the context in which the sentence appears. Specifically, the reference to “loan” in the last sentence must be read in light of the regulation in its entirety, in the regulatory context of related rules, and in light of its statutory source of authority to act.

Finally, I am at a loss to understand how the majority can leap from its declared interpretation of the regulation as voiding only a portion of a “loan” (because that is the precise term on which the majority focuses) that is excessive under this regulatory scheme, to a remedy that imposes an equitable mortgage on the property in a lesser amount in order to protect the bank’s security interest. The plain-language meaning that the majority ascribes to the term “loan” in the last sentence of the regulation hardly supports the remedy imposed based on this reinterpreted regulatory mechanism.

Although one could question the reasonableness of the majority’s interpretation, I need not go that far because it is sufficient for purposes of this appeal to note that the majority’s plain language reading fails to demonstrate that the agency has adopted an interpretation of its own regulation that is “plainly unreasonable.” Rather, the agency’s interpretation emerges as sensible and reasonable; it reconciles the language of the regulation and of the regulatory scheme as a consistent whole, and it is soundly based on the statutory grant of HMFA’s authority to regulate in this area. It is entitled to deference and it is HMFA’s interpretation of its own regulation that should prevail. See In re Advisory Op. No. 01-2008, supra, 201 N.J. at 262 , 989 A.2d 1254 .

IV.

Respectfully, I cannot join the majority’s rejection of HMFA’s interpretation of its own regulation. In my view, the agency’s interpretation is not plainly unreasonable. That other remedies were available do not make the agency’s choice plainly unreasonable. That the modifier “such” did not precede the term “loan” in the last sentence is not enough to support a reading of the last *213 sentence that precludes the interpretation that HMFA ascribes to its own promulgated regulation. I respectfully dissent and would instead affirm the cogent opinion of the Appellate Division.

For reversal and remandment—Chief Justice RABNER and Justices ALBIN, HOENS, PATTERSON and Judge WEFING (temporarily assigned)—5.

For affirmance—Justice LaVECCHIA—1.