Petition for Writ of Certiorari — Glukowsky v. Equity One, Inc.

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No. 047398 SEP 1 * 2004

—~

OFFICE O°

3n The

Supreme Court of the Anited States

MARK GLUKOWSKY,

Petitioner,

EQUITY ONE, INC., a Delaware corporation,

Respondent.

VICTOR and ELAINE YURITCH,

Petitioners,

COUNTRYWIDE HOME LOANS, INC., d/b/a

America’s Wholesale Lender, a foreign corporation,

Respondent.

On Petition For A Writ Of Certiorari

To The Supreme Court Of New Jersey

PETITION FOR A WRIT OF CERTIORARI

LEWIS G. ADLER

Counsel of Record

ROGER C. MATTSON

26 Newton Avenue

Woodbury, NJ 08096

(856) 845-1968

Fax: (856) 848-9504

COCKLE LAW BRIEF PRINTING CO. (800) 225-6964

OR CALL COLLECT (402) 342-2831

QUESTIONS PRESENTED

Whether Congress vested regulatory power in the

states concerning prepayment penalties and other

interest charges in “federally related mortgages” un-

der their opt-out provisions of Depository Institu-

tions Deregulation and Monetary Control Act of 1980

(DIDMCA) 12 U.S.C. §1735(f)-7(a)?

Whether the Office of Thrift Supervision (OTS)

regulations adopted in 1996 under the Alternative

Mortgage Transaction Parity Act, 12 U.S.C. §§3801 et

seq. (AMPTA or Parity Act) were ultra vires?

TABLE OF CONTENTS

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Reasons for Granting the Petition .................ccccccccceceees

‘

II.

This court should resolve the conflict between

Depository Institutions Deregulation and

Monetary Control Act of 1980 (DIDMCA) 12

U.S.C. §1735(f)-7(a) and the Alternative Mort-

gage Transaction Parity Act (AMPTA or Parity

Act) as to whether State laws adopted pursu-

ant to the limited opt-out of DIDMCA are pre-

empted by AMPTA and its regulations .............

This court should confirm that the 1996 OTS

regulations were ultra vires as the OTS has

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Chevron Deference Is Inappropriate......................66

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TABLE OF AUTHORITIES

Page

CASES

Brown & Williamson Tobacco Corp. v. FDA, 153

F.3d 155 (4th Cir. 1998), cert. granted, 119 S.Ct.

PN a ss0hethmnastonensuacilsineisicsumaassiiarsoni. a... 16, 17, 22

California Division of Labor Standards Enforce-

ment v. Dillingham Construction, N.A., Inc., 519

lic 17

Casino Ventures v. Stewart, 183 F.3d 307 (1999),

cert. denied, 528 U.S. 1077 (2000)............ iaaanidadanbaacaiibars: 18

Chevron, U.S.A., Inc. v. Natural Resources Defense

Council, Inc., 467 U.S. 837 i | RRC 14, 16, 17

Cipollone v. Liggett Group Inc., 505 U.S. 504 ( 1902)........ 18

Commonwealth of Virginia Department of Educa-

tion v. Riley, 106 F.3d 559 (4th Cir 1997) en banc........ 16

Currie v. Diamond Mortgage Corp. of Ill., 859 F.2d

oth wy eter gpa ee TRO 23

Fidelity Federal Savings and Loan Ass’n v. De La

Cuesta, 458 U.S. 141 ON i iisirniacal to ne 17, 18

First Gibraltar Bank, FSB v. Morales, 19 F.3d 1032

(Sth Cir. 1994)........ sacainsutast ance ENCED 9

Glukowsky v. Equity One, Inc., 180 N.J. 49 (2004)......... 1, 5

Glukowsky v. Equity One, Inc., 360 N.J. Super 1

“cts pan oe eo TE 25

Gregory v. Ashcroft, 501 U.S. 452 5). | SERRE VOOR aa 21

Int'l Assoc. of Indep. Tanker Owners v. Locke, 148

F3d 1053 (9th Cir. 1998), cert. granted, 68

ee NE es ciascanteicstcse caresses mck, 17

TABLE OF AUTHORITIES — Continued

Lowe v. Sporicidin International, 47 F.3d 124 (4th

Sas OE withiccinissnshicicaatncemnbilacaseceshelineseuhicuhaeaspucidatietipsdsiailenbaanen 18

New York Conference of Blue Cross & Blue Shield

Plans v. Travelers Insurance Co., 514 U.S. 645

CRIED iathsicab libponisindscasseh papiceiiiieniupbaiissaindibaaabasandglsiitaedahansaiiutaiaiilaiies 17

Pennhurst v. State School & Hospital v. Halder-

I, Se ie Be Eh aiisiate viens niccsnseieistdenincninslanaveadaes 22

Smiley v. Citibank (South Dakota), N.A., 517 U.S.

SN insects cs cinsdidtnlesikec adsehancecies tc csipsanaanccaglia tones 17,19

Smith v. Fidelity Consumer Discount Co., 898 F.2d

ee CN Ge icici inten hchacnea ca titciniaciaeaditaienctaen 11

U.S. v. Langley, 62 F.3d 602 (4th Cir. 1995) en banc,

cert. denied, 116 S.Ct. 797 (1996)................esseeeeeeees 11, 20

U.S. v. Wilkes, 120 F.3d 468 (4th Cir. 1997), cert.

denied sub nom. Cameron v. U.S., 115 S.Ct. 885

PIII sciisvicaiddetssmidsinnasincaciasas va sasicaiaaibenn-asaauadgendbilcsaseaiaiaaanaaiaanin 14

Yuritch v. Countrywide, __ N.J. __ (2004), 854 A.2d

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STATUTES

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TABLE OF AUTHORITIES - Continued

Page

Fn AEs Ee PR sarees cistron enue a ue ae 15, 16

RB EGC. GE TRON) isiseccsvssansansesessoseesssincocecectes 23

Depository Institutions Deregulation and Monetary

Control Act of 1980 (DIDMCA) 12 USC.

Be FN i iitkcitcniedian nae ee 1, 6, 22, 25

12 U.S.C. §1735f-Ta(ay(L) ......ccccscsscescsessesesssssssseseeceseseesece.n, 8

Se SIIDAS. GEFIE TAD snvsccrscascsosidonstoniainanaicumnesiidecoa 7

12 U.S.C. §1735f-7a(bN(4)...........c.cscecececesesssososososoeeeeeses.., 5, 8

GONE incirndinssksnnernmeccniontaine aa ae cee 10

12 U.S.C. §1757(5)(A)(Viii) ooo ccececesececececesesecesecess. 20, 23

Alternative Mortgage Transaction Parity Act 12

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REGULATIONS

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EB CF i iicchinnsciicuiiadsin 3, 8, 24

BB Pe GO i visisccscicieciia ee 3, 4, 8, 24

TABLE OF AUTHORITIES — Continued

Page

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PRS, BIA veisenissteiobanliamaaamaveal 8,9

OTHER AUTHORITY

GE TOR. THAD, Be siiicsriicirensicsinceatiummenasibaaae 15

GO FO. FAG. Be tistitiinisncinsiccecisccanapeinnacaetan 20

67 Fed. Reg. 20470 (April 25, 2002)................ececeeeeeeeees 9,13

67 Fed. Reg. 60545 (September 26, 2002)..................... 9,13

Senate Report 97-463, Housing and Community

Development Amendments of 1982 (Filed May 12,

RS Bi: GD nicestinansiccnssssssnistacinieaanndaamaaes 16, 23

OPINION BELOW

The New Jersey Supreme court opinion is reported as

Glukowsky v. Equity One, Inc., 180 N.J. 49 (2004). (Appen-

dix at 1). The decision of the New J ersey Appellate Division

is reported as 360 N.J. Super 1 (App. Div. 2003). (Appendix

at 29). The related case of Yuritch v. Countrywide was

decided by the New Jersey Supreme Court on the same

basis in its decision reported as__ NJ. ___. (2004), 854

A.2d 917 (2004) (Appendix at 28) without further decision.

JURISDICTION

The New Jersey Supreme Court entered its initial

decision on May 26, 2004 (Appendix at 1) and entered an

order denying reconsideration on June 15, 2004 (Appendix at

82). The related case of Yuritch v. Countrywide was decided

by the New Jersey Supreme Court on the same basis in its

decision reported as July 8, 2004. (Appendix at 28) This court

has jurisdiction under 28 U.S.C. §1257(a) to review the NJ.

Supreme Court’s decision on a writ of certiorari.

STATUTORY PROVISION INVOLVED

12 U.S.C. §1735(f)-7(a)

(4) At any time after March 31, 1980, any State

may adopt a provision of law placing limita-

tions on discount points or such other

charges on any loan, mortgage, credit sale,

or advance described in subsection (a)(1) of

this section.

STATEMENT OF FACTS

Mark Glukowsky v. Equity One

The petitioner, Mark Glukowsky, purchased a home

on October 29, 1999. He obtained a loan from Equity One

in order to finance the purchase. The loan included a

prepayment rider, that if the mortgage loan was paid in

full within the first three years of the loan the borrower

would have to pay an additional charge of 3% of the

amount prepaid if paid in the first year, 2% of the amount

prepaid in the second year and 1% of the amount prepaid

if paid in the third year.

On April 19, 2001, Mr. Glukowsky sold the property

and paid off, in full, the loan with Equity One. The pay off

included a prepayment penalty of $1,427.97.

Equity One, Inc. is a Delaware Corporation and a non-

depository lender. The courts below have characterized the

loan from Equity One to Mr. Glukowsky as a balloon

mortgage subject to regulations under AMPTA and OTS

regulations adopted thereunder.

Under New Jersey law, a lender such as Equity One is

prohibited from charging a prepayment penalty on any

loan secured by a residential property.

Yuritch v. Countrywide

Victor and Elaine Yuritch entered into a residential

mortgage transaction with Countrywide Home Loans, Inc,

a California Corporation, on February 2, 1999. The loan

contained a variable interest rate. Victor and Elaine

Yuritch sold the property and paid off the loan on Novem-

ber 11, 2002. Countrywide in its pay-off statement in-

cluded a requirement for the payment of $6,015.10 as a

PT Le

I L_£L2

Prepayment penalty calculated as six months advance

interest on the amount which prepayment is in excess of

twenty percent of the principle balance. The pre-payment

penalty as demanded was paid at settlement on N. ovember

30, 2002 by the plaintiffs.

PROCEDURAL HISTORY

Mark Glukowsky v. Equity One

On May 17, 2001, Mr. Glukowsky filed a putative

class action complaint which alleged that Equity One

violated New Jersey law by charging and collecting a

prepayment penalty. Count One alleged that Equity One

violated N.J.S.A. 46:10B-2 by charging and collecting a

prepayment penalty upon the satisfaction of the mortgage.

Count Two alleged the same as regards to N.J.S.A. 17:3B-

22. Count Three alleged that Equity One’s actions

amounted to consumer fraud in violation of N.J.S.A. 56:8-

2, New Jersey Consumer Fraud Act.

In lieu of filing an answer, Equity One filed a motion

to dismiss for failure to state a claim upon which relief

may be granted. Mr. Glukowsky filed a cross motion for

summary judgment on the legal issues raised. The trial

court granted Equity One’s motion holding that 12 C.FR.

§560.220 barred enforcement of N.J.’s Prepayment Penalty

Law.

under the Parity Act when it applied 12 C.F.R. §560.34 to

state lending institutions engaged in’ AMTS. The panel

concluded that Congress did not intend the Parity Act to

pre-empt State Consumer Protection laws that prohibited

the imposition of prepayment fees on real estate transac-

tions in general, and on alternative mortgage transactions

(AMTS) in particular. The panel reinstated the claims that

alleged violations of the New Jersey Prepayment Law and

Consumer fraud Act.

In a 4-3 decision the New Jersey Supreme Court

majority reversed the Appellate Court decision holding

that the New Jersey Prepayment Law was pre-empted by

the 1996 version of 12 C.F.R. §560.220. In a strongly

worded dissent, citing the Appellate Court’s decision, the

court noted:

“I write further only to underscore the point that

affording lenders protection under the 1996 regu-

lation, which by now has been universally recog-

nized as misguided, becomes especially unjust

when viewed in conjunction with the sequence of

events relating to the “opt-out” mechanism pro-

vided by Congress when it enacted the underlying

legislation.

In passing the Parity Act, Congress afforded each

State 3 years to assert its right not to be pre-

empted by the federal regulatory scheme.

12 U.S.C.A. 3804. Congress enacted the law in-

cluding that provision in 1982, some fourteen

years before the suspect 1996 regulation was

promulgated. During the three year window

from 1982 to 1985, neither the New Jersey legis-

lature nor that of any other State could predict

that the OTS, or any other regulatory agency,

someday would turn the salutary congressional

goal of ensuring the availability of alternative

mortgages on its head by sanctioning what ar-

guably amounts to predatory lending practices by

aia i

state chartered institutions. As explained by

Judge King, the countenance of those practices, by

the federal regulations’ own admission, finds no

support in the intent manifested by Congress

when it enacted the Parity Act. That such ultra

vires regulation came into being only after the

states were no longer free to exempt themselves,

compounds the injustice of allowing such lending

practices the safe haven accorded by pre-emption

in these circumstances.”

Id. at 73.

Mr. Glukowsky petitioned the court to reconsider its

decision in that Congress through the adoption of the

Depository Institutions Deregulation and Monetary |

Control Act of 1980, 12 U.S.C. §1735f-7A(b)(4) (DIDMCA) |

specifically left the regulation of prepayment penalties,

attorney's fees, late charges and similar limitations de-

signed to protect borrowers on first residential home

mortgages to the states if they chose to opt out of the

federal scheme. The motion for reconsideration was denied

on June 15, 2004.

ts sa

Yuritch v. Countrywide

A similar complaint was filed against Countrywide as

was filed against Equity One. Countrywide filed a motion

to dismiss for failing to state a claim alleging the same

defenses as Equity One. The trial court granted the motion

to dismiss. Yuritch filed his appeal! which was granted and

the Appellate Division reversed the trial court for the

Same reasons as it did in Glukowsky. The New Jersey

Supreme Court, relying on its decision in Glukowsky,

reversed the Appellate Court and reinstated the dismissal

in its decision of July 8, 2004. (App. 28)

REASONS FOR GRANTING THE PETITION

I. This court should resolve the conflict between

Depository Institutions Deregulation and

Monetary Control Act of 1980 (DIDMCA) 12

U.S.C. §1735(f)-7(a) and the Alternative Mort-

gage Transaction Parity Act (AMPTA or Parity

Act) as to whether State laws adopted pursuant

to the limited opt-out of DIDMCA are pre-

empted by AMPTA and its regulations.

The issue concerning the conflict between the Deposi-

tory Institutions Deregulation and Monetary Control Act

of 1980 (DIDMCA) 12 U.S.C. §1735(f)-7(a) and the Alter-

native Mortgage Transaction Parity Act (AMPTA or Parity

Act) 12 U.S.C. §§3801 et seq. as to whether State laws

adopted pursuant to the limited opt-out of DIDMCA are

pre-empted by AMPTA and its regulations, is one of first

impression. There appear to be no reported decisions

which address this conflict.

The issues before the court can be narrowed to a very

simple analysis. The central issue concerns the interplay

between AMPTA and DIDMCA. AMPTA provided for

lenders to make alternative mortgages as defined by the

Act. DIDMCA, specifically provides for State consumer

legislation regulating first mortgage loan interest and

interest related charges. The court must determine if the

general grants of authority under the Parity Act somehow

trump the specific reservations of authority to the States

in DIDMCA. This determination is critical where a loan is

covered under both acts as in the instant case.

DIDMCA applies to the instant loan. The act sets

forth the requirements for loans to be covered as follows:

(a) The loan must be a first lien on residential

property;

(b) The loan must have been made after March

1, 1980; and

under the act. (see 12 U.S.C. §1735f-7a(1))

In the instant case each of these criteria are met. The

loan was a first lien on Mr. Glukowsky’s residence and was

made on October 29, 1999. Finally, Equity One is a lender

as defined by the Act. The same is true of Mr. Yurtich’s

loan.

For a loan to be subject to AMPTA it must meet the

following criteria:

(a) The loan must be an alternative mortgage

transaction;

(b) The loan must be made by a qualified hous-

ing creditor; and

license to lend.

In Mr. Glukowsky’s case, the courts below have held

that the balloon mortgage was an alternative mortgage.

Equity One is a qualified housing creditor as it made more

than five real estate secured loans in the preceding year.

Equity One is a licensed lender by the State of New J ersey.

In the Mr. Yuritch’s case, the courts below have held

that the variable rate mortgage was an alternative

mortgage. Countrywide is a qualified housing creditor as

it made more than five real estate secured loans in the

preceding year. Countrywide is a licensed lender by the

State of New Jersey.

The loans in the instant case are clearly covered by

both acts. The regulations under each act are clearly in

conflict. The AMPTA regulation 12 C.F.R. §560.220 with 12

C.F.R. §560.34 provides that a lender may charge a

prepayment penalty. Under the opt-out provision of

DIDMCA Congress vested with the States the regulation

of interest and interest charges.

DIDMCA 12 U.S.C. §1735f-7a(b)(4) provides that:

“Any time after March 1, 1980, any State may

adopt a provision of law placing limitations on

discount points or such other charges on any

loan, mortgage, credit sale or advance described

in subsection (a)(1) of this section.”

12 U.S.C. §1735f-7a(a)(1) provides a description of

those charges. |

“The provision of the constitution or laws of

any State expressly limiting the rate or amount of

interest, discount points, finance charges, or other

charges which may be charged taken, received or

reserved.”

It is clear from the plain language of the statute

that Congress vested in the States the ability to regu-

late all aspects of first mortgage loan charges including

prepayment penalties as long as the State adopted such

a law after March 1, 1980. This is important.to note as

the laws and regulations relied on by both Mr. Glu-

kowsky and Mr. Yuritch were adopted after March 1,

1980. Those laws are N.J.S.A. 17:11C-23, N.J.S.A.

17:3B-23 and N.J.A.C. 3:15-10.1(b). All of these laws

restrict the ability of lenders in New Jersey to charge a

prepayment penalty.

N.J.A.C. 3:15-10.1(b) applies specifically to the lenders

in the instant action and specifically prohibits prepayment

penalties for all mortgages in New Jersey.

“A borrower may repay a first mortgage loan, sec-

ond mortgage loan or consumer loan at any time

without penalty.”

The New Jersey Supreme Court has incorrectly stated

that DIDMCA and the Parity Act are unrelated laws. The

two laws must be read in harmony both in their respective

Scope and purpose. There is no dispute below that New

Jersey was authorized by the limited opt out provisions of

DIDMCA to enact laws restricting prepayment penalties.

The problem is the fact that pursuant to DIDMCA that

authority was specifically reserved to the States. This

must be balanced against the general preemption found by

the Court in the Parity Act. The problem with the Court’s

interpretation is that a prepayment penalty is not inher-

ent in any type of alternative mortgage. In fact this

position has been explicitly rejected by the OTS when it

adopted its revised rules in 2002. 67 Fed. Reg. 20470

(April 25, 2002) (App. 140) and 67 Fed. Reg. 60545 (Sep-

tember 26, 2002) (App. 176) This analysis was used by the

court in First Gibraltar Bank, FSB uv. Morales, 19 F.3d

1032 (5th Cir. 1994), if a law impedes the making of an

alternative mortgage such as the Texas Homestead law

which made reverse mortgages impossible, the state law

must yield. Under DIDMCA, a state may at any time

adopt a law which restricts discount points, finance

charges, and other charges such as prepayment penalties

and late charges. New Jersey was specifically authorized

by Congress in the limited opt out provision of DIDMCA to

regulate points, late charges, attorneys fees and prepay-

ment penalties. To suggest otherwise would be to render

the limited opt out provision of DIDMCA a nullity. This

interpretation is supported by the OTS as they noted in

footnote 19 that the Parity Act makes no reference to fees

or penalties.

It is of note that the Parity Act makes no ref-

erence to fees and penalties nor does it di-

rect federal regulators to consider their

impact on alternative mortgages. 67 Fed.

Reg. 20470 (September 26, 2002)

AMPTA loans are not exempt from DIDMCA. It is

important to note that the Parity Act must be read in

conjunction with DIDMCA. 12 U.S.C. §3805 of AMPTA

states that section 501(c)(1) of DIDMCA shall not apply to

transactions which are subject to this chapter. This is

important because that is the only part of DIDMCA where

Parity Act loans are exempted. Section 501(c)(1) is the

portion of the act concerning OTS consumer protection

regulation of loans secured by mobile homes.

Congress was aware of its actions and only exempted

alternative mortgage transactions (AMTS) from a small

portion of DIDMCA. Congress could have easily stated

that all Parity Act loans would be exempt from the opt-out

provisions of DIDMCA. Congress chose not to do so. New

Jersey was specifically authorized by Congress in the

limited opt-out provision of DIDMCA to regulate interest,

discount points, late charges, attorney's fees, prepayment

penalties and other loan related charges. To suggest

otherwise would be to render the limited opt-out provision

of DIDMCA a nullity. Congress is presumed to know

statutes it has passed and “absent a clear manifestation of

contrary intent, a newly enacted statute is presumed to be

harmonious with existing law.” US. v, Langley, 62 F.3d

602, 605 (4th Cir. 1995) en banc, cert. denied, 116 S.Ct. 797

(1996).

DIDMCA provides for a regulation of interest and its

component charges. AMPTA provided for a different type

of mortgage loan other than traditional 30 year fixed rate

mortgages such as variable rate mortgages, balloon

mortgages and reverse mortgages which were not gener-

ally available in many states in 1982. The issue in this

case concerns loans which were clearly governed by both

laws. The courts have uniformly held that the scope of

DIDMCA is broad and Congress specifically reserved to

the States the option to regulate these charges. See Smith

v. Fidelity Consumer Discount Co., 898 F.2d 907 (3rd Cir.

1990).

As of this date the courts have refused to address the

issue of the scope and effect of the opt-out provision of

DIDMCA. The court should. grant this petition to address

this issue.

II. This court should confirm that the 1996 OTS

regulations were ultra vires as the OTS has

admitted.

The court should grant this petition for a Writ of

Certiorari in order to close a tremendous regulatory hole

which has allowed predatory lending to flourish.

Justice Zazzali in his dissent below crystallized the

issue when he wrote:

“I write further only to underscore the point that

affording lenders protection under the 1996 regu-

lation, which by now has been universally recog-

nized as misguided, becomes especially unjust

when viewed in conjunction with the sequence of

events relating to the “opt-out” mechanism pro-

vided by Congress when it enacted the underlying

legislation.

In passing the Parity Act, Congress afforded each

State 3 years to assert its right not to be pre-

empted by the federal regulatory scheme.

12 U.S.C.A. 3804. Congress enacted the law in-

cluding that provision in 1982, some fourteen

years before the suspect 1996 regulation was

promulgated. During the three year window from

1982 to 1985, neither the New Jersey legislature

nor that of any other State could predict that the

OTS, or any other regulatory agency, someday

would turn the salutary congressional goal of en-

suring the availability of alternative mortgages

on its head by sanctioning what arguably

amounts to predatory lending practices by state

chartered institutions. As explained by Judge

King, the countenance of those practices, by the

federal regulations’ own admission, finds no sup-

port in the intent manifested by Congress when it

enacted the Parity Act. That such ultra vires

regulation came into being only after the states

were no longer free to exempt themselves, com-

pounds the injustice of allowing such lending

practices the safe haven accorded by pre-emption

in these circumstances.”

Id. at 73.

It is rare that any agency will candidly admit that a

prior action taken was outside the scope of its legislative

authority. Such a statement should not be lightly ignored.

The OTS wrote:

_ A AA st ere

“One of the congressional findings underlying the

Parity Act was that OTS and other federal regu-

lators had adopted regulations authorizing their

federally chartered institutions to offer alterna-

tive mortgages, and that the Purpose of the Act

was to eliminate the discriminating impact of

those regulations. OTS regulations on prepay-

ment penalties and late fees, however, were not

adopted to enable federal thrifts to engage in al-

ternative mortgage financin , but rather to per-

mit federal thrifts the flexibility to exercise their

lending powers in a uniform federal scheme. See

12 C.ER. 560.2(a). Therefore, OTS does not be-

lieve that Congress intended that regulations

such as these would offer a basis for claiming dis-

criminatory treatment or were needed to provide

parity with federally charted institutions.” 67

Fed. Reg. 20470 (April 25, 2002) (Appendix at

140).

When the OTS later adopted the final rule in Septem-

ber of 2002, it had not changed its position in this regard

as it wrote:

“If Congress had viewed the regulation of

prepayment penalties as essential to parity, it is

unlikely that Congress would have imposed a

regulatory scheme that, at the time of its enact-

ment, ensured different treatment among the

various state creditors.” 67 Fed. Reg. 60545-

60546 (September 26, 2002) (Appendxi at 176-

177).

OTS has agreed that its belated 1996 “Clarification”

was unauthorized and contrary to the federalism princi-

ples stressed in recent decisions of this Court.

Chevron Deference Is Inappropriate.

The OTS is not entitled to deference under Chevron,

U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467

U.S. 837, 842-43 (1984). Chevron requires a two-part test:

first, the Court inquires whether the plain language of the

statute addresses the precise issue. If so, that is the end of

the matter, because courts as well as agencies must give

effect to the unambiguously expressed intent of Congress.

Id. If, however, the statute is silent or ambiguous, the

agency’s interpretation will be upheld if it is a permissible

construction of the statute — so long as it is a matter

within the agency’s authority. Id.

In determining whether a statute is ambiguous, a

court is guided by reference to the language itself, the

context in which the language is used, and the broader

context of the statute as a whole. U.S. v. Wilkes, 120 F.3d

468, 469-70 (4th Cir. 1997), cert. denied sub nom. Cameron

v. U.S., 115 S.Ct. 885 (1998). The Parity Act provision at

issue is whether “An (AMT) may be made by a housing

creditor in accordance with this section, notwithstanding

any State constitution, law or regulation.” 12 U.S.C.

§3803(c). The plain meaning of those words is that State

Laws that would prevent AMTs from being made are

preempted, and that State laws that do not interfere with

the making of AMTs are not preempted. The broader

context of the statute itself compels this result: the pur-

pose of the Act was to foster the making of AMTs by

nonfederal lenders. There is no other purpose described in

Section 3801(9b) that would envision preemption of State

laws beyond those that prevent the making of AMTs.

Hence, the federal statute not being ambiguous, there is

nothing for OTS to construe; State laws regulating pre-

payment penalties do not obstruct the making of AMTs

and, therefore, are not preempted by Section 3803(c). This

position has been echoed by the OTS in its recent rulemak-

ing.

One of the congressional findings underlying the

Parity Act was that OTS and other federal regu-

lators had adopted regulations authorizing their

federally charted institutions to offer alternative

mortgages, and that the purpose of the Act was to

eliminate the discriminatory impact of those

regulations. OTS regulations on prepayment pen-

alties and late fees, however, were not adopted to

enable federal thrifts to engage in alternative

mortgage financing, but rather to permit federal

thrifts the flexibility to exercise their lending pow-

ers in a uniform federal scheme. See 12 CER.

560.2(a). Therefore, OTS does not believe that

Congress intended that regulations such as these

would offer a basis for claiming discriminatory

treatment or were needed to provide parity with

federally charted institutions.

Yet even if the Parity Act’s silence were found to be

ambiguous on the subject of prepayment penalties, the

OTS would still not be entitled to deference. Its conclusion

in 1996 that State laws regulating prepayment penalties

were preempted by the Parity Act was (i) flatly inconsis-

tent with its own then — effective regulations, which were

limited to those that described and defined AMTs, see 48

Fed. Reg. 23053, and (ii) an impermissible construction of

the Parity Act, because it would render the Act’s opt-out

Provision a nullity, see infra. The OTS’s 1996 opinion on

preemption is also rebutted by another section of the

Garn Act of which the Parity Act is a part, 12 U.S.C.

§1701j-3, which expressly preempted State due-on-sale

restrictions. The legislative history shows that Congress

recognized the extraordinary intrusion into state police

powers accomplished by preemption, and set out in fine

detail its reasons for doing so. Excerpts from Senate

Report, pp. 3074-79, 3110-12. In that manner, Congress

made known its “clear and manifest purpose” to preempt

due-on-sale restrictions in 12 U.S.C. §1701j-3. Compare

Section 1701j-3 with the sharply focused language of

Section 3803(a)(3) and Section 807 of the Parity Act.

Congress said nothing about preempting State prepay-

ment penalty laws either in the Parity Act or its legislative

history, even though prepayment penalty statutes are

similar to due-on-sale restrictions as exercises of state

police power over lending practices. Had Congress in-

tended to preempt State laws governing prepayment

penalties in the Parity Act, surely there would be at least a

fingerprint in the legislativé history so indicating.

Moreover, when the issue is whether Congress has

preempted or authorized preemption of State law, it is

inappropriate for courts to grant deference under Chevron.

See Brown & Williamson Tobacco Corp. v. FDA, 153 F.3d

155, 162 (4th Cir. 1998) (Court should strictly scrutinize

agency interpretations of its own authority), cert. granted,

119 S.Ct. 1495 (1999); Commonwealth of Virginia Depart-

ment of Education v. Riley, 106 F.3d 559, 565 n.4, 566-67

(4th Cir. 1997) en banc (Chevron deference inappropriate

when congressional authorization principal issue for

decision).

In this case, treating New Jersey in a manner consis-

tent with her constitutional status requires the court to

make an effort to reconcile federal and state statutory

schemes, rather than ousting New Jerseys Consumer

Protection limitations. Here, as in other cases involving

overlapping federal and state consumer protection legisla-

tion, express statutory language of preemption is to be

interpreted narrowly, with a presumption against preemp-

tion. of the histarig Piae powers vi sites. Tris correct

approach is illustrated in recent decisions of the Supreme

Court of the United States. For example, in the context of

employee benefits, the Supreme Court has rejected an

expansive view of preemption and instead applied lan-

guage of express preemption more strictly, with a “pre-

sumption against preemption” of state law alleged to

conflict with ERISA. See New York Conference of Blue

Cross & Blue Shield Plans v. Travelers Insurance Co., 514

U.S. 645, 655 ( 1995); California Division of Labor Stan-

dards Enforcement v. Dillingham Construction, N.A., Inc.,

519 U.S. 316, 331-32 (1997). The plain language of section

3803(c) considered in light of the history and structure of

the Parity Act, and the presumption against preemption,

supports the conclusion that Congress did not authorize

the 1996 regulatory action of OTS, maki Chevron

deference inappropriate: [a] precondition to deference

under Chevron is a congressional delegation of administra-

tive authority. No deference is due the [agency] construc-

tion of the Act unless it is acting within the bounds of its

congressionally-established authority.” Brown & Wiliiam-

son Tobacco, 153 F.3d at 161 (citation omitted). Accord,

Intl Assoc. of Indep. Tanker Owners v. Locke, 148 F.3d

1053, 1067 (9th Cir. 1998) (“Preemption by regulations

enacted by a federal agency does not occur if that agency is

acting beyond the scope of its delegated powers”), cert.

granted, 68 U.S.L.W. 3152 (1999). As noted previously, the

OTS has conceded this in its effort to correct the regula-

tions.

Defendant Equity One has cited Smiley v. Citibank

(South Dakota), N.A., 517 U.S. 735 (1996) and Fidelity

Federal Savings and Loan Ass’n v. De La Cuesta, 458 U.S.

NS ee,

141, 153-54 (1982). However, these cases are inapposite,

because they do not involve interpretation of express

statutory language of preemption setting forth the intent

of Congress: See Cipollone v. Liggett Group Inc., 505 U.S.

504, 517 (1992) (“When Congress has considered the issue

of preemption and had included in the enacted legislation

a provision explicitly addressing that issue, and when that

provision provides a reliable indicium of congressional

intent with respect to state authority, there is no need to

infer congressional intent to pre-empt state laws from the

substantive provisions of the legislation”) (citations omit-

ted); accord, Casino Ventures v. Stewart, 183 F.3d 307, 312

(1999), cert. denied, 528 U.S. 1077 (2000) (express preemp-

tion provisions are “strong evidence that Congress did not

wish to extend preemption any further”) (quoting Cipol-

lone, 505 U.S. at 517; Lowe v. Sporicidin International, 47

F.3d 124, 128 (4th Cir. 1995) (“It seems clear to us that the

Supreme Court’s preemption analysis in Cipollone makes

it clear that our narrower view of FIFRA preemption is

preferable.”)

Fidelity Federal concerned a regulation for federal

thrifts issued by the Federal Home Loan Bank Board

under a broad grant of rulemaking authority in the Home

Owner’s Loan Act of 1933 (“HOLA”). See 12 U.S.C.

§1464(a). The Court held that a regulation preempting

state limitations on due-on-sale clauses was a valid exer-

cise of the FHLBB’s plenary regulatory authority with

respect to federal savings and loans: “The language and

history of HOLA convince us that Congress delegated to

the Board, ample authority to regulate the lending prac-

tices of federal savings and loans so as to further the Act’s

purposes, and that c is consistent with those purposes”.

458 U.S. at 159.

In contrast, the Parity Act contains no such broad

grant of authority for OTS to issue regulations for state-

chartered mortgage companies. Rather, Congress strictly

limited the task assigned the OTS in the Parity Act to

assure States an opportunity to make an informed choice

and participate jointly in the regulation of AMTs by state-

chartered housing creditors. Moreover, even OTS admitted

that its 1996 regulation was not an exercise of plenary

regulatory authority, but a mere clarification of the Parity

Act, “to eliminate possible confusion.” ~

Smiley concerned a regulation for national banks

issued by the OCC under a broad grant of rulemaking

authority in the National Bank Act. The Court held that a

regulation interpreting the word “interest” preempted

state law. However, the Court emphasized that it was not

dealing with the question of whether a statute is preemp-

tive, and it recognized that a statutory provision dealing

with preemption would implicate the presumption against

preemption and the clear statement rule. See Smiley, 517

US. at 743-44 (citing Cipollone, 505 U.S. at 518).

In contrast, this case concerns express language of

preemption in 12 U.S.C. §3803(c) and a statutory design

that evinces clear congressional intent not to disturb

state laws that do not prevent or significantly interfere

with the ability of housing creditors to make, purchase

and enforce AMTs. The case against preemption is espe-

cially strong where — as here — the federal and state -

schemes are so manifestly compatible. New Jersey’s

longstanding limitations on prepayment penalties existed

alongside federal statutes and regulations for more than a

decade before OTS announced its novel “clarification” in

1996. New Jersey’s limitations on prepayment penalties

never prevented or obstructed state chartered housing

creditors from making AMTs.

Congress is presumed to know what statutes it has

passed, and “absent a clear manifestation of contrary

intent, a newly enacted ... statute is presumed to be

harmonious with existing law.... ” U.S. v. Langley, 62

F.3d 602, 605 (4th Cir. 1995) en banc, cert. denied, 116

S.Ct. 797 (1996). The existing (in 1982) NCUA statute (the

Federal Credit Union Act — 12 U.S.C. §1757(5)(A)(viii) —

barred the imposition of prepayment penalties. The Parity

Act may most easily and logically be harmonized with that

law by interpreting the Parity Act not to have any effect on

State Laws limiting prepayment penalties.

The Parity Act provided that States could opt out from

a preemption provision of Section 3803 within three years

from October 15, 1982. Section 3804. New Jersey did not

do so because AMTs were already legal in New Jersey.

Indeed, when the opt out window closed in 1985, the

regulations identified by the FHLBB in its three Notices to

Housing Creditors not only failed to preempt State laws

regulating prepayment penalties, they specifically stated

that federal regulations of general application to mortgage

loans were not applicable to AMTs. 48 Fed. Reg. 25053.

Since the OTS waited until 1996 to opine that State

laws regulating prepayment penalties were preempted by

the Parity Act, a state legislature would need the powers

of Nostradamus to have known in October 1985 — when

the “opt-out window” closed that it should opt out from a

federal intrusion into state law not to be accomplished for

eleven years. The OTS has now even suggested that

Congress should allow a new period for opt-out from the

Parity Act for this very reason.

not defined until 1996, after the opt-out period had ex-

pired. Such a bizarre interpretation must be shunned,

whether advanced in the belief that Congress intended to

sandbag the States, or in the belief that State statutes can

be vitiated by an agency opinion issued eleven years after

the fact (an opinion flatly inconsistent with the regulations

that were contemporaneously adopted). A finding of

preemption is inconsistent with the notice of concurrent

sovereignty. See Gregory v. Ashcroft, 501 US. 452, 457

(1991). Moreover, to countenance such a disingenuous

method of preemption would contravene the principle that

preemption of State laws is not a power that is exercised

lightly. Id. 501 U.S. at 460. It would render the “clear

statement” rule meaningless to allow an agency to decide

after the opt-out window closes that State law is pre-

empted in a brand new area. See Gregory, 501 U.S. at 461:

the clear statement rule assures that Congress “has in fact

faced, and intended to bring into issue, the critical matters

involved in the judicial decision.”

In addition, the opt-out provision provides that States

could opt out from the preemption accomplished by the

Act. See Section 3804: States may opt out if “such State

does not want the preemption provided in section 3803 of

this title to apply to AMTs” (emphasis supplied). The

underlined words would be meaningless if Congress

intended preemption to occur either (i) by federal agency,

or (ii) after the opt-out window closed. Surely, Congress

meant that States would be able to make a knowing

decision about whether to opt out. Pennhurst v. State

School & Hospital v. Hailderman, 451 US. 1, 17 (1981).

Novel regulatory interpretations that expand agency

jurisdiction are not entitled to deference. Brown & Wil-

liamson Tobacco Corp., 153 F.3d at 155, 163, 168, 170, n.18

(rejecting novel interpretation expanding regulatory

jurisdiction 60 years after passage of statute).

New Jersey consumers have always been able to

obtain AMTs and New Jersey’s ban on prepayment penal-

ties has in no way limited their AMT options and alterna-

tives. Moreover, the NCUA statute barred the imposition

of prepayment penalties before passing the Parity Act. But

even beyond this inconsistency, the OTS itself has recog-

nized that the New Jersey Statutes protect consumers. See

12 C.F.R. §590(3)(c), dealing with state usury laws: “Noth-

ing in this section preempts limitation in state laws on

prepayment charges ... or other provisions designed to

protect consumers.” (emphasis supplied). Indeed, that very

regulation lends support to the view that Congress is

sufficiently familiar with the importance of State laws

regulating prepayment penalties that it would not pre-

empt such laws in such an indirect manner.

It is important to recognize that there is no estab-

lished federal policy requiring uniformity or disfavoring

limitations on prepayment penalties as a means of in-

creasing the availability of credit. Congress allowed states

to opt out of identified federal reguiations, which several

states did, rebutting any argument based on uniform

national standards for AMTs. Moreover, although the

Depository Institutions Deregulation and Monetary

Control Act of 1980, 12 U.S.C. §1735f-7a, preempted many

State laws affecting first mortgage loans, Congress chose

to allow the States to opt out of the act and

re-regulate interest and interest charges, a field left

historically to State control. See Currie v. Diamond Mort-

&age Corp. of Ill., 859 F 2d 1538, 1541-43 (7th Cir. 1988).

As noted above, Congress has also made the policy

determination that federal credit union borrowers should

be permitted to prepay their loans without penalty, 12

U.S.C. §1757(5)(A)(viii). It also has prohibited prepayment

penalties as a condition of eligibility for insurance of home

equity conversion mortgages for elderly homeowners. 12

U.S.C. §1715z-20(d)(4). Thus, it cannot be said that federal

policy disfavors limitations on prepayment penalties as a

means of increasing credit availability. See Senate Report

97-463, Housing and Community Development Amend-

ments of 1982 (Filed May 12, 1982) p. 55:

“Through the Parity Act... housing creditors

... are being authorized to engage in transactions

in accordance with regulations issued by those

federal agencies for the institutions that they

charter. This does not place non-federally char-

tered housing creditors under the supervision of

the federal agencies, but instead merely enables

them to follow a federal program as an alterna-

tive to State Law.” ?

The federal “program” is the ability to make AMTs

which in 1982 many States did not permit. That is why the

federal program was an alternative to State law. Under

federal law, loans made under NCUA authority could not

impose prepayment penalties. 12 U.S.C. §1757(5)(A)(viii).

Hence, if AMTs made through the NCUA were forbidden to

impose prepayment penalties, the federal “program”

envisioned by Congress could not be a program that

required the ability to impose prepayment penalties as a

necessary component.

Here, the core issue is about who has the authority to

make important policy decisions. This Court should not

conclude that the Parity Act’s silence on prepayment

penalties conferred a license to regulate on OTS and the

federal court to substitute their judgments for those of

State legislatures. The Parity Act, properly read, respects

State sovereignty and gives effect to the important State

interests served by New Jersey's consumer protection

statutes, without significantly interfering with the ability

of housing creditors to make, purchase and enforce AMTs.

As Judge King wrote:

We agree with the reasoning set forth in the

OTS’s Notice of Proposed Rulemaking. In accor-

dance with that reasoning, we find that 12 C.F-R.

§ 560.220 is invalid to the extent it incorporates

12 C.FR. § 560.34, thereby regulating prepay-

ment penalties assessed by state-chartered hous-

ing creditors on AMTs covered by the Parity Act.

Furthermore, as will be discussed, in our opinion,

Shinn, Face, and Benay, as well as the OTS 1996

Opinion Letter, were incorrectly decided because

they did not give proper consideration to: (1) Con-

gress’s limited purpose in passing the Parity Act,

to create a national market for AMTs; or (2) Con-

gress’s limited intent, through the Parity Act’s

preemption provision, to preempt only those state

laws which prohibit or interfere with a housing

creditor’s ability to make, purchase, or enforce

AMTs.

We hold that, to the extent 12 C.E-R. § 560.220 in-

corporates the regulation of prepayment penalties

under 12 C.E-R. §$ 560.34, and applies 12 C.ER.

§ 560.34 to AMTs issued by state-chartered hous-

ing creditors, it is unlawful, because it exceeds the

scope of authority Congress delegated to the OTS

under the Parity Act. Id., 360 NJ. Super. 1 at 36

(App. Div. 2003).

CONCLUSION

Predatory lending has become rampant across the

country. The OTS and the Courts have observed that

prepayment penalties are the primary tool used by these

lenders to prey on consumer borrowers. States such as

New Jersey have attempted to protect their citizens by

passing laws prohibiting such charges pursuant to the opt-

out provision of the Depository Institutions Deregulation

and Monetary Control Act of 1980 (DIDMCA) 12 U.S.C.

§1735(f)-7(a). Only to be frustrated in their attempt to

enforce such laws the Court should grant this writ of

certiorari to hold that the OTS regulations under AMPTA

do not preempt these laws.

Respectfully submitted,

LEWIs G. ADLER, Esq.

ROGER C. Mattson, Esq.

App. i

TABLE OF CONTENTS TO APPENDIX

New Jersey Supreme Court Opinion: Glukowsky v.

Equity One, Inc., 180 N.J. 49 (2004) oo.eececccccecceceseees App. 1

New Jersey Supreme Court Opinion: Yuritch v.

Countrywide, __ N.J. __ (2004), 854 A.2d 917

CIPI scisnscnnsinsussonbuinscthahedidieldadlitaad ands tia aie App. 28

Superior Court of New Jersey Appellate Division

Decision: Glukowsky v. Equity One, Inc., 360 NJ.

ape 2 (Amp Tie, DIGI a sissviesssiitnsresatitsiniricdkanticcas App. 29

New Jersey Supreme Court Opinion: Glukowsky v.

Equity One, Inc., denial of reconsideration dated

CO TE, Di iver ainicdistnnapiialapiting ee App. 83

Text of the Alternative Mortgage Transaction

Parity Act 12 U.S.C. 3801 et seq. .....cececcesesceseeees App. 84

Text of Depository Institutions Deregulation and

Monetary Control Act of 1980 (DIDMCA) 12

IAS. SERINE GE TU csiicssneoninscniclenibied teat, tao App. 90

Text of Office of Thrift Supervision Parity Act

Regulations 12 C.PAR. 84............ccsccoccocsoscosceoseore App. 105

Text of Office of Thrift Supervision DIDMCA Act

Regulations 12 C.F.R. 590.1 et seq........ccccceseseee. App. 106

New Jersey Prepayment Law N.J.S.A. 46:10B-1 et

DOT), .nossensnssnenssnenhahatnnsaecsséenbhbaasdinibeniiademmabaatniin App. 112

New Jersey Prepayment Regulation N.J.A.C. 3:15-

Bok .scaspsesensionss cienesutinensbaumienbailate igen: ame ae amen App. 112

New Jersey Prepayment Regulation N.J.A.C. 3:15-

WDE, snsnsesseesinssssicosésetaiiniaiibaecntinsiiabummieacs aan App. 126

SRS RR NS les 1 SO eM he Bh te ome G

TABLE OF CONTENTS

TO APPENDIX — Continued

Page

Office of Thrift Supervision Notice of Proposed

Rulemaking, Alternative Mortgage Transaction

Parity Act, 67 Fed. Reg. 20,468, April 25, 2002..... App. 128

Office of Thrift Supervision Notice of Final Rule,

Alternative Mortgage Transaction Parity Act, 67

Fed. Reg. 60,542, September 26, 2002................ App. 161

Office of Thrift Supervision Delay of Final Rule,

Alternative Mortgage Transaction Parity Act, 67

Fed. Reg. 76,304, December 12, 2002................. App. 220

App. 1

SUPREME COURT OF NEW JERSEY

A-22 September Term 2003

MARK GLUKOWSKYy,

Plaintiff-Respondent,

Vv.

EQUITY ONE, INC., a Delaware

Corporation,

Defendant-Appellant.

Argued February 3, 2004 — Decided May 26, 2004

On certification to the Superior Court, Appellate

Division, whose opinion is reported at 360 N.J.

Super. 1 (2003).

Mark S. Melodia argued the cause for appellant

(Reed Smith, attorneys; Mr. Melodia and Lauren

Graham Delehey, on the brief).

Lewis G. Adler argued the cause for respondent

(Mr. Adler, attorney; Mr. Adler, Roger C. Mattson

and Louis D. Fletcher, on the briefs).

Dennis R. Casale argued the cause for amicus

curiae Mortgage Bankers Association of New

Jersey (Levy & Watkinson and Pepper Hamilton,

attorneys; Mr. Casale and E. Robert Levy of coun-

sel; Mr. Casale, Mr. Levy and Michael G. Petrone,

on the brief).

David McMillin argued the cause for amicus cu-

riae Legal Services of New Jersey (Melville D.

Miller, Jr, President, attorney; Mr. McMillin,

Carrie Ferraro, Gwen E. Orlowski and Rebecca

Shore, on the brief).

App. 2

William H. Hyatt, Jr. submitted a brief on behalf

of amicus curiae National Home Equity Mort-

gage Association (Kirkpatrick & Lockhart, attor-

neys).

Michael M. Horn submitted a brief on behalf

of amici curiae American Bankers Association,

American Financial Services Association, America’s

Community Bankers, Consumer Bankers Associa-

tion, Consumer Mortgage Coalition, Mortgage

Bankers Association of America, New Jersey Fi-

nancial Services Association and New Jersey

League-of Community Bankers (McCarter & Eng-

lish, attorneys; Mark D. Knoll, on the brief).

JUSTICE ALBIN delivered the opinion of the Court.

In 1996, the federal Office of Thrift Supervision (OTS)

issued a regulation authorizing state housing lenders to

charge prepayment penalties in alternative mortgage

transactions (AMT). Alternative Mortgage Transaction

Parity Act, 12 C.FR. § 560.220 (1996). That regulation

would preempt our state laws that prohibit housing

lenders from charging prepayment penalties. Plaintiff

contends that OTS exceeded the scope of authority dele-

gated to it by Congress under the Alternative Mortgage

Transaction Parity Act of 1982, 12 U.S.C.A. §§ 3801-06

(Parity Act), when it issued 12 C.FER. § 560.220. In deter-

mining whether that federal regulation is valid, we ad-

dress principles concerning the scope of authority granted

to a regulatory agency, preemption, and comity.

In 1999, plaintiff Mark Glukowsky secured a $72,000

mortgage loan from defendant Equity One to finance the

purchase of a home in Mount Laurel. The financing

App. 3

arrangement provided a fixed-interest rate over a ten-year

term at the end of which the loan, though not fully amor-

tized, would mature. On the maturity date in 2009, plain-

tiff would owe $62,021.25 of the principal and have the

choice to pay the entire principal or refinance the loan

with Equity One or another lender. This method of financ-

ing a residential mortgage is commonly referred to as a

“balloon lo»n” and constitutes an AMT under the Parity

Act. An AMT is a loan with an interest rate or finance

charge that may be adjusted or renegotiated; a loan with a

fixed-interest rate that matures before it is fully amor-

tized, thus implicitly permitting rate adjustments; or a

loan with other variations “not common to traditional

fixed-rate, fixed-term transactions.” 12 U.S.C.A. § 3802(1).

As part of the mortgage contract, plaintiff agreed to

pay a prepayment fee to Equity One if he repaid the loan

in full during the first three years of its term.’ The mort-

gage contract also contained a “due on sale” clause, provid-

ing that if the mortgaged property was sold or transferred

without Equity One’s prior written consent, the full

amount of the loan would be due on demand. In 2001,

plaintiff sold the Mount Laurel residence subject to the

mortgage and “due on sale” clause. Equity One exercised

its right to demand full payment of the loan and sent

plaintiff a pay-off statement. That statement included a

two percent prepayment fee in the amount of $1,427.97

because the outstanding balance on the loan was to be

' Under the terms of the Prepayment Rider, full repayment of the

loan in the first year would result in a prepayment fee equal to three

percent of the amount being prepaid, in the second year a two percent

fee, and in the third year a one percent fee.

App. 4

paid within the second year of the mortgage term. Plaintiff

paid the prepayment fee under protest.

Plaintiff later filed a complaint alleging that Equity

One had violated New Jersey's Prepayment Penalty Law,

N.J.S.A. 46:10B-2, Market Rate Consumer Loan Act,

N.J.S.A. 17:3B-22, and Consumer Fraud Act, N.J.S.A.

56:8-2, by collecting the prepayment fee. Equity One

moved to dismiss the complaint on the ground that it was

preempted by 12 C.F-R. § 560.220, which barred enforce-

ment of any state law that prohibited a state-chartered

lending institution from charging a prepayment fee on an

AMT.

Before the promulgation of 12 C.ER. § 560.220 by

OTS in 1996, federal lenders were free to charge prepay-

ment fees on AMTs- pursuant to 12 C.F-R. § 560.34, while

state lenders, such as Equity One, were subject to state

laws, many of which prohibited prepayment fees in real

estate transactions. The adoption of 12 CFR. § 560.220

placed state-chartered housing creditors on an equal

footing with their federal counterparts by extending 12

C.FE-R. § 560.34 to state lenders and preempting any state

law that forbid charging a prepayment fee on an AMT. The

Law Division found that 12 C.FR. § 560.220 barred

enforcement of New Jersey’s Prepayment Penalty Law and

dismissed the complaint on the basis of federal preemp-

tion.

The Appellate Division reversed and held that OTS

exceeded the scope of its authority under the Parity Act

when it applied 12 C.F-R. § 560.34 to state lending institu-

tions engaged in AMTs. Glukowsky v. Equity One, Inc., 360

N.J. Super. 1, 12 (2003). The panel concluded that Con-

gress did not intend the Parity Act to preempt state

App. 5

consumer protection laws that prohibited the imposition of

prepayment fees on real estate transactions in general,

and on AMTs in particular. Jd. at 37-39. The panel rein-

stated the claims that alleged violations of New Jersey’s

Prepayment Law and Consumer Fraud Act, but affirmed

the dismissal of the claim arising under the Market Rate

Consumer Loan Act because that statute did not apply to

defendant. Id. at 48. Plaintiff was allowed to amend his

complaint to allege other claims arising under federal and

state law.’ Ibid. The panel did not address whether to

apply its decision retroactively, leaving that issue to be

developed on remand. Jbid.

We granted Equity One’s petition for certification. 177

N.J. 575 (2003). We also granted the motions of the Ameri-

can Bankers Association, et al.,’ the National Home Equity

Mortgage Association, the Mortgage Bankers Association

of New Jersey, and Legal Services of New Jersey for leave

to participate as amici curiae.

* In his brief before the Appellate Division, plaintiff argued for the

first time that defendant’s collection of a prepayment penalty violated

the federal due-on-sale regulation, 12 C.FR. § 591.5(b)(2)(i); the New

Jersey Licensed Lenders Act, N.J.S.A. 17:11C-1 to -49; and general

contract law principles prohibiting unconscionable contract terms.

Glukowsky, supra, 360 N.J. Super. at 10. Plaintiff neither pleaded those

claims in his complaint nor moved to amend the complaint to state such

claims. Jd. at 10-11. Nevertheless, after reinstating the complaint, the

Appellate Division allowed plaintiff to amend the complaint to assert

those new claims. Id. at 47.

* Amici are American Bankers Association, American Financial

Services Association, America’s Community Bankers, Consumer

Bankers Association, Consumer Mortgage Coalition, Mortgage Bankers

Association of America, New Jersey Financial Services Association, and

New Jersey League of Community Bankers. Those organizations

represent mortgage lenders who make and service mortgage loans in

New Jersey and nationwide.

See St eke See

App. 6

The central issue in this case is whether the Parity

Act gave OTS the authority to adopt the challenged

regulation. To determine whether 12 C.F-R. § 560.220 is a

valid expression of legislative authority, we first turn to

the history of the Parity Act and the rule adopted by OTS.

Il.

In the late 1970s and early 1980s, an increasingly

volatile interest rate market seriously impaired the ability

of housing creditors to provide consumers with fixed-term,

fixed-rate mortgages secured by residential property. Natl

Home Equity Mortgage Ass’n v. Face, 239 F:'3d 633, 635

(4th Cir.), cert. denied, 534 U.S. 823, 122 S. Ct. 58, 151 L.

Ed. 2d 26 (2001); 12 U.S.C.A. § 3801(a)(1). Those market

conditions made it exceedingly difficult for consumers to

obtain and afford credit for the purchase of a home. See

Grunbeck v. Dime Sav. Bank of N.Y., FSB, 74 F.3d 331, 343

(1st Cir. 1996).

In response to the precarious state of the residential

mortgage market, “Congress enacted the Garn St. Ger-

main Depository Institutions Act of 1982 to revitalize the

housing industry by strengthening the financial stability

of home mortgage lending institutions and ensuring the

availability of home mortgage loans.” Face, supra, 239 F.3d

at 635 (internal quotation marks omitted). Title VIII of

that legislation, the Parity Act, allowed state-chartered

housing creditors to offer alternative mortgages if they

agreed to operate in accordance with federal regulations.

Ibid. (citing S. Conf. Rep. No. 97-641, at 94 (1982), re-

printed in 1982 U.S.C.C.A.N. 3128, 3137). The ability of

state lending institutions to issue AMTs was seen by

App. 7

Congress as essential to ensure the nation an adequate

supply of housing credit. 12 U.S.C.A. § 3801(a)(2). Before

passage of the Parity Act, federally-chartered lenders were

authorized to engage in alternative mortgage financing.

See 12 U.S.C.A. § 3801(a)(3). However, twenty-six states

either prohibited state-chartered lenders from engaging in

AMTs or imposed on those lenders burdensome restric-

tions. Alternative Mortgage Transaction Parity Act; Pre-

emption, 67 Fed. Reg. 60,542, 60,543 (2002) (to be codified

at 12 CFR. § 560.220) fhereinafter 2002 Final Rule}.

The express legislative purpose of the Parity Act is

to eliminate the discriminatory impact that [fed-

eral] regulations [authorizing federally chartered

housing creditors to engage in AMTs] have upon

nonfederally chartered housing creditors and

provide them with parity with federally char-

tered institutions by authorizing all housing

creditors to make, purchase, and enforce alterna-

tive mortgage transactions so long as the transac-

tions are in conformity with the regulations

issued by the Federal agencies.

[12 U.S.C.A. § 3801(b) (emphasis added). ]

To achieve the goals of the Parity Act, Congress

granted to the Federal Home Loan Bank Board (FHLBB),

the predecessor to OTS, and two other federal agencies,

the rulemaking authority “to prevent discrimination

against” state-chartered lending institutions engaged in

“making, purchasing, and enforcing alternative mortgage

transactions.”* 12 U.S.C.A. § 3803(a)(3). That rulemaking

* State-chartered banks and state-chartered credit unions must

comply with regulations issued by the Comptroller of the Currency for

national banks and the National Credit Union Administration Board

(Continued on following page)

App. 8

authority included the power to promulgate regulations in

furtherance of the Parity Act “notwithstanding any State

constitution, law, or regulation.” 12 U.S.C_A. § 3803(a)(3) and

(c). In 1989, the statute was amended to substitute OTS for

the FHLBB as the agency regulating state-chartered housing

lenders. Financial Institutions Reform, Recovery and En-

forcement Act of 1989, Pub. L. No. 101-73, § 744(c), 103 Stat.

183 (1989) (codified at 12 U.S.C.A. § 3801(a)(3)).

States were not bound involuntarily to the Parity Act.

Those states wishing to opt-out of the Act’s preemption

provisions only needed to certify an intention to do so

within three years of its passage. 12 U.S.C.A. § 3804. New

Jersey did not avail itself of that option. Glukowsky, supra,

360 N.J. Super. at 21. By not exiting the federal program

within the three-year period, the State necessarily agreed

to follow all applicable federal regulations, those in exis-

tence then and those to be adopted in the future.”

Congress directed OTS to “identify, describe, and

publish those portions of [its] regulations that are inap-

propriate for (and thus inapplicable to) ... nonfederally

for federal credit unions, respectively. 12 U.S.C.A. § 3803(a)(1) and (2).

All other non-federally-chartered housing creditors lending in reliance

on the Parity Act must comply with regulations issued by OTS, or its

predecessor, FHLBB. Id. § 3803(a)(3).

° Our dissenting colleagues suggest that, because the New Jersey

Legislature did not anticipate OTS’s adoption of 12 C.FR. § 560.220,

the regulation is infirm. However, when the states agreed to be bound

by the federal regulatory framework involving the Parity Act, those

states necessarily agreed to foilow all applicable federal regulations in

furtherance of the Parity Act. The states knew that they could not exit

the program merely because they disagreed with a particular federal

regulation. Nowhere in this record is there a suggestion that New

Jersey would have opted out had it known that OTS would adopt 12

C.F-R. § 560.220.

App. 9

chartered housing creditors.”*® Pub. L. No. 97-320, § 807(b),

96 Stat. 1469 (1982). Based on the broad rulemaking

authority delegated to it pursuant to 12 U.S.CA.

8§ 1463(a)(2), 1464(a) of the Home Owners’ Loan Act, 12

U.S.C.A. § 3803(a)(3), and § 807(b) of the Parity Act, OTS

in 1996 adopted 12 CFR. § 560.220, giving state-

chartered housing lenders the same authority to impose

prepayment penalties on AMTs already possessed by their

federal counterparts. Face, supra, 239 F3d at 640; Shinn

v. Encore Mortgage Servs., Inc., 96 F Supp. 2d 419, 423-24

(D.N.J. 2000).

12 C.FR. § 560.220 extended the benefit of four

federal regulations to state-chartered housing lenders

engaged in AMTs, “notwithstanding any state constitution,

law, or regulation.”’ Only one of those regulations, 12

* The FHLBB in 1983 issued a Final Rule that identified three of

its regulations that “describe and define” AMTs, and thus also would be

applied to state-chartered housing creditors: § 545.33(c), granting

authority to engage in AMTs; § 545.33(e), limiting adjustments to loans

secured by borrower-occupied property; and § 545.33(f)(4)-(11), imposing

disclosure requirements on AMTs secured by borrower-occupied

property. Implementation of New Powers; Limitation on Loans to One

Borrower, 48 Fed. Reg. 23,032, 23,053 (1983). The FHLBB deemed all of

its other regulations to be inappropriate and, therefore, inapplicable to

AMTs. Ibid. The FHLBB did not identify any regulations that applied

to mortgage loans generally, and specifically did not apply its regula-

tions regarding prepayment penalties to state-chartered lenders. Jbid.

" The version of 12 C.FR. § 560.220 made effective October 30,

1996 provided:

Pursuant to 12 U.S.C. 3803, housing creditors that are not

commercial banks, credit unions, or Federal Savings asso-

ciations may make alternative mortgage transactions as de-

fined by that section and further defined and described by

applicable regulations identified in this section, notwith-

standing any state constitution, law, or regulation. In accor-

dance with section 807(b) of Public Law 97-320, 12 U.S.C.

(Continued on following page)

App. 10

C.F-R. § 560.34, is relevant to this case. That regulation

provides:

Any prepayment on a real estate loan must be

applied directly to reduce the principal balance

on the loan unless the loan contract or the bor-

rower specifies otherwise. Subject to the terms of

the loan contract, a Federal savings association

may impose a fee for any prepayment of a loan.

[12 C_.FE-R. § 560.34 (emphasis added).]

By applying 12 C_.FR. § 560.34 to state lenders issuing

AMTs, 12 C.F-R. § 560.220 clearly preempted enforcement

of New Jersey's Prepayment Penalty Law.

The adoption of 12 C.F-R. § 560.220 followed a 1996

OTS opinion letter holding that by virtue of the Parity Act

Wisconsin-chartered savings and loan associations issuing

AMTs were not subject to that state’s prepayment penalty

law. Effect of Parity Act on Wisconsin Prepayment Penalty

Statute, Op. Chief Counsel, OTS No. P-96-6 (Apr. 30,

1996). OTS reasoned that

li]Jf state housing creditors were required to fol-

low the Wisconsin Statute when making vari-

able-rate mortgage loans, they would clearly be

disadvantaged vis-a-vis federal thrifts — the very

3801 note, §§ 560.33, 560.34, 560.35, and 560.210 of this

part are identified as appropriate and applicable to the ex-

ercise of this authority and all regulations not so identified

are deemed inappropriate and inapplicable. Housing credi-

tors engaged in credit sales should read the term “loan” as

“credit sale” wherever applicable.

[Lending and Investment, 61 Fed. Reg. 50,951, 50,983 (1996)

(to be codified at 12 C.E-R. § 560.220) [hereinafter 1996 Fi-

nal Rule}.] ia og a

App. 11

result Congress intended to prevent. The Wis-

consin Statute thus appears to fall within the

scope of laws preempted by the Parity Act. Ac-

cordingly, state Savings associations and state

housing creditors that are not state banks or

credit unions and that originate variable-rate

loans in conformity with all applicable OTS regu-

lations need not comply with the Wisconsin Stat-

ute.

(Ibid. ]}

Based on that analysis, 12 CFR. § 560.34 was made

applicable to state lenders through 12 C.FR. § 560.220.

In 2002, OTS proposed a rule change removing 12

C.F-R. § 560.34 from 12 C.FE-R. § 560.220, thereby eliminat-

ing the preemption Provision that barred enforcement of

state prepayment laws against state lenders engaged in

AMTs. During that rulemaking process, OTS reexamined

the appropriateness of regulating prepayment fees and

late charges relating to AMTs by state lenders. See 2002

Final Rule, supra, 67 Fed. Reg. 60,542; Alternative Mort-

gage Transaction Parity Act; Preemption, 67 Fed. Reg.

20,468 (2002) (to be codified at § 560.220) (proposed Apr.

25, 2002) [hereinafter 2002 Notice cf Proposed Rulemak-

ing]; 2000 Advance Notice of Proposed Rulemaking, supra,

65 Fed. Reg. at 17,814. OTS acknowledged that whether

Congress intended to preempt state laws governing

prepayment fees fell within a “gray area.” 2002 Notice of

Proposed Rulemaking, supra, 67 Fed. Reg. at 20,470. The

Parity Act and its legislative history provided OTS with

little direction as to which federal regulations were to

apply to state-chartered housing creditors that engage in

the making, purchasing, and enforcing of AMTs. 2002

Final Rule, supra, 67 Fed. Reg. at 60,543. When OTS

App. 12

decided to regulate prepayment fees in 1996 pursuant to

the Parity Act, it did so believing that Congress intended

to remedy the disadvantage to state-chartered institutions

that flowed from differing federal and state laws regulat-

ing AMTs. 12 U.S.C.A. § 3801(b). By 2002, however, after

12 C.F-R. § 560.220 had been on the books for six years,

OTS had knowledge that widespread use of prepayment

penalties in sub-prime loans promoted predatory lending

practices.” 2002 Final Rule, supra, 67 Fed. Reg. at 60,547-

48. In the year prior to passage of the Parity Act only

about ten percent of sub-prime loans included prepayment

penalties, but by 1999 that figure had risen to approxi-

mately seventy to seventy-six percent. Jd. at 60,547 (citing

data from the Joint HUD/Treasury Report on Recommen-

dations to Curb Predatory Home Mortgage Lending (Apr.

20, 2000)). Anecdotal evidence also suggested that preda-

tory lending practices disproportionately targeted minori-

ties and the elderly. Ibid.

Because the 1996 OTS regulation preempted state

laws prohibiting prepayment penalties only as applied to

AMTs, it also had the unintended consequence of creating

an incentive for state lenders to favor AMTs over tradi-

tional fixed-interest mortgages that still were subject to

state prepayment penalty laws. See 2002 Final Rule,

supra, 67 Fed. Reg. at 60,546; 2002 Notice of Proposed

Rulemaking, supra, 67 Fed. Reg. at 20,469. Last, OTS no

longer accepted the “apparent rationale” for its 1996 rule

* Sub-prime loans have higher interest rates than prime loans and

typically are extended to borrowers whose past credit problems make

them a higher risk. Natl Home Equity Mortg. Ass’n v. OTS, 271 F

Supp. 2d 264, 277 n.8 (D.C. Cir. 2003); 2000 Advance Notice of Proposed

Rulemaking, supra, 65 Fed. Reg. at 17,814.

App. 13

that absent preemption of state prepayment laws “state

housing creditors would be disadvantaged vis-a-vis federal

thrifts.” Id. at 60,543. Based on this new reality, OTS

reasoned that state laws regulating prepayment fees and

late charges should “reflect each state legislature’s judg-

ment, after due consideration, about appropriate consumer

protections applicable to state-chartered lenders.” Id. at

60,548. OTS would not “construe its authority under [the

Parity Act] to frustrate these state efforts where another —

less intrusive construction of [the Parity Act] is permissi-

ble.” Ibid.

In its 2002 Final Rule, effective J uly 2003, OTS

eliminated § 560.34 from the list of federal regulations

applicable to state-chartered housing creditors, finding

that a creditor’s ability to assess prepayment fees was “not

essential or intrinsic to the ability to offer alternative

mortgages.” 2002 Final Rule, supra, 67 Fed. Reg. at

60,544. Nevertheless, OTS concluded in the 2002 Final

Rule that its 1996 regulation was a permissible interpre-

tation at the time. Jd. at 60,550.

In light of that legislative and regulatory history, we

return to the rationale provided by the Appellate Division

for holding that OTS acted without legislative authority in

adopting the 1996 version of 12 CFR. § 560.220. The

appellate panel sought to divine what Congress intended

when it spoke in terms of state-chartered lending institu-

tions achieving parity with federally-chartered institutions

in “making, purchasing, and enforcing alternative mort-

gage transactions.” Glukowsky, supra, 360 N.J. Super. at

27, 36-38; 12 U.S.C.A. § 3803(a)(3). Did Congress intend a

)

;

App. 14

narrow purpose, preempting only those state laws that

prohibited state lenders from marketing AMTs or did

Congress have a more expansive purpose, achieving

competitive equality between state- and federally-

chartered lenders? The panel interpreted the Parity Act as

having the limited purpose of preempting only those state

laws that prohibited or restricted a state-chartered lend-

ing institution from marketing an AMT. Glukowsky, supra,

360 N.J. Super. at 40. The panel found that OTS had

construed the purpose of the Parity Act too broadly by

attempting to achieve “complete parity between federally

and non-federally chartered housing creditors.” Id. at 37.

In the panel’s view, Congress did not intend “that every

AMT, throughout the nation, must contain, or at least

offer, the same terms, down to the minutiae of regulating

the fees and penalties which may be imposed.” Ibid.

Accordingly, the 1996 extension of 12 C.FR. § 560.34 to

state lenders was an impermissible interpretation of the

Parity Act because the Act was not intended to create

precise equality between state and federal lenders that

issued AMTs.

Although the Appellate Division acknowledged that

an agency’s interpretation of a statute falling within its

regulatory authority is entitled to deference, it found that

the 1996 version of 12 C.FR. § 560.220 was “‘entitled to

considerably less deference,” because it represented a

sharp change from the agency’s prior interpretation of the

Parity Act. Id. at 42-43 (quoting Good Samaritan Hosp. v.

Shalala, 508 U.S. 402, 417, 113 S. Ct. 2151, 2161, 124 L.

Ed. 2d 368, 383 (1993)). While noting that an agency may

support a change of direction by a reasoned analysis, the

panel concluded that the 1996 Final Rule “was not sup-

ported by any reasoning at all.” Id. at 32. The panel relied

App. 15

on language in the 2002 Notice of Proposed Rulemaking, in

which OTS suggested that it had not explained sufficiently

its reasons for adopting the 1996 rule and its departure

from the prior standard of permitting state laws to regu-

late prepayment fees in AMTs. Ibid. (citing 67 Fed. Reg. at

20,470). The panel considered the language in OTS’s 2002

Notice of Proposed Rulemaking a tacit admission that it

had exceeded the authority delegated to it by Congress in

promulgating the 1996 regulation. Jd. at 33. Reasoning

that prepayment penalties do not prohibit or interfere

with a housing creditor’s ability to make, purchase, or

enforce AMTs, the panel concluded that OTS never had

authority to apply 12 C.FR. § 560.34 to state-chartered

lenders.

We disagree with the conclusion reached by the

Appellate Division that OTS exceeded the authority

Congress delegated to it in the Parity Act. Congress’s

intent is not entirely clear from the statutory language.

We accept OTS’s explanation that its 1996 rulemaking

represented one permissible interpretation of the Parity

Act. OTS is the agency responsible for enforcing the Parity

Act and its interpretation of that Act is entitled to sub-

stantial deference. Moreover, the principle of comity

instructs state courts to give due regard to a federal court’s

interpretation of a federal statute. Dewey v. R.J. Reynolds

Tobacco Co., 121 N.J. 69, 80 (1990). Federal courts uni-

formly have concluded that OTS in 1996 acted within the

authority delegated to it by Congress by incorporating

§ 560.34 into 12 C_FR. § 560.220 to allow state-chartered

lenders to impose prepayment penalties in AMTs.

McCarthy v. Option One Mortgage Corp., 362 F.3d 1008,

1010-11 (7th Cir. 2004); Nat’ Home Equity Mortgage Ass’n

App. 16

v. Face, supra, 239 FSa at GSPPAS Shinr v: Fnwe .Monrt-

gage Servs., Inc., supra, 96 F. Supp. 2d at 424, 426.

III.

The power of a federal statute to preempt a state law

is derived from the Supremacy Clause of the United States

Constitution. U.S. Const. art. VI., cl. 2; Fid. Fed. Sav. &

Loan Ass’n v. de la Cuesta, 458 U.S. 141, 152, 102 S. Ct.

3014, 3022, 73 L. Ed. 2d 664, 674 (1982). Congress can

pass legislation that either explicitly or implicitly pre-

empts state law. Id. at 152-53, 102 S. Ct. at 3022, 73 L. Ed.

2d at 675. That Congress intended the Parity Act to have

preemptive power over state laws is clear, but less clear is

which laws it intended to preempt. OTS, one of the regula-

tory agencies responsible for enforcement of the Parity

Act, was left to determine the general goals of the Act and

to interpret its cryptic language.

The regulations of a federal agency are given the same

weight and afforded the same presumptions regarding

preemption as federal statutes unless the regulations are

“arbitrary, capricious, or manifestly contrary to the stat-

ute.” Chevron U.S.A., Inc. v. Natural Res. Def. Council, 467

U.S. 837, 844, 104 S. Ct. 2778, 2782, 81 L. Ed. 2d 694, 703

(1984). A federal regulation will have preemptive effect

provided the agency intended to preempt state law and

acted within the scope of its authority. Fid. Fed., supra,

458 U.S. at 154, 102 S. Ct. at 3023, 73 L. Ed. 2d at 675;

Taylor v. First Union Nat'l Bank, 162 N.J. 75, 88 (1999).

A court generally must defer to a regulatory agency’s

decision, unless the agency acts outside the scope of its

authority or arbitrarily. Fid. Fed., supra, 458 U.S. at 153-54,

App. 17

LU. FS Mt att 222222 (3° WR? 20’ at’ 675° Uetérence is

warranted

because the responsibilities for assessing the

wisdom of such policy choices and resolving the

struggle between competing views of the public

interest are not judicial ones, and because of the

agencys greater familiarity with the ever-

changing facts and circumstances surrounding

the subjects regulated.

[FDA v. Brown & Williamson Tobacco Corp., 529

U.S. 120, 132, 120 S. Ct 1291, 1300, 146 L. Ed.

2d 121, 134 (2000) (internal quotation marks and

citations omitted).]

An agency’s statutory interpretation is entitled to

deference even when that agency has changed its interpre-

tation over time. “An initial agency interpretation is not

interpretations and the wisdom of its policy on a continu-

ing basis.” Chevron, supra, 467 U.S. at 863-64, 104 S. Ct

at 2792, 81 L. Ed. Se at 715-16; see also Motor Vehicle

Mfrs. Ass’n of United States v, State Farm Mut. Auto. Ins.

Co., 463 U.S. 29, 42, 103 S. Ct 2856, 2866, 77 L. Ed. 2d

443, 457 (1983) (finding that agencies “must be given

ample latitude to adapt their rules to the demands of

changing circumstances”) (internal quotation marks and

citation omitted); Brown & Williamson Tobacco Corp.,

supra, 529 U.S. at 156-57, 120 S. Ct at 1313, 146 L. Ed. 2d

at 149. However, when an agency changes its course, it

must provide a “reasoned analysis.” Motor Vehicle Mfrs.

Ass’n, supra, 463 U.S. at 57, 103 S. Ct. at 2874, 77 L. Ed. 2d

at 466. In those instances in which Congress has not spoken

directly to the issue, but “the agency's interpretation is

App. 18

reasonable,” we must not reject “an agency’s exercise of its

generally conferred authority to resolve a particular

statutory ambiguity simply because the agency’s chosen

resolution seems unwise.” United States v. Mead Corp.,

538 U.S. 218, 229, 121 S. Ct. 2164, 2172, 150 L. Ed. 2d

292, 305 (2001).

Although due deference must be given to an agency’s

interpretation of a statute in an area over which it has

regulatory power, “the final word on statutory interpreta-

tion is for the courts.” Grunbeck, supra, 74 F.3d at 341.

Therefore, we must decide whether Congress conferred on

OTS the authority to preempt states’ prepayment penalty

laws as they apply to AMTs. There is no doubt that OTS

intended its regulation to preempt states’ prepayment

penalty laws. 1996 Final Rule, supra, 61 Fed. Reg. at

50,983. The only issue to be resolved is whether OTS was

authorized pursuant to the Parity Act to apply § 560.34,

which protected federally-chartered housing lenders from

laws forbidding prepayment penalties, to state-chartered

housing lenders by its incorporation into 12 C.FR.

§ 560.220.

IV.

OTS currently takes the position that allowing the

charging of prepayment penalties on an AMT is not

intrinsic to the Parity Act’s mandate. However, in 1996,

construing parity to mean competitive equality between

state and federal housing lenders appeared a sensible

interpretation of the language of the Act and a laudable

goal. The Appellate Division has concluded that the 1996

version of 12 C.FER. § 560.220 was a mistaken interpreta-

tion of the Parity Act based on OTS’s change of course.

App. 19

Glukowsky, supra, 360 N.J. Super. at 31-34, 36. Regulatory

law, however, is not static. It has elasticity that permits it

to adapt to changing circumstances and conditions. In

rejecting a challenge to the validity of rules promulgated

by the Interstate Commerce Commission, the United

States Supreme Court stated:

Regulatory agencies do not establish rules of

conduct to last forever; they are supposed, within

the limits of the law and of fair and prudent ad-

ministration, to adapt their rules and practices

to the Nation’s needs in a volatile, changing

economy. They are neither required nor supposed

to regulate the present and the future within the

inflexible limits of yesterday.

[Am. Trucking Ass’ns, Inc. v. Atchison, Topeka &

Santa Fe R. Co., 387 U.S. 397, 416, 87 S. Ct.

1608, 1618, 18 L. Ed. 2d 847, 860 (1967).]

See also In re PSE & G Co.’s Rate Unbundling, 167 N.J. 377,

385 (2001) (noting administrative agencies’ ability to be

flexible and responsive to changing conditions); Heir v,.

Degnan, 82 N.J. 109, 121-22 (1980) (observing advantage of

administrative regulations is flexibility to keep pace with

current needs). A regulatory agency is charged with the

responsibility of adapting its regulations to changing condi-

tions when enforcing a statute under its authority. See, e.g.,

Bob Jones Univ. v. United States, 461 U.S. 574, 596, 103 S.

Ct. 2017, 2031, 76 L. Ed. 2d 157, 176 (1983) (acknowledging

IRS’s administrative authority “to meet changing conditions

and new problems”). In addressing rapidly changing and

sometimes difficult to understand market conditions, a

regulatory agency may experiment — within the scope of its

authority — to meet the pressing needs of the moment. “One

of the most significant advantages of the administrative

App. 20

process is its ability to adapt to new circumstances in a

flexible manner. . . .” FCC v. Nat'l Citizens Comm. for Broad.,

436 U.S. 775, 811, 98 S. Ct. 2096, 2120, 56 L. Ed. 2d, 697,

724 (1978).

Time and experience have taught OTS that preempt-

ing states’ prepayment penalty laws is not essential to the

goals of the Parity Act. State-chartered housing lenders

that are barred by state law from charging prepayment

fees will not necessarily be less profitable. Those lenders

can do what lenders have always done — adjust their

interest rates to compete in the marketplace. 2002 Notice

of Proposed Rulemaking, supra, 67 Fed. Reg. at 20,473.

Real-world experience has shown OTS that a regulation

that appeared eminently reasonable in 1996 is not neces-

sary to achieve the paramount objectives of the Parity Act

in 2003. That OTS altered its direction to better effectuate

the purposes of the Parity Act does not require the conclu-

sion that its 1996 interpretation of that Act was impermis-

sible. OTS’s commentary on its 2002 rule change speaks

persuasively to that point:

In this final rule, OTS has selected between two

permissible interpretations of [the Parity Act]

based upon a reevaluation of the statute. OTS

has, in no way, concluded that the 1996 rule

changes reflected an impermissible construction

of its statute. Accordingly, there is no basis for

arguing that the final rule applies retroactively

to transactions consummated before the effective

date.

[2002 Final Rule, supra, 67 Fed. Reg. at 60,550.]

Further, the Appellate Division’s reliance on the 2002

Notice of Proposed Rulemaking to the exclusion of the

Final Rule fails to account for the preliminary nature of

App. 21

proposed rulemaking. See Dow Chem., USA v. Consumer

Prod. Safety Comm’n, 459 F Supp. 378, 391 (W.D. La.

1978) (recognizing informa] rulemaking process as channel

for participation by public, experts, and other constituen-

cies to provide information on effects of proposed rules and

to suggest alternatives). Established principles of adminis-

trative law require that a reviewing court defer to an

agency's own resolution of a conflict between that agency’s

decisions. See Smith v. Brown, 35 F.3d 1516, 1527 (Fed.

Cir. 1994), superseded by statute on other grounds stated

by Disabled Am. Veterans v. Gober, 234 F'3d 682 (Fed. Cir.

2000), rehearing denied (2001). The Appellate Division

accorded greater weight to commentary in the Proposed

Rule than to commentary in the Final Rule. Contra Chris-

tensen v. Harris County, 529 U.S. 576, 587, 120 S. Ct.

1655, 1662-63, 146 L. Ed. 2d 621, 631 (2000) (declining to

accord Chevron deference to informal agency pronounce-

ments); Madison v. Res. for Human Dev. Inc., 233 F.3d

175, 185 (3d Cir. 2000) (acknowledging that informal

agency interpretations are accorded less deference than

regulations).

Unless there are compelling indications that OTS is

wrong in concluding that there are two permissible inter-

pretations of the Parity Act, we should exercise restraint

before rushing to invalidate the 1996 regulation. N.J.

Guild of Hearing Aid Dispensers v. Long, 75 N.J. 544, 575-

76 (1978); see also Matturri v. Bd. of Trs. of the Judicial

Ret. Sys., 173 N.J. 368, 382 (2002).

In deciding whether OTS exceeded the scope of its

authority in promulgating 12 C.FR. § 560.220, we give due

App. 22

consideration to the interpretation of the Parity Act by the

federal courts. Federal courts uniformly have concluded

that the Parity Act allowed federal agencies to promulgate

regulations preempting state laws governing prepayment

penalties.

In Shinn v. Encore Mortgage Services, Inc., supra, 96

F. Supp. 2d at 424, 426, the district court determined that

Congress had granted OTS broad authority to regulate

state-chartered lenders engaged in AMTs and that the

1996 version of 12 C.FER. § 560.220 preempted New

Jerseys Prepayment Penalty Law, N.J.S.A. 46:10B-2, as

applied to state-chartered lenders engaged in AMTs. See

also Glukowsky, supra, 360 N.J. Super. at 31 (noting same

result in unpublished decision of Benay v. Ameriquest

Mortgage Co., No. CIVA002173 DMC, 2001 WL 34120911,

at (D.N.J. June 29, 2001)). The district court reasoned that

the Parity Act did not have the limited purpose of pre-

empting only those “state laws, which would completely

prohibit or obstruct the creation of AMTs.” Shinn, supra,

96 F Supp. 2d at 425. The court rejected the plaintiffs’

claims that “the sole purpose of the Act is to enable state

lenders to engage in AMTs” and instead found that a

“paramount purpose of the Act is to create parity between

state and federal lenders who engage in AMTs.” Ibid. The

court concluded that the regulation reflected “a permissi-

ble interpretation of the congressional authority vested in

the OTS under the Parity Act.” Ibid.

In National Home Equity Mortgage Ass’n v. Face,

supra, 239 F.3d at 639-40, the United States Court of

Appeals for the Fourth Circuit also endorsed the view that

Congress delegated broad authority to OTS to regulate

state-chartered housing creditors that elected to have

their AMTs governed by the Parity Act. Jd. at 639. The

App. 23

court found that in exercising that rulemaking authority,

OTS was permitted to preempt not only those state laws

that prohibited AMTs, but also those laws that denied

state-chartered housing creditors competitive parity with

federally-chartered lenders. Jd. at 640. Consequently, the

Court of Appeals held that 12 C.FR. § 560.34 as incorpo-

rated into 12 CFR. § 560.220 preempted Virginia from

enforcing against state lenders its laws limiting prepay-

ment penalties involving AMTs. Id. at 635, 640.

In McCarthy v. Option One Mortgage Corp., supra,

362 F.3d at 1010-11, the Seventh Circuit Court of Appeals

followed the analysis in Face and Shinn to hold that an

Illinois law prohibiting prepayment penalties did not

apply to an AMT paid off in 2001 under the Parity Act.

Notably, McCarthy was decided after the rule change to 12

C.F-R. § 560.220 that eliminated the application of 12

C.F-R. § 560.34 to state-chartered lenders. The court found

that the “Parity Act provides equal opportunity for state-

chartered lenders to offer alternative mortgages as long as

they comply with federal regulations.” Jd. at 1011. The

court did not engage in a hindsight assessment of the 1996

version of 12 C.F-R. § 560.220 through the prism of the.

2002 rule change. The court implicitly concluded that the

1996 regulation was a permissible interpretation of the

Parity Act.

Last, in National Home Equity Mortgage Ass’n v. OTS,

271 F. Supp. 2d 264, 268 (D.D.C. 2003), the plaintiff

challenged not the 1996 incarnation of 12 C.FR. § 560.220,

but whether the 2002 rule change was a valid expression

of the authority delegated to OTS by Congress. In that

case, the plaintiff brought suit against OTS, challenging

the removal of § 560.34 from 12 CFR. § 560.220, the effect

of which was to allow state prepayment penalty laws to

App. 24

apply to AMTs. Jd. at 268, 269. The district court held that

the 2002 rule change by OTS was entitled to deference. Id.

at 275. The court determined that “the text of [the Parity

Act] clearly permits OTS to conclude that the Act requires

it to identify only those regulations authorizing AMTs, and

to define such regulations as those that are ‘essential or

intrinsic’ to [a state-chartered lender’s] ability to provide

AMTs.” Id. at 273. The district court found that the [sic]

“the scope of the [Parity] Act’s preemption is ambiguous,”

id. at 272, although suggestive of an intent by Congress

“to preempt only those regulations authorizing AMTs,” id.

at 271. The court noted that plaintiff’s reading of the

statute as requiring preemption of all state laws governing

AMTs was “one reasonable interpretation of the Parity

Act, [although] it is not expressly required by the plain

language of the Act, nor is it the only reasonable interpre-

tation of the [the Parity Act’s] terms.” Ibid. Therefore,

inferentially, OTS’s 1996 adoption of 12 C.FR. § 560.220

was a reasonable interpretation of the Act.

Those federal court decisions, while not binding on

New Jersey courts, are entitled to respectful consideration

in the interests of judicial comity. Judicial comity helps to

ensure uniformity and discourage forum shopping. Dewey,

supra, 121 N.J. at 80.

Finally, because OTS is the administrative agency

charged with enforcement of the Parity Act, its opinion is

entitled to great weight and is a substantial factor in our

interpretation of the Act. N.J. Guild, supra, 75 N.J. at 575

(quoting Youakim v. Miller, 425 U.S. 231, 235, 96 S. Ct.

1399, 1402, 47 L. Ed. 2d 701, 706 (1976)). We cannot

conclude, based on the language of the Parity Act or its

legislative history, that Congress would not have sanc-

tioned OTS’s interpretation of the Act. See Fid. Fed.,

App. 25

supra, 458 U.S. at 153-54, 102 S. Ct at 3022, 73 L. Ed. 2d

at 675 (citing United States v. Shimer, 367 U.S. 374, 381-

82, 81 S. Ct. 1554, 1559-60, 6 L. Ed. 2d 908, 913-14

(1961)). Although the Appellate Division’s view represents

one reasonable interpretation of the authority granted to

OTS under the statute, we find that it is not the only

reasonable interpretation. We, therefore, cannot declare

invalid OTS’s decision to adopt the 1996 regulation.

VI.

This case has brought to our attention a gap in our

court rules. Rule 4:28-4(a) requires a party challenging the

validity of a State statute, rule, regulation, executive order

or franchise in a legal action to give notice of the challenge

to the Attorney General. Rule 2:5-1(h) requires that notice

to the Attorney General be provided when such a chal-

lenge is raised on appeal. However, we have no compara-

ble rule requiring that notice be given to the attorney or

chief legal officer of a federal department or agency when

its laws or regulations are challenged in our courts. We,

therefore, submit_to the Civil Rules Practice Committee

consideration of an appropriate revision to our rules that

will require notice to be given to the appropriate federal

officer and agency when a federal law or regulation is

challenged in a New Jersey court.

VII.

We hold that the New Jersey Prepayment Law was

preempted by the 1996 version of 12 CFR. § 560.220.

Accordingly, we reverse the decision of the Appellate

Division, and reinstate the decision of the trial court

App. 26

dismissing plaintiff’s complaint for failure to state a claim

upon which relief can be granted.”

CHIEF JUSTICE PORITZ and JUSTICES LONG,

and LaVECCHIA join in JUSTICE ALBIN’s opinion.

JUSTICE ZAZZALI filed a separate dissenting opinion in

which JUSTICES VERNIERO and WALLACE join.

JUSTICE ZAZZALI, dissenting.

The majority opinion represents a principled treat-

ment of a complex problem. However, I do not believe that

the preemption doctrine applies. Therefore, I respectfully

dissent. I would affirm the judgment of the Appellate

Division substantially for the reasons expressed by Judge

King in his comprehensive and well-reasoned opinion.

Glukowsky v. Equity One, Inc., 360 N.J. Super. 1 (2003).

I write further only to underscore the point that

affording lenders protection under the 1996 regulation,

which by now has been universally recognized as mis-

guided, becomes especially unjust when viewed in conjunc-

tion with the sequence of events relating to the “opt-out”

mechanism provided by Congress when it enacted the

underlying legislation. Ante at at (slip op. at 9).

In passing the Parity Act, Congress afforded each

state three years to assert its right not to be preempted by

the federal regulatory scheme. 12 U.S.C.A. § 3804. Con-

gress enacted the law including that provision in 1982,

* Although our dissenting colleagues observe that “plaintiff might

yet find relief by alleging a violation of 12 C.FR. § 591.5(b)(2)\i),” we

express no view on the validity of the filing of any new complaint.

App. 27

some fourteen years before the suspect 1996 regulation

was promulgated. Ante at ___ (slip op. at 9). During the

three-year window from 1982 to 1985, neither the New

Jersey Legislature nor that of any other state could predict

that the OTS, or any other regulatory agency, someday

would turn the salutary congressional goal of ensuring the

availability of alternative mortgages on its head by sanc-

tioning what arguably amount to predatory lending

practices by state-chartered institutions. As explained by

Judge King, the countenance of those practices, by the

federal regulators’ own admission, finds no support in the

intent manifested by Congress when it enacted the Parity

Act. Glukowsky, supra, 360 N.J. Super. at 32-34. That such

an ultra vires regulation came into being only after the

states were no longer free to exempt themselves com-

pounds the injustice of allowing such lending practices the

safe-haven accorded by preemption in these circum-

stances.

Finally, by virtue of the rule that a dismissal under

Rule 4:6-2(e) is presumptively without prejudice, Printing

Mart-Morristown v. Sharp Electronics Corp., 116 N.J. 739,

772 (1989), plaintiff might yet find relief by alleging a

violation of 12 CFR. 591.5(b)\(2)(i). As the Appellate

Division noted, that regulation prevents lenders from

collecting prepayment penalties when they have de-

manded full payment under a due-on-sale clause. Glu-

kowsky, supra, 360 N.J. Super. at 23-24.

Justice Verniero and Justice Wallace join in this

opinion.

App. 28

SUPREME COURT OF NEW JERSEY

C-746 September Term 2003

55,729

VICTOR and ELAINE YURITCH,

Plaintiffs-Respondents,

v. ON PETITION FOR

COUNTRYWIDE HOME LOANS, CERTIFICATION

INC., D/B/A AMERICA’S (Filed Jul. 12, 2004)

WHOLESALE LENDER,

A FOREIGN CORPORATION, -

Defendant-Petitioner.

To the Appellate Division, Superior Court:

A petition for certification of the judgment in A-2850-

02 having been submitted to this Court, and the Court

having considered the same;

It is ORDERED that the petition for certification is

granted, the judgment of the Appellate Division is summa-

rily reversed, and the order of the Superior Court, Law

Division, Camden County, (L-5030-02) is reinstated. See

Glukowsky v. Equity One, Inc., __. N.J. ___ (decided May

26, 2004).

WITNESS, the Honorable Deborah T. Poritz, Chief

Justice, at Trenton, this 8th day of July, 2004.

/s/ Stephen Townsend

CLERK OF THE SUPREME COURT

App. 29

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELALTE DIVISION

SUEPRIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-3202-01T3

MARK GLUKOWSKY,

Plaintiff-Appellant,

v. (Filed Apr. 24, 2003)

EQUITY ONE, INC.,

Defendant-Respondent.

Submitted: February 5, 2003 Decided: APR 24,

2003

Before Judges King, Wefing and Lisa.

On appeal from the Superior Court of New Jer-

sey, Law Division, Gloucester County, L-872-01.

Lewis G. Adler, attorney for appellant (Mr. Adler,

Roger C. Mattson and Louis D. Fletcher, on the

brief).

Reed Smith, attorneys for respondent (Lauren

Graham, Delehey, of counsel; Leonard A. Bern-

stein, Robert M. Jaworski and Ms. Delehey, on

the brief).

The opinion of the court was delivered by

KING, P.J.A.D.

This case presents a question of federal preemption of

state law respecting prepayment fees for residential af

App. 30

mortgages. We find no federal preemption, revérse and

remand for further proceedings.

In 1999, plaintiff secured a residential mortgage from

defendant in the amount of $72,000. This was a so-called

“balloon loan,” meaning that the debt matures at the end

of an interval shorter than the terms of the amortization

schedule. At the maturity date, in 2009, plaintiff would

still owe $62,021.25. This is considered an alternative

mortgage transaction (AMT) under federal law. AMTs are

all residential mortgages other than traditional, fixed-

term, fixed-rate mortgages.

In 2001, plaintiff sold the mortgaged property. At that

time, plaintiff prepaid the remaining loan balance plus a

prepayment fee amounting to two percent of the principal

balance of the loan ($1,427.97). The prepayment fee was

calculated under the terms of a “Prepayment Rider” to the

mortgage contract.

Plaintiff then filed suit alleging that prepayment fees,

regardless of their amount, violate New Jersey law, relying

upon the Prepayment Law, N.J.S.A. 46:10B-1 to -11.1; the

Market Rate Consumer Loan Act, N.J.S.A. 17:3B-4 to -27;

and the Consumer Fraud Act, N.J.S.A. 56:8-1 to -2.13.

Upon defendant’s motion, the Law Division judge dis-

missed the complaint, under R. 4:6-2(e), for failure to state

a claim upon which relief can be granted, holding that the

state law claims were preempted by federal law.

The questions presented on this appeal are: (1)

whether the complaint states a claim for which relief may

be granted under New Jersey law, and (2) whether any

App. 31

valid state law claims nevertheless must be dismissed

because they are preempted by federal law.

Plaintiff also contends that he should be permitted to

amend the complaint to assert claims under: (1) a federal

due-on-sale regulation, 12 C.FR. § 591.5(b)(2)(i), which

prohibits housing lenders from collecting prepayment fees

where they have demanded prepayment of the mortgage

under the mortgage contract’s due-on-sale clause (A due-

on-sale clause is “a contractual provision that permits the

lender to declare the entire balance of a loan immediately

due and payable if the property securing the loan is sold or

otherwise transferred.” Fid. Fed. Sav. and Loan Ass’n v. de

la Cuesta, 458 U.S. 141, 145, 102 S. Ct. 3014, 3018, 73 L.

Ed. 2d 664, 670 (1982)); (2) the Licensed Lenders Act,

N.J.S.A. 17:11C-1 to -49, and one of the regulations

adopted thereunder, N.J.A.C. 3:15-10.1, which prohibits

prépayment fees; and (3) general contract law principles

which prohibit unconscionable contract terms, such as the

Prepayment Rider to the mortgage contract. Plaintiff does

not explicitly request permission to amend the complaint

to assert these claims. Instead, he argues as though these

claims are pled in the complaint. Since they clearly are

not, we treat plaintiff’s arguments as requests for permis-

sion to amend the complaint.

As to the preemption issue, the central issue on appeal,

there clearly exists a direct conflict between state and federal

law regarding whether prepayment penalties may be

charged in alternative mortgage transactions. New Jersey

explicitly prohibits state-chartered housing creditors from

collecting prepayment penalties, with respect to any residen-

tial mortgage transaction. See N.J.S.A. 46:10B-2. On the

other hand, a 1996 federal regulation, issued by the Office of

Thrift Supervision (OTS), permits state-chartered housing

va a

App. 32

creditors to charge prepayment fees in alternative mortgage

transactions. See 12 C.F-R. § 560.220 (incorporating 12 C.F-R.

§ 560.34, which permits federally chartered housing creditors

to collect prepayment penalties, and applying it to state-

chartered housing creditors with respect to AMTs). The OTS

adopted 12 C.F-R. § 560.220 pursuant to authority delegated

to it by Congress, under the Alternative Mortgage Transac-

tions Parity Act (Parity Act), 12 U.S.C_A. § 3801 to § 3806.

Furthermore, in adopting 12 C.FR. § 560.220, the OTS

expressly stated that this regulation was intended to pre-

empt state law to the contrary.

Thus, we must hold that 12 C.F-R. § 560.220 preempts

plaintiff’s state law claims challenging the prepayment

fee unless we find that in issuing this regulation the OTS

acted arbitrarily, or exceeded the authority delegated to it

by Congress. This is the nub of the preemption issue.

Plaintiff contends that 12 C.FR. § 560.220 is invalid

because, in issuing it, the OTS exceeded the authority

delegated to it by Congress under the Parity Act. We

agree.

In finding federal preemption, and dismissing the

complaint, the Law Division judge primarily relied upon

two published federal court decisions in which the courts

held that 12 C.E-R. § 560.220 was a valid exercise of the

OTS’s delegated authority, and that 12 CER. § 560.220

preempted state laws regulating prepayment fees — at

least to the extent those state laws are applied in the

context of alternative mortgage transactions. See Nat'l

Home Equity Mortgage Ass’n v. Face (Face) 239 F:3d 633

(4th Cir.), cert. denied, 534 U.S. 823, 122 S. Ct. 58, 151 L.

Ed. 2d 26 (2001); Shinn v. Encore Mortgage Serv., Inc., 96

F. Supp. 2d 419, 422 (D.N.J. 2000).

App. 33

Since the Law Division judge entered judgment,

however, there has been a significant, albeit unusual,

development, which casts doubt on these federal decisions

and subjects them to closer scrutiny. Specifically, in April

2002, the OTS published a Notice of Proposed Rulemaking

in which it repudiated 12 C.FR. § 560.220 and put forth a

number of arguments which support a conclusion that, in

adopting 12 CFR. § 560.220 in 1996, the OTS acted

arbitrarily and exceeded the authority delegated to it by

Congress. Alternative Mortgage Transaction Parity Act;

Preemption, 67 Fed. Reg. 20,468 (Apr. 25, 2002). Subse-

quently, the OTS adopted that Proposed Rulemaking as

final. Alternative Mortgage Transaction Parity Act; Pre-

emption, 67 Fed. Reg., 60,542 (Sept. 26, 2002). We agree

with the arguments advanced by the OTS and find they

are supported by a recent case from the California Court of

Appeals, in which that court discussed the limited nature

of the Parity Act’s preemption clause, although in a con-

text different than presented in this case. See Black v. Fin.

Freedom Senior Funding Corp., 112 Cal. Rptr. 2d 445, 457

(Cal. Ct. App. 2001), cert. denied sub nom., ULLICO, Inc.

v. Black, __ U.S. __, 122 S. Ct. 2662, 153 L. Ed. 2d 837

(2002).

We reverse the rulings of the Law Division judge, in

part. We hold that plaintiff’s state law claims are not

preempted by 12 C.FR. § 560.220 because this regulation

was adopted arbitrarily, and exceeds the scope of authority

Congress delegated to the OTS under the Parity Act. We

remand for further proceedings on plaintiff’s claims under

the Prepayment Law and the Consumer Fraud Act. We

affirm dismissal of plaintiff’s claim under the Market

Rate Consumer Loan Act because defendant is not an

entity covered by this statute. Finally on remand, plaintiff

| aa a site as deal st derhehaeae de

App. 34

is permitted to amend the complaint to assert claims

under the federal due-on-sale regulation, 12 C.FR.

§ 591.5(e)(2)(i); N.J.A.C. 3:15-10.1(b) and general contract

principles; defendant may raise the issue of retroactivity.

This is the procedural context. On May 17, 2002

plaintiff filed a complaint alleging that in collecting a

prepayment fee with respect to the prepayment of his

mortgage defendant violated New Jerseys Prepayment

Law, N.J.S.A. 46:10B-2, and the Market Rate Consumer

Loan Act, N.J.S.A. 17:3B-22. Plaintiff also alleged that

collection of a prepayment fee constituted an unconscion-

able business practice, in violation of the Consumer Fraud

Act, N.J.S.A. 56:8-2. Plaintiff also sought class certifica-

tion.

In lieu of an answer, defendant filed a motion to

dismiss, under R. 4:6-2, for failure to state a claim upon

which relief may be granted. Plaintiff opposed that motion,

and filed a cross-motion for summary judgment, which

defendants opposed. After hearing oral argument on

January 18, 2002 the judge issued an oral decision, grant-

ing defendant’s motion, and denying plaintiff’s cross-

motion.

III

Defendant is a Delaware corporation, which main-

tains an office in Mount Laurel, Burlington County.

Defendant is licensed under New Jersey’s Licensed Lend-

ers Act and engages in the business of residential mort-

gage lending.

App. 35

On October 29, 1999 plaintiff and a co-borrower

financed the purchase of a residence, located at 133-135

Route 530 (Pemberton Road), Southampton, Burlington

County, with a mortgage loan secured from defendant. The

total amount of the mortgage was $72,000, and the matur-

ity date was November 1, 2009. The mortgage contract

provided for federal and New Jersey law to control the

transaction.

The mortgage is considered a “balloon loan.” At

maturity, plaintiff would still owe $62,021.25 of the princi-

pal and would be obligated to repay that entire amount, or

obtain refinancing from defendant or another mortgage

lender. Under the terms of the mortgage, defendant

reserved the right not to refinance the loan.

Of particular relevance to this case is the Prepayment

Rider to the mortgage’s “Balloon Note.” The Prepayment

Rider imposes a prepayment fee if the mortgage is prepaid

in full during the first three years of the loan term. Spe-

cifically, the Prepayment Rider states:

4. BORROWER’S RIGHT TO REPAY

I have the right to make payments of principal at

any time before they are due. A payment of prin-

cipal only is known as a “prepayment.” When I

make a prepayment, I will tell the Note Holder in

writing that I am doing so.

I may make a partial prepayment without paying

the prepayment charge. If I make a full prepay-

ment within one (1) year of the date of this Note, I

agree to pay a prepayment charge of 3.0000% of

the amount being prepaid; If I make a full pre-

payment more than one (1) year but within two (2)

years of the date of this Note, I agree to pay a pre-

payment charge of 2.0000% of the amount being

App. 36

prepaid; if I make a full prepayment more than

two (2) years but within three (3) years of the date

of this Note, I agree to pay a prepayment charge

of 1.0000% of the amount being prepaid. If I

make full prepayment more than three (3) years

after the date of this Note, there will be no pre-

payment charge. The Note Holder will use all of

my prepayments to reduce the amount of princi-

pal that I owe under this Note. If I make a par-

tial prepayment, there will be no changes in the

due date or in the amount of my monthly pay-

ment unless the Note Holder agrees in writing to

those changes. My partial prepayment may re-

duce the amount of my monthly payments after

the first Change Date following my partial pre-

payment. However, any reduction due to my par-

tial prepayment may be offset by an interest rate

increase.

{(emphasis added).]

The Prepayment Rider amended language in the “Balloon

Note,” under which no prepayment penalties could be

imposed.

Also relevant is Section 17 of the mortgage contract,

the so-called due-on-sale clause, which states, in pertinent

part, as follows:

17. Transfer of the Property or a Benefi-

cial Interest in Borrower. If all or any part of

the Property or any interest in it is sold or trans-

ferred ... without Lender’s prior written con-

sent, Lender may, at its option, require

immediate payment in full of all sums secured by

this Security Instrument. However, this option

shall not be exercised by Lender if exercise is

prohibited by federal law as of the date of this

Security Instrument.

App. 37

If Lender exercises this option, Lender shall give

Borrower notice of acceleration. The notice shall

provide a period of not less than 30 days from the

date the notice is delivered or mailed within

which Borrower must pay all sums secured by

this Security Instrument. If Borrower fails to pay

these sums prior to the expiration of this period,

Lender may invoke any remedies permitted by

this Security Instrument without further notice

or demand on Borrower.

On or about April 11, 2001 defendant provided a

payoff statement to plaintiff, stating that the mortgage

was in default and if not brought current, could be re-

ferred to an attorney for foreclosure. The Payoff Statement

reflected the amount needed to prepay the mortgage in

full, which included the remaining principal balance,

interest, various fees and late charges, plus a prepayment

fee of $1,427.97. Plaintiff sold the property, and on April

19, 2001 paid the amount indicated in the Payoff State-

ment, including the prepayment fee.

SUMMARY OF APPLICABLE LAW

This case involves a spider’s web of federal and state

statutes and regulations governing mortgage transactions.

To complicate things, the parties dispute which statutes

and regulations actually apply in the context of this case.

We provide summaries of the statutes and regulations

at issue in this case. We also summarily resolve some of

the parties’ more specious arguments, regarding the

applicability of the various statutes and regulations, in our

attempt to narrow the issues presented.

App. 38

State Statutes and Regulations

The complaint alleges violations of three New Jersey

statutes: (1) the Prepayment Law; (2) the Market Rate

Consumer Loan Act; and (3) the Consumer Fraud Act. On

appeal, plaintiff also essentially requests permission to

amend the complaint, to assert a claim under the New

Jersey Licensed Lenders Act, N.J.S.A. 17:11C-1 to -49, and

N.J.A.C. 3:15-10.1, a regulation adopted under N.J.S.A.

17:11C-49.

The Prepayment Law

New Jerseys Prepayment Law provides _ that

“[p]repayment of a mortgage loan may be made by or on

behalf of a mortgagor at any time without penalty.”

N.J.S.A. 46:10B-2. The statute defines “prepayment” as

“payment in full of the balance owing on a mortgage loan

at any time prior to the time limited for the final payment

of such loan in an instrument evidencing such loan.”

N.J.S.A. 46:10B-1(c).

The Prepayment Law also provides for a limited right

to make partial prepayments of mortgage principal,

without incurring a prepayment fee. Specifically, N.J.S.A.

46:10B-3 provides as follows:

A mortgagor shall have the right, during any 6

month period beginning with the date of the

mortgage loan, to pay, without charge or penalty,

an additional sum of $50.00, or multiples thereof,

on account of the principal amount owing on a

mortgage loan, provided that the additional sums

so paid and the principal payments required to

be made by the terms of such mortgage loan dur-

ing such 6 month period do not together exceed

in any such 6 month period 33-1/3% of the face

App. 39

amount of such mortgage loan. The right to make

additional payments as provided by this section

shall not be cumulative, and to the extent that it

is not exercised during any 6 month period, shall

lapse.

In addition, the Prepayment Law provides that no

provision of a mortgage which denies the rights conferred

by the above sections [N.J.S.A. 46:10B-2 and NWJ.S.A.

46:10B-3] shall be enforceable, N.J.S.A. 46:10B-4, and that

any prepayment fees collected in knowing violation of the

statute must be repaid, with interest calculated at six

percent per annum. N.J.S.A. 46:10B-5.

Finally, the Prepayment Law provides that:

This act shall not apply to loans secured by a

mortgage on real property the prepayment of

which is governed by any other statute of this

State or of the United States, nor shall it apply to

any loans, secured by mortgage on real property,

made pursuant to any statute of this State or of

the United States expressly authorizing interest

charges in excess of 6% per annum.

[N.J.S.A. 46:10B-9.]

The Market Rate Consumer Loan Act

As its name implies, the Market Rate Consumer Loan

Act regulates consumer loan transactions. N.J.S.A. 17:3B-

4 to -27. It applies to loans offered by “lenders,” with

“lenders” defined as: (1) “banking institutions” (defined as

banks, out-of-state or out-of-country banks having a

branch office in New Jersey, savings banks, and national

banking associations having a principal or a branch office

in New Jersey); (2) federally chartered savings banks; and

eee ee ER ee ee A Le eae aT Te Sanit Eee Gate Bee aa

App. 40

(3) “associations” (defined as state associations, federal

associations having a principal or a branch office in New

Jersey, and out-of-state associations having a branch office

in New Jersey). N.J.S.A. 17:3B-5(d); N.J.S.A. 17:9A-1(2);

N.J.S.A. 17:12B-5(3).

The Market Rate Consumer Loan Act prohibits

lenders, as defined above, from charging prepayment fees,

as follows:

a. An individual borrower may prepay a loan in

full at any time without payment of any prepay-

ment charge.

b. If a borrower wishes to prepay a loan, a

lender shall not use the “rule of 78’s” to calculate

the amount of interest owed by the borrower. The

lender shall use a simple interest basis to calcu-

late the amount of interest owed by the borrower.

[N.J.S.A. 17:3B-22.]

Consumer Fraud Act

The Consumer Fraud Act prohibits “unconscionable

commercial practices.” N.J.S.A. 56:8-2. It also provides for

a private right of action, to recover monies lost as a result

of such practices, N.J.S.A. 56:8-2.12, and states that the

rights protected under the Act are cumulative of other

rights and remedies under New Jersey law. N.J.S.A. 56:8-

2.13.

New Jersey Licensed Lenders Act

Defendant is licensed as, among other things, a

“mortgage banker,” under the New Jersey Licensed Lend-

ers Act (Licensed Lenders Act). N.J.S.A. 17:11C-1 to -49. A

App. 41

regulation adopted, in part, under the Licensed Lenders

Act, N.J.S.A. 17:11C-49, provides that: “[a] borrower may

repay a first mortgage loan, second mortgage loan or

consumer loan at any time without penalty.” N.J.A.C.

3:15-10.1(b). See also N.J.A.C., Title 3, Ch. 15, References

and Annotations.

Federal Statutes and Regulations The Parity Act

The only federal law of significance to this litigation

is: (1) the Parity Act, 12 U.S.C.A. § 3801 to § 3806, which

was adopted in 1982; and (2) a regulation adopted by the

OTS, under the Parity Act, in 1996, 12 C_FR. § 560.220. It

is 12 C.FR. § 560.220 which allegedly preempts plaintiff’s

state law claims.

Purpose of the Parity Act

Prior to passage of the Parity Act, federal regulations

permitted federally chartered housing lenders to engage in

AMTs. Many states, however, prohibited state-chartered

housing lenders (also referred to as “non-federally char-

tered housing lenders”) from engaging in AMTs. Shinn, 96

F. Supp. at 422.

The purpose of the Parity Act was to provide parity

between federally chartered and state-chartered housing

lenders, “by authorizing all housing creditors to make,

purchase and enforce alternative mortgage transactions so

long as the transactions are in conformity with the regula-

tions issued” by the relevant federal agencies. 12 U.S.C.A.

§ 3801(b) (emphasis added). The relevant federal agencies,

issuing regulations under the Parity Act, are: (1) the Comp-

troller of the Currency, which issues regulations applicable to

App. 42

national banks; (2) the National Credit Union Administra-

tion, which issues regulations applicable to national credit

unions; and (3) the OTS, which issues regulations applicable

to all other housing creditors, for example, savings and loan

associations, mutual savings banks, and savings banks. 12

U.S.C.A. § 3801(a)(3), § 3803(a). Shinn, 96 F Supp. 2d at 422-

23. (As originally worded, the Parity Act referenced the

“Federal Home Loan Bank Board,” (FHLBB), which is the

predecessor to the OTS). Glass v. United States, 258 F.3d 1349,

1352, n.3, as amended by, 273 F.3d 1072 (Fed. Cir. 2001);

Turner v. First Union Natl Bank, 162 N.J. 75, 87, n.2 (1999).

Congress passed the Parity Act in 1982 in response to

“increasingly volatile and dynamic changes in interest

rates,” which Congress found “seriously impaired the

ability of housing creditors to provide consumers” with

traditional residential mortgages. 12 U.S.C.A. § 3801(a)(1).

The Act represented the congressional response to a

concern that state bans on AMTs “would reduce the overall

availability of mortgage credit, since fixed-rate mortgages

had become relatively more expensive as the result of

increased interest-rate volatility.” Grunbeck v. Dime Sav.

Bank of New York, FSB, 74 F.3d 331, 343 (1st Cir. 1996).

Congress believed that AMTs were “essential to the provi-

sion of an adequate supply of credit secured by residential

property necessary to meet the demand expected during

the 1980's.” 12 U.S.C.A. § 3801(a)(2).

Definitional Provisions

The Parity Act defines AMTs as follows:

(1) the term “alternative mortgage transaction”

means a loan or credit sale secured by an inter-

est in residential real property, a dwelling, all

App. 43

stock allocated to a dwelling unit in a residential

cooperative housing corporation, or a residential

manufactured home...

(A) in which the interest rate or fi-

nance charge may be adjusted or rene-

gotiated;

(B) involving a fixed-rate, but which

implicitly permits rate adjustments by

having the debt mature at the end of an

interval shorter than the term of the

amortization schedule; or

method of determining return, term,

repayment, or other variation not com-

mon to traditional fixed-rate, fixed-term

transactions, including without limita-

tion, transactions that involve the shar-

ing of equity or appreciation;

[12 U.S.C.A. § 3802(1).]

The term AMT “is a broad catch-all term for all manner of

mortgage instruments that do not conform to the tradi-

tional fully-amortized, fixed-interest-rate mortgage loan.”

First Gibraltar Bank, FSB v. Morales, 19 F.3d 1032, 1037

(5th Cir.), cert. denied, 513 U.S. 876, 115 S. Ct. 204, 130

L. Ed.2d 134 (1994), vacated on other grounds, 42 F.3d 895

(5th Cir. 1995).

Although plaintiff disputes this fact, it is clear that

the mortgage at issue in the present case qualifies as an

AMT under 12 U.S.C.A. § 3802(1)(B) or (C). Specifically,

although it is a fixed-rate, fixed-term mortgage, the debt

matures at the end of an interval shorter than the term of

the amortization schedule, thereby implicitly permitting

rate adjustments under 12 U.S.C.A. § 3802(1)(B).

hom Ce ee eee fo

App. 44

The niorguge daw wuiasitetes % hydloson'nw., wiinhs' fs

not the traditional, fixed-rate, fixed-term mortgage. 12

U.S.C.A. § 3802(1)(C). Plaintiff’s contention that the

mortgage at issue is not a balloon note is incorrect. Black’s

Law Dictionary (6th ed. 1991) defines “balloon note” as “[a]

form of promissory note which commonly calls for mini-

mum payments of principal, if any, and the payment of

interest at regular intervals, but which requires a sub-

stantial payment of principal at the end of the term; the

final payment frequently representing all the principal.”

The mortgage at issue clearly fits this definition.

There is also no real dispute that defendant is a

“housing creditor,” as defined by the Parity Act, 12

U.S.C.A. § 3802(2), since defendant is engaged in the

business of making residential mortgage loans, 12

U.S.C.A. § 3802(2)(C), and is licensed under New Jersey

law to enter into AMTs, 12 U.S.C.A. § 3802(2). While

plaintiff disputes that defendant is a “Licensed Lender,”

under New Jersey law, defendant has provided copies of its

state-issued licenses to substantiate this fact.

Substantive Provisions of the Parity Act

Substantively, the Parity Act provides that all housing

creditors (both federally chartered and non-federally

chartered) may make, purchase, and enforce AMTs, so long

as the transactions are made in accordance with regula-

tions governing AMTs, as issued by the relevant federal

agencies — the Comptroller of the Currency, the National

Credit Union Administration Board, and the OTS. 12

U.S.C.A. § 3803(a).

App. 45

Thie Brativy stv -disu -cotivaras -au -express ~pruvimnou

relating to the preemption of state law, which states as

follows:

An alternative mortgage transaction may be

made by a housing creditor in accordance with

this section, notwithstanding any State constitu-

tion, law, or regulation.

[12 U.S.C.A. § 3803(c).]

The statute further provided for a limited time-frame,

after the effective date of the Parity Act, during which

states could choose to opt out of the Parity Act. In order to

opt out, during that limited time-frame, states were

required to pass a law stating “explicitly and by its terms

that such State does not want the preemption provided in

[12 U.S.C.A. § 3803] to apply with respect to alternative

mortgage transactions (or to any class or type of alterna-

tive mortgage transaction) subject to the laws of such

State...” 12 U.S.C.A. § 3804(a).

New Jersey did not opt out of the Parity Act. This fact

has been acknowledged by the Office of the Attorney

General of the State of New Jersey, in an extensive formal

opinion of March 6, 1987, and was recognized in Shinn, 96

F. Supp. 2d at 424. Plaintiff also admits this in his brief.

Plaintiff’s relatively brief argument, claiming that New

Jersey did opt out of the Parity Act, is specious and is

rejected. We also note that the statute plaintiff identifies

as New Jersey’s official “opt-out” of the Parity Act, the

Market Rate Consumer Loan Act, does not explicitly state

that New Jersey was opting out of Parity Act preemption.

Indeed, the statute contains no reference whatsoever to

the Parity Act. N.J.S.A. 17:3B-4 to -27. Therefore, it does

App. 46

not constitute an “opt-out” of Parity Act preemption, as

defined by 12 U.S.C.A. § 3804(a).

Relevant Federal Regulations

Adopted Pursuant to the Parity Act

The parties do not dispute that, under the Parity Act,

the relevant federal agency in the present case is the OTS.

In 1996, the OTS adopted a regulation which clarified that

state-chartered housing creditors, like their federal coun-

terparts, are authorized to charge prepayment penalties.

Specifically, in 12 C.FR. § 560.220, the OTS determined

that, as an exercise of its delegated powers under the

Parity Act, 12 U.S.C.A. § 3803(a)(3), and thus in preemp-

tion of all contrary state law under 12 U.S.C.A. § 3803(c),

the provisions of 12 C.F-R. § 560.34 should be applied to

AMTs issued by state-chartered housing creditors. The

OTS adopted 12 C_F'R. § 560.34 pursuant to the authority

delegated to it under the Home Owners’ Loan Act (HOLA),

12 U.S.C.A. § 1461 to § 1470. See 12 C.E-R. § 560.1(a). 12

C.F-R. § 560.34 provides as follows:

Any prepayment on a real estate loan must be

applied directly to reduce the principal balance

on the loan unless the loan contract or the bor-

rower specifies otherwise. Subject to the terms of

the loan contract, a Federal savings and loan as-

sociation may impose a fee for any prepayment of

a loan.

((emphasis added).]

App. 47

The Depository Institutions

Deregulation and Monetary Control Act

Plaintiff also claims that the Depository Institutions

Deregulation and Monetary Control Act of 1980 (DIDA) is

relevant to this case. DIDA was passed in response to

congressional concern that state interest-rate ceilings

were depressing home mortgage interest rates to below-

market levels, thereby artificially disrupting the availabil-

ity of funds for both traditional fixed-rate mortgages and

AMTs. Grunbeck, 74 F.3d at 343-44. Defendant claims

DIDA is irrelevant to this case.

In fact, no aspect of DIDA is directly implicated by

this case. DIDA may be considered relevant only to the

extent its preemption clause may be compared and con-

trasted to that of the Parity Act’s. DIDA’s preemption

clause states as follows:

(a) The provisions of the constitution of any

State expressly limiting the rate or amount of in-

terest, discount points, or other charges which

may be charged, taken, received, or reserved by

lenders and the provisions of any State law ex-

pressly limiting the rate or amount of interest,

discount points, or other charges which may be

charged, taken, received, or reserved shall not

apply to any loan, mortgage, or advance which is

insured under title I or II of this chapter.

(b) The provisions of subsection (a) shall apply

to loans, mortgages, or advances made or exe-

cuted in any State until the effective date (after

December 21, 1979) of a provision of law of that

State limiting the rate or amount of interest, dis-

count points, or other charges on any such loan,

mortgage, or advance.

[12 U.S.C.A. § 1735f-7.]

App. 48

DIDA’s preemption provision is different from the

Parity Act’s in one significant respect. Clearly, DIDA’s

preemption provision was not intended to prevent state

limitations on prepayment charges. Grunbeck, 74 F.3d at

340 (citing 1980 U.S.C.C_A.N. at 255). This fact is con-

firmed in the applicable federal regulation, which provides

that nothing in DIDA “preempts limitations in state laws

on prepayment charges, attorneys’ fees, late charges or

other provisions designed to protect borrowers.” 12 C.ER.

§ 590.3(c).

Plaintiff’s additional contention, that DIDA is rele-

vant to the Parity Act, because the two statutes overlap, is

technically accurate. However, that statutory overlap is of

no significance. Specifically, the Parity Act provides that

Section 501(c)(1) of DIDA, 12 U.S.C.A. § 1735f-7a(c)(1),

shall not apply to transactions subject to the Parity Act. 12

U.S.C.A. § 3805. Roughly, Section 501(c)(1) of DIDA

provides that DIDA preemption shall not apply to a

mortgage which is secured by a first lien on a manufac-

tured residential home, unless the terms and conditions of

that mortgage comply with the consumer protection

provisions specified in regulations prescribed by the

Federal Home Loan Bank Board (FHLBB), regarding, for

example, balloon payments, prepayment penalties, late

charges and deferral fees. 12 U.S.C.A. § 1735f-7a(c).

Thus, all the Parity Act intended, by stating that

Section 501(c)(1) of DIDA does not apply to transactions

subject to the Parity Act, is that “certain federal consumer

protection provisions with respect to balloon payments,

prepayment penalties, late charges and deferral fees that

are applicable in connection with mobile home transac-

tions are not applicable to transactions authorized by the

[Parity] Act.” Alan S. Kaplinsky, “Federal Usury Law

App. 49

Developments,” Practicing Law Institute, Commercial Law

and Practice Course Handbook Series, Consumer Financial

Services Litigation (1998).

Neither party in the present case contends that the

mortgage transaction involved a mobile home. Therefore,

neither 501(c)(1) of DIDA nor 12 U.S.C.A. § 3805 are

implicated.

Federal “Due-on-Sale” Regulation

Finally, plaintiff. requests permission to amend the

complaint, to state a claim under the federal due-on-sale

regulation. 12 C.F-R. § 591.5(b)(2)(i). Pursuant to authority

granted under HOLA and DIDA, the OTS has issued

regulations, permanently preempting state prohibitions on

the exercise of due-on-sale clauses by all lenders, whether

federally or state-chartered. 12 C.F-R. § 591.1 to 591.6.

These regulations apply to all real property loans and all

lenders making such loans. 12 C.F-R. § 591.1.

Under these regulations, specifically 12 CFR.

§ 591.5(b)(2)(i), no prepayment fee may be imposed where

a residential mortgage lender declares, by written notice,

that it is exercising a due-on-sale clause in the mortgage

instrument.

During oral argument on the parties’ cross-motions,

the Law Division judge did not engage in any analysis of

plaintiff’s state law claims to determine whether they

stated a cause of action. Instead, the judge presumed the

validity of the state law claims and turned to the federal

preemption analysis, dismissing the complaint on that

App. 50

basis. This is the analytical framework defendant urges on

appeal.

Although it may seem unusual to consider the ques-

tion of federal preemption, before determining whether

plaintiff states a valid state law claim, this is the proce-

dure we follow here. The issue of preemption is the most

important one presented in this case. We conclude that the

state law claims are not preempted because, in adopting

12 C.FR. § 560.220, the OTS acted arbitrarily, and ex-

ceeded the authority delegated by Congress under the

Parity Act.

Federal Preemption

In General

The question of federal preemption is a question of

law, subject to de novo review. New Jersey Payphone Ass'n,

Inc. v. Town of West New York, 299 F.3d 235, 242 (3d Cir.

2002). Congress’s power to preempt state law is derived

from the Supremacy Clause of the United States Constitu-

tion. U.S. Const. art. VI, cl. 2; Fidelity, 458 U.S. at 152,

102 S. Ct. at 3022, 73 L. Ed.2d at 674; Abdullah v. Am.

Airlines, Inc., 181 F.3d 363, 366 (3d Cir. 1999); Turner, 162

N.J. at 87. Congress may choose to occupy a field, taking

all regulatory authority over a certain subject matter.

Alternatively, it may share the field with the states, or

adopt as federal policy the state scheme of regulation. The

ultimate question in each case is one of congressional

intent. Rice v. Santa Fe Eievator Corp., 331 U.S. 218, 230,

67 S. Ct. 1146, 1152, 91 L.Ed. 1447, 1459 (1947); Abduliah,

181 F.3d at 366. The presumption, however, is that Con-

gress did not intend to supplant state law. Maryland uv.

App. 51

Louisiana, 451 U.S. 725, 746, 101 S. Ct. 2114, 2129, 68 L.

Ed. 2d 576, 595 (1981); Abdullah, 181 F.3d at 366.

In determining whether Congress intended to pre-

empt state law, the starting point is the statutory lan-

guage. “Preemption may be either express or implied, and

‘is compelled whether Congress’ command is explicitly

stated in the statute’s language or implicitly contained in

its structure and purpose.” Fidelity, 458 U.S. at 152-53,

102 S. Ct. at 3022, 73 L. Ed. 2d at 675 (quoting Jones v.

Rath Packing Co., 430 U.S. 519, 525, 97 S. Ct. 1305, 1309,

51 L. Ed. 2d 604, 614 (1977)).

Absent explicit preemptive language, Congress’

intent to supersede state law altogether may be

inferred because “[t]he scheme of federal regula-

tion may be so pervasive as to make reasonable

the inference that Congress left no room for the

States to supplement it,” because “the Act of

Congress may touch 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 obligations imposed by it may reveal

the same purpose.”

[Id., 458 U.S. at 153, 102 S. Ct. at 3022, 73 L.

Ed. 2d at 675 (quoting Rice, 331 U.S. at 230, 67

S. Ct. at 1152, 91 L. Ed. at 1459).]

Accord, Turner, 162 N.J. at 87-88.

Even where Congress has not completely displaced

state regulation in a particular subject matter, state law

will be nullified to the extent it actually conflicts with federal

law, i.e., to the extent compliance with both federal and

state law is a physical impossibility. or to the extent state

App. 52

law is an obstacle to the accomplishment of Congressional

objectives. Fidelity, 458 U.S. at 153, 102 S. Ct. at 3022, 73

L. Ed. 2d at 675.

Preemptive Effect of Federal Regulations

Federal regulations “are givem controlling weight

unless they are arbitrary, capricious, or manifestly contrary

to the statute.” Chevron U.S.A., Inc. v. Natural Res. Def.

Council, 467 U.S. 837, 844, 104 S. Ct. 2778, 2782, 81 L.

Ed. 2d 694, 703 (1984) (emphasis added). Subject to this

qualification, federal regulations hawe the same preemp-

tive effect as federal statutes:

Where Congress has directed an administrator to

exercise his discretion, his judgments are subject

to judicial review only to determine whether he

has exceeded his statutory authority or acted ar-

bitrarily. United States v. Shimer, 367 U.S. 374,

381-82, 81 S. Ct. 1554, 1559-60, 6 L. Ed. 2d 908,

913-14 (1961). When the administrator promul-

gates regulations intended to pre-empt state law,

the court’s inquiry is similarly limited:

“If [hjis choice represents a reasonable

accommodation of conflicting policies

that were committed to the agency’s

care by the statute, we should not dis-

turb it unless it appears from the stat-

ute or its legislative history that the

accommodation is not one that Con-

gress would have sanctioned.” Id., 367

U.S. at 383, 81 S. Ct. at 1560, 6 L. Ed.

2d at 915.

[Fidelity, 458 U.S. at 154, 102 S. Ct. at 3023, 73

L. Ed. 2d at 675.]

App. 53

Accord, Leary v. United States, 395 U.S. 6, 23-24, 89 S. Ct.

1532, 1541-42, 23 L. Ed. 2d 57, 74 (1969); Brown & Wil-

liamson Tobacco Corp. v. Food and Drug Admin., 153 F.3d

155, 161 (4th Cir. 1998), aff’d, 529 U.S. 120, 120 S. Ct.

1291, 146 L. Ed. 2d 121 (2000); Ayers v. Philadelphia

Hous. Auth., 908 F.2d 1184, 1189 (3d Cir. 1990), cert.

denied, 498 U.S. 1103, 111 S. Ct. 1003, 112 L. Ed. 2d 1086

(1991); Natural Res. Def. Council v. U.S. E.PA., 822 F.2d

104, 111-12 (D.C. Cir. 1987). See also Turner, 162 N.J. at

88 (as long as federal agency intended to preempt state

law, and acted within scope of delegated authority, federal

regulations have same preemptive effect as federal stat-

utes).

Preemption and Plaintiff’s State Claims

Relevant Statutory and Regulatory Language

In this case, there is no question that, through the

Parity Act, Congress intended to preempt state law. The

Parity Act contains an express preemption clause, which

states as follows:

An alternative mortgage transaction may be

made by a housing creditor in accordance with

this section, notwithstanding any State constitu-

tion, law, or regulation.

[12 U.S.C.A. § 3803(c).]

The question presented by this case is: to what extent did

Congress, through the Parity Act, intend to preempt state

laws? This question involves an interpretation of the scope

of the Parity Act’s preemption clause. Cipollone v. Liggett

Group, Inc., 505 U.S. 504, 517, 112 S. Ct. 2608, 2618, 120

L. Ed. 2d 407, 423 (1992).

aa Pe ne ge Oe, Lae ek

App. 54

Similarly, there is no question that, in passing 12

C.F-R. § 560.220, the OTS intended to preempt state law,

pursuant to the authority delegated to the agency, by

Congress, under the Parity Act. That is evident from the

language of 12 C.F-R. § 560.220 in which the OTS stated

that non-federally chartered housing creditors could make

AMTs, in accordance with this regulation, “notwithstand-

ing any state constitution, law, or regulation.”

Moreover, there is no question that 12 C.FR.

§ 560.220 actually conflicts with New Jersey law. Specifi-

cally, New Jersey's Prepayment Law expressly prohibits

prepayment penalties on residential mortgages. N.J.S.A.

46:10B-2. However, in 12 C.FR. § 560.220, the OTS

determined that state-chartered housing creditors, like

their federal counterparts, are authorized to charge

prepayment penalties on AMTs. Specifically, in 12 C_.F-R.

§ 560.220, the OTS determined that 12 C.FR. § 560.34

should be applied to AMTs issued by state-chartered

housing creditors, under the Parity Act. 12 CER. § 560.34

provides that “subject to the terms of the loan contract, a

Federal savings and loan association may impose a fee for

any prepayment of a loan.”

Thus, in the present case, the heart of the preemption

issue is whether 12 C.FER. § 560.220 constitutes a valid

exercise of the OTS’s regulatory authority. In other words,

in implementing 12 C_F-R. § 560.220, in 1996, did the OTS

exceed the bounds of authority, delegated to it by Con-

gress, under the Parity Act? Turner, 162 N.J. at 88. See

also, Thomas v. North Carolina Dept. of Human Res., 478

S.E.2d 816, 823-24 (N.C. Ct. App. 1996) (under federal

system, states possess sovereignty concurrent with that of

federal government, subject only to limitations imposed by

Supremacy Clause; therefore, state court had jurisdiction

App. 55

to interpret federal statute and invalidate federal regula-

tion which conflicted with it), aff’d, 485 S.E.2d 295 (N.C.

1997).

Applicable Law

There are three cases addressing the scope of the

Parity Act’s preemption clause, in the context of state

statutes limiting prepayment penalties. They are: (1)

Shinn, 96 F. Supp. 2d 419; (2) Face, 239 F.3d 633; and (3)

Benay v. Ameriquest Mortgage Co., No. 00-2173 (D.N.J.

June 29, 2001). Benay is an unpublished decision, and

thus has no precedential value. R. 1:36-3. We mention

Benay for historical purposes and the sake of complete-

ness, not as precedent. Both parties discussed Benay in

their briefs. Falcon v. American Cyanamid, 221 Nd.

Super. 252, 261 n.2 (App. Div.1 987).

Also relevant are a Notice of Proposed Rulemaking,

published by the OTS on April 25, 2002, Alternative

Mortgage Transaction Act Parity Act; Preemption, 67 Fed.

Reg. 20,468 (Apr. 25, 2002), and a Final Rulemaking,

published by the OTS on September 26, 2002, Alternative

Mortgage Transaction Parity Act; Preemption, 67 Fed. Reg.

60,542 (Sept. 26, 2002).

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

In Shinn, the plaintiffs were charged a prepayment

fee of $4,838.80 when they refinanced their mortgage,

which constituted an AMT under the Parity Act. Id. at

420, 425-26. They filed suit, alleging that the prepayment

fee violated New Jersey's Prepayment Law and Consumer

Fraud Act, and the Federal Truth in Lending Act. Id. at

App. 56

420. After removing the case to federal court, the defen-

dants moved to dismiss the state law claims, on the

grounds that they were preempted by the Parity Act. Ibid.

The court held that the plaintiffs’ claim under New

Jerseys Prepayment Law was preempted by 12 C.FR.

§ 560.220, which expressly permits state-chartered hous-

ing creditors, like their federal counterparts, to charge

prepayment fees on AMTs covered by the Parity Act. Jd. at

422-26. In reaching this conclusion, the court first deter-

mined that, in passing 12 C.FR. § 560.220, the OTS

“clearly expressed its intent to preempt state laws which

limit state creditors’ ability to charge prepayment penal-

ties in connection with AMTs.” Jd. at 423. For this proposi-

tion, the court also relied upon an opinion letter issued by

the OTS in 1996 (OTS 1996 Opinion Letter). In the OTS

1996 Opinion Letter, the OTS expressed that the Parity

Act preempted a Wisconsin statute which, depending upon

the circumstances, limited or flatly prohibited prepayment

penalties. The OTS concluded that a contrary interpreta-

tion “would undermine the purposes of the Parity Act|,] as

state housing creditors ‘would be clearly disadvantaged

vis-a-vis federal thrifts — the very result Congress in-

tended to prevent.’” Ibid. (quoting Effect of Parity Act on

Wisconsin Prepayment Penalty Statute, 1996 OTS LEXIS

19, *7).

Next, the Shinn court considered whether 12 C.ER.

§ 560.220 constituted a valid exercise of the OTS’s dele-

gated authority under the Parity Act. As to this issue, the

court concluded that, under the Parity Act, 12 U.S.C.A.

§ 3803(a)(3), Congress delegated to the Director of the OTS

broad authority to regulate state-chartered housing

creditors which engaged in AMTs, co-extensive with the

OTS’s authority to regulate comparable, federally-chartered

App. 57

housing creditors. Id. at 424. The court thus held that the

OTS had the requisite authority to issue the regulation in

issue, 12 C.F-R. § 560.220, as well as the OTS 1996 Opin-

ion Letter. Id. at 423-24.

The court rejected the plaintiffs’ argument that the

OTS’s authority to issue regulations under the Parity Act,

applicable to AMTs issued by state-chartered housing

creditors, was limited to a sixty-day period immediately

following passage of the Parity Act. The court found no

support for that argument in the statutory language of the

Parity Act, or in logic. Id. at 424-25. The court further

rejected the plaintiffs’ argument that, by passing 12 C.F-R.

§ 560.220 in 1996, after the Parity Act’s opt-out period had

ended, under 12 U.S.C.A. § 3804, New Jersey had been

“sandbagged” into accepting the Parity Act, without

understanding its true effects. Id. at 424-25. The court

concluded that, in agreeing to the Parity Act’s preemption

provision, New Jersey accepted and understood that, not

only would state-chartered housing creditors be governed

by the OTS’s regulations applicable to AMTs, but also that

the OTS would have the Se to the

extent authorized by its rulemaking authority. Jd. at 425.

Finally, the court rejected the plaintiffs’ contention

that 12 C.FR. § 560.220 constituted an unreasonable

application or interpretation of the Parity Act’s preemption

provision, stating:

Contrary to plaintiffs’ characterization of the

~ity] Act, the Court finds that [12 U.S.C.A.]

§ 5603(c) does not limit the preemptive effect of

the [Parity] Act to state laws which would com-

pletely prohibit or obstruct the creation of AMTs.

Section 3803(c) states only that “[a]n alternative

mortgage transaction may be made by a housing

App. 58

creditor in accordance with this section, notwith-

standing any State constitution, law, or regula-

tion.” The language of this section does not

support plaintiffs’ narrow interpretation of [the

Parity Act’s] preemptive effect. Nor does the

Court agree that the sole purpose of the [Parity]

Act is to enable state lenders to engage in AMTs.

A paramount purpose of the [Parity] Act is [to]

create parity between state and federal lenders

who engage in AMTs. The Court finds that the

[OTS 1996 Opinion Letter] and the OTS’s regula-

tions governing prepayment penalties [12 C_.F-R.

§ 560.220] are, to the extent they preempt state

law, a permissible interpretation of the congres-

sional authority vested in the OTS under the

Parity Act.

(Id. at 425.]

Face, 239 F.3d 633 (4th Cir. 2001)

In Face, the National Home Equity Mortgage Associa-

tion filed a declaratory judgment suit, seeking to prohibit

Virginia officials, with respect to AMTs made under the

Parity Act, from enforcing a state statute which limited

prepayment penalties. Face, 239 F.3d at 635-36, 638. The

court held that the Virginia statute was preempted by 12

C.F-R. § 560.220, adopted by the OTS pursuant to author-

ity delegated to it under the Parity Act, which expressly

permits both federally and non-federally chartered hous-

ing creditors to charge prepayment penalties on AMTs,

subject only to the terms of the mortgage contract. Jd. at

638-40.

App. 59

Benay, No. 00-2173 (D.N.J. June 29, 2001)

In Benay, the plaintiffs engaged in an adjustable rate

mortgage (an AMT) with defendant. When they sold the

mortgaged property, they were charged a prepayment

penalty of $11,045.36 on a principal balance of

$249,194.24. Plaintiffs sued, alleging that the prepayment

penalty violated New Jersey's Prepayment Law. Relying

upon Shinn, 96 F. Supp. 2d 419, and Face, 239 F.3d 633,

the court held that the Prepayment Law claim was pre-

empted by 12 C.FR. § 560.220, under which defendant

was authorized to charge the prepayment penalty.

The court also considered the “reasonableness” of the

amount of the prepayment fee. The court found that there

was no reasonableness limitation on prepayment penal-

ties, under either federal or state law. Rather, New Jersey

courts would only void contract provisions they found to be

“unconscionable.” As to this issue, the court held that the

prepayment penalty at issue was “neither unconscionable

nor made to mislead the Plaintiffs.”’

' On October 21, 2002 the Seventh Circuit Court of Appeals issued

an opinion in which it examined the breadth of federal preemption

under the Alternative Mortgage Transaction Parity Act (Parity Act).

Illinois Ass’n of Mortgage Brokers v. Office of Banks and Real Estate,

308 F.3d 762 (7th Cir. 2002). The court took a broad view of the intent of

Congress in passing the Parity Act, and a broad view of the Parity Act’s

preemption clause.

The Seventh Circuit did not address preemption of prepayment

penalties, in particular, which is the subject matter of our case. The

court declined to address which state regulations, in particular, were

preempted by the Parity Act, 12 U.S.C.A. § 3803(c), and applicable OTS

regulations, and left that decision to the district court, on remand. /d.

at 768.

App. 60

OTS’s April 25, 2002 Notice

of Proposed Rulemaking

After Shinn, Face, and Benay were decided, the OTS

published a Notice of Proposed Rulemaking which casts

strong doubt on the correctness of the holdings in those

cases. Specifically, on April 25, 2002, the OTS issued a

Notice of Proposed Rulemaking in which it proposed that

the “OTS would no longer identify its regulations on

prepayment ... charges” as applicable to state housing

creditors under the Parity Act. Alternative Mortgage

Transaction Parity Act; Preemption, 67 Fed. Reg. 20,468

(Apr. 25, 2002) (Proposed Rulemaking).- In other words,

under the OTS’s Proposed Rulemaking, 12 C_.F-R. § 560.220

will no longer incorporate 12 C.F-R. § 560.34. Therefore,

the OTS will no longer authorize state-chartered housing

creditors, like their federal counterparts, to charge pre-

payment penalties on AMTs made under the Parity Act.

Ibid.

Of significant importance to this case are the OTS’s

stated reasons for its Proposed Rulemaking. First, in the

Proposed Rulemaking, the OTS repudiated its 1996

decision to incorporate 12 C.F-R. § 560.34 into 12 CER.

§ 560.220, and thus to regulate prepayment penalties on

AMTs issued by state-chartered housing creditors under

the Parity Act. The OTS also repudiated the OTS 1996

Opinion Letter, in which the OTS expressed that Wiscon-

sin’s statutory restrictions on prepayment fees were

preempted by the Parity Act. The OTS stated that, in its

opinion, both decisions were not well-reasoned. Indeed, the

OTS admitted that its decision, in 1996, to incorporate 12

C.F-R. § 560.34 into 12 C_.F-R. § 560.220, was not supported

by any reasoning at all. 67 Fed. Reg. at 20,469-70, n.17. In

so stating, the OTS tacitly admitted that 12 CFR.

App. 61

§ 560.220, to the extent it incorporates 12 C.FR. § 560.34,

is arbitrary and capricious, and unlawful. If the OTS is

correct on this point, then plaintiff’s claims, challenging

the prepayment fee under state laws which prohibit

prepayment penalties, are not preempted by 12 C.FR.

§ 560.220, because it is an invalid regulation. Fidelity, 458

U.S. at 154, 102 S. Ct. at 3023, 73 L. Ed. 2d at 675.

Second, in the Notice of Proposed Rulemaking, the

OTS suggested the agency’s current belief that its decision,

in 1996, to incorporate 12 C.F-R. § 560.34 into 12 C.FR.

§ 560.220, and thus to regulate prepayment penalties on

AMTs issued by state-chartered housing creditors under

the Parity Act, exceeded the scope of authority delegated

to the OTS, by Congress, under the Parity Act. Alternative

Mortgage Transaction Parity Act; Preemption, 67 Fed. Reg.

at 20,469-70. Specifically, the OTS states that, in its

current opinion:

prepayment ... fee provisions are not intrinsic to

the ability to offer alternative mortgages.

(Id. at 24,670.]

While the OTS recognized that state housing creditors

might view its Proposed Rulemaking as having a discrimi-

natory impact on their ability to offer alternative mort-

gages, the OTS noted that:

States that restrict prepayment penalties ...

generally apply those restrictions to all real es-

tate loans, not just to alternative mortgage

transactions. The states’ laws in these areas are

not directed at restricting alternative mortgage

transactions but in regulating mortgage transac-

tions in general.

(Ibid. ]

App. 62

Moreover, the OTS examined the intent of the Parity Act,

and the scope of the Parity Act’s preemption clause,

stating as follows:

One of the congressional findings underlying the

Parity Act was that OTS and the other federal

regulators had adopted regulations authorizing

their federally chartered institutions to offer al-

ternative mortgages, and that the purpose of the

Act was to eliminate the discriminatory impact of

those regulations. [The] OTS regulation[ ] on pre-

payment penalties [12 C.F-R. $ 560.34] ... how-

ever, [was] not adopted to enable federal thrifts to

engage in alternative mortgage financing, but

rather to permit federal thrifts the flexibility to

exercise their lending powers under a uniform

federal scheme. See 12 C.F-R. 560.2(a). Therefore,

OTS does not believe that Congress intended that

regulations such as [12 C.E-R. $ 560.34] would of-

fer a basis for claiming discriminatory treatment

or were needed to provide parity with federally-

chartered institutions. Indeed, OTS broadly al-

lows federal thrifts to impose loan-related fees

- (e.g., initial charges and servicing fees) on any

loan including alternative mortgages, notwith-

standing any state law to the contrary. OTS also

allows federal thrifts to process and originate

any loan including alternative mortgages, with-

out regard to state law. There is no basis for dis-

tinguishing prepayment penalties .. . from these

other OTS rules that apply generally to loans.

(Ibid. (footnotes omitted) (emphasis added).]

These statements reflect at least a tacit admission by

the OTS that, to the extent 12 C.FER. § 560.220 incorpo-

rates 12 CER. § 560.34, and thus regulates prepayment

penalties on AMTs issued by state-chartered housing

App. 63

creditors under the Parity Act, it is not “an accommodation

Congress would have sanctioned” as an appropriate

exercise of the Parity Act’s preemption clause, because it is

not necessary to effectuate Congress’s goals in passing the

Parity Act. Fidelity, 458 U.S. at 154, 102 S. Ct. at 3023, 73

L. Ed. 2d at 675. If the OTS is correct on this point, then

plaintiff’s state law claims, challenging the prepayment

fee, are not preempted by 12 C.FR. § 560.220, which is an

invalid regulation. Ibid.

Thus, both of the OTS’s stated reasons for its Pro-

posed Rulemaking question the very foundation upon

which the holdings of Shinn, Face, and Benay, are based —

the legality of 12 CFR. § 560.220, the OTS’s decision, in

1996, to regulate state-chartered housing creditors’ as-

sessment of prepayment penalties on AMTs made under

the Parity Act. In our opinion, the OTS’s Notice of Pro-

posed Rulemaking requires that the holdings of Shinn,

Face, and Benay be subjected to greater scrutiny, based

upon the arguments put forth by the OTS. We disagree

with defendant’s contention that the Proposed Rulemaking

does not constitute an acknowledgment by the OTS that

12 CFR. § 560.220 is ultra vires. That contention is

unsupported by the language used in the Proposed Rule-

making.

OTS’s September 26, 2002, Final Rulemaking

On September 26, 2002 the OTS adopted the Proposed

Rulemaking as final, and explicitly adopted the findings

and conclusions it had made in the Proposed Rulemaking.

Alternative Mortgage Transaction Parity Act; Preemption, .

67 Fed. Reg. 60,542, 60,544 (Sept. 26, 2002) (Final Rule-

making).

Pe a

App. 64

The OTS also criticized Congress for not giving the

applicable federal agencies sufficient guidance in how to

exercise their delegated regulatory authority under the

Parity Act. In the OTS’s opinion, this lack of clarity has

resulted in inconsistencies in approach, both between the

three federal agencies and within the OTS. More specifi-

cally, the OTS noted that, originally, the FHLBB took a

narrow view of its regulatory authority under the Parity

Act; only in 1996 did the OTS take the expanded view with

which the agency now disagrees. Id. at 60,543-45.

In the OTS’s present opinion, the agency may not

regulate those aspects of AMTs which are applicable to

real estate lending in general — such as prepayment fees —

which the OTS does not believe are essential for parity.

The OTS reasoned that, in passing the Parity Act, Con-

gress did not intend to place state housing creditors under

the supervision of federal agencies; indeed, Congress left

room for state action by specifically reserving specific

areas to the states. Moreover, had Congress intended to

regulate prepayment penalties, it is unlikely Congress

would have adopted the statutory scheme found in the

Parity Act — allowing three different federal agencies to

promulgate regulations, each of which, at the time the

Parity Act was passed, took a different approach to pre-

payment penalties. Jd. at 60,543-48.

Nevertheless, the OTS concluded that the various

approaches taken between and among the three federal

agencies demonstrated that the scope of the Parity Act’s

preemption was “susceptible to a number of interpreta-

tions.” Id. at 60,544. While the OTS now disagreed with

the approach taken in 1996, the OTS did not believe the

approach taken in 1996 represented an “impermissible

construction” of the Parity Act. Rather it represented a

App. 65

choice between “two permissible interpretations” of the

Parity Act. Id. at 60,550. Therefore, the OTS did not

believe its present position was inconsistent with the

decisions in Face and Shinn. Id. at 60,546-47, n.26.

Finally, the OTS stated that it would not apply its

Final Rulemaking retroactively, to loans consummated

before the effective date. Id. at 60,550. It recognized that

to do so “would seriously disrupt the mortgage markets,”

and the OTS did not believe that it could take away or

impair vested rights acquired under a lawfully issued and

effective regulation. [bid.

On December 12, 2002 the OTS delayed the effective

date of its final rule, published on September 26, 2002,

Alternative Mortgage Transaction Parity Act; Preemption,

67 Fed. Reg. 60,5421 (Sep. 26, 2002). The effective date of

the new rule has been extended for six months, to July 1,

2003, in order to permit state-chartered housing creditors

additional time to determine applicable legal requirements

under state law, reprogram systems and rewrite docu-

ments, and conduct training of their employees and

agents. Alternative Mortgage Transaction Parity Act;

Preemption Delay of Effective Date, 67 Fed. Reg. 76,304

(Dec. 12, 2002). Therefore, 12 C.F-R. § 560.220, the validity

of which is at issue in the present Glukowsky litigation,

will remain in effect through July 1, 2003. The OTS’s

decision to defer implementation of its new rule points to

the difficulties housing creditors face in complying with

regulations on a state-by-state basis.

Decision on Preemption Issue

We believe that Congress’s intent in passing the

Parity Act was narrow and the scope of its preemption

App. 66

clause is also narrow. In our opinion, in passing the Parity

Act, Congress neither intended to nor authorized the OTS

to issue 12 C.F'R. § 560.220, to the extent that regulation

purports to preempt state laws which limit or prohibit the

assessment of prepayment penalties on AMTs.

We agree with the reasoning set forth in the OTS’s

Notice of Proposed Rulemaking. In accordance with that

reasoning, we find that 12 CFR. § 560.220 is invalid to

the extent it incorporates 12 CFR. § 560.34, thereby

regulating prepayment penalties assessed by state-

chartered housing creditors on AMTs covered by the Parity

Act. Furthermore, as will be discussed, in our opinion,

Shinn, Face, and Benay, as well as the OTS 1996 Opinion

Letter, were incorrectly decided because they did not give

proper consideration to: (1) Congress’s limited purpose in

passing the Parity Act, to create a national market for

AMTs; or (2) Congress’s limited intent, through the Parity

Act’s preemption provision, to preempt only those state

laws which prohibit or interfere with a housing creditor’s

ability to make, purchase, or enforce AMTs.

We hold that, to the extent 12 CFR. § 560.220 incor-

porates the regulation of prepayment penalties under 12

C.F-R. § 560.34, and applies 12 C.F-R. § 560.34 to AMTs

issued by state-chartered housing creditors, it is unlawful,

because it exceeds the scope of authority Congress dele-

gated to the OTS under the Parity Act.

Congress Had a Limited Purpose

in Passing the Parity Act

Congress’s stated purpose in passing the Parity Act

was to provide non-federally chartered housing creditors

parity with federally chartered housing creditors “by

App. 67

authorizing” non-federally chartered housing creditors to

make, purchase, and enforce AMTs. 12 U.S.C.A. § 3801(b)

(emphasis added). Nothing in the Parity Act indicates that

it was directed at anything other than achieving the

limited purpose of creating a national market for AMTs,

making AMTs available throughout the United States.

The purpose of the Parity Act could not have been, as

defendant argues, and as the federal courts suggested in

Shinn, Face, and Benay, to create complete parity between

federally and non-federally chartered housing creditors, so

that every AMT, throughout the nation, must contain, or

at least offer, the same terms, down to the minutiae of

regulating the fees and p

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