Lead Opinion
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
I.
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 arrangement provided a fixed-interest rate over a ten-year term at the end of which the loan, though not fully amortized, would mature. On the maturity date in 2009, plaintiff 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 financing a residential mortgage is commonly referred to as a “balloon loan” 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 amortized, 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.
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 enforcement 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.F.R. § 560.220 by OTS in 1996, federal lenders were free to charge prepayment 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 C.F.R. § 560.220 placed state-chartered housing creditors on an equal footing with their federal counterparts by extending 12 C.F.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.F.R. § 560.220 barred enforcement of New Jersey’s Prepayment Penalty Law and dismissed the complaint on the basis of federal preemption.
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 institutions engaged in AMTs. Glukowsky v. Equity One, Inc., 360 N.J.Super. 1, 12,
We granted Equity One’s petition for certification. 177 N.J. 575,
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 legisla
II.
A.
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. Nat’l Home Equity Mortgage Ass’n v. Face,
In response to the precarious state of the residential mortgage market, “Congress enacted the Garn St. Germain 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,
The express legislative purpose of the Parity Act is
to eliminate the discriminatory impact that [federal] regulations [authorizing federally chartered housing creditors to engage in AMTs] have upon nonfederally chartered housing creditors and provide them with parity with federally chartered institutions by authorizing all housing creditors to make, purchase, and enforce alternative mortgage transactions so long as the transactions 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.”
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,
Congress directed OTS to “identify, describe, and publish those portions of [its] regulations that are inappropriate for (and thus inapplicable to) ... nonfederally chartered housing creditors.”
12 C.F.R. § 560.220 extended the benefit of four federal regulations to state-chartered housing lenders engaged in AMTs,
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 borrower 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.F.R. § 560.34 (emphasis added).]
By applying 12 C.F.R. § 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
[i]f state housing creditors were required to follow the Wisconsin Statute when making variable-rate mortgage loans, they would clearly be disadvantaged vis-á-vis federal thrifts — the very result Congress intended to prevent. The Wisconsin Statute thus appears to fall within the scope of laws preempted by the Parity Act. Accordingly, 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 regulations need not comply with the Wisconsin Statute.
[Ibid.]
In 2002, OTS proposed a rule change removing 12 C.F.R. § 560.34 from 12 C.F.R. § 560.220, thereby eliminating the preemption provision that barred enforcement of state prepayment laws against state lenders engaged in AMTs. During that rule-making 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 Mortgage Transaction Parity Act; Preemption, 67 Fed. Reg. 20,468 (2002) (to be codified at § 560.220) (proposed Apr. 25, 2002) [hereinafter 2002 Notice of Proposed Rulemaking ]; 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, pm-chasing, and enforcing of AMTs. 2002 Final Rule, supra, 67 Fed.Reg. at 60,543. When OTS decided to regulate prepayment fees in 1996 pmsuant 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 regulating 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.
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 traditional 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 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 judgment, 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 permissible.” Ibid.
In its 2002 Final Rule, effective July 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 interpretation at the time. Id. at 60,550.
B.
In light of that legislative and regulatory history, we return to the rationale provided by the Appellate Division for holding that
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.F.R. § 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,
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 substantial 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,
III.
The power of a federal statute to preempt a state law is derived from the Supremacy Clause of the United States Constitu
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 statute.” Chevron U.S.A., Inc. v. Natural Res. Def. Council, 467 U.S. 837, 844, 104 S.Ct. 2778, 2782,
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, 102 S.Ct. at 3022-23,
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 agency’s 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 interpretation over time. “An initial agency interpretation is not instantly carved in stone. On the contrary, the agency, to engage in informed rule-making, must consider varying interpretations and the wisdom of its policy on a continuing basis.” Chevron, supra, 467 U.S. at 863-
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 interpretation is for the courts.” Grunbeck, supra,
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
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 administration, 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,
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 proposed rulemaking. See Dow Chem., USA v. Consumer Prod. Safety Comm’n, 459 F.Supp. 378, 391 (W.D.La.1978) (recognizing informal rulemaking process as channel for participation by public, experts, and other constituencies to provide information on effects of proposed rules and to suggest alternatives). Established principles of administrative 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,
Unless there are compelling indications that OTS is wrong in concluding that there are two permissible interpretations 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,
Y.
In deciding whether OTS exceeded the scope of its authority in promulgating 12 C.F.R. § 560.220, we give due 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,
In National Home Equity Mortgage Ass’n v. Face, supra,
In McCarthy v. Option One Mortgage Corp., supra,
Last, in National Home Equity Mortgage Ass’n v. OTS,
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,
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-l(h) requires that notice to the Attorney General be provided when such a challenge is raised on appeal. However, we have no comparable 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 C.F.R. § 560.220. Accordingly, we reverse the decision of the Appellate Division, and reinstate the decision of the trial court dismissing plaintiff’s complaint for failure to state a claim upon which relief can be granted.
Notes
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.
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.F.R. § 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 NJ.Super. at 10,
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.
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 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.F.R. § 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 follow 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.
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)-(ll), 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 regulations regarding prepayment penalties to state-chartered lenders. Ibid.
The version of 12 C.F.R. § 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 associations may make alternative mortgage transactions as defined by that section and further defined and described by applicable regulations identified in this section, notwithstanding any state constitution, law, or regulation. In accordance with section 807(b) of Public Law 97-320, 12 U.S.C. 3801 note, §§ 560.33, 560.34, 560.35, and 560.210 of this part are identified as appropriate and applicable to the exercise of this authority and all regulations not so identified are deemed inappropriate and inapplicable. Housing creditors 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.F.R. § 560.220) [hereinafter 1996 Final 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. Nat'l Home Equity Mortg. Ass'n v. OTS,
Although our dissenting colleagues observe that "plaintiff might yet find relief by alleging a violation of 12 C.F.R. § 591.5(b)(20)(i),” we express no view on the validity of the filing of any new complaint.
Dissenting Opinion
dissenting.
The majority opinion represents a principled treatment of a complex problem. However, I do not believe that the preemption
I write further only to underscore the point that affording lenders protection under the 1996 regulation, which by now has been universally recognized as misguided, becomes especially unjust when viewed in conjunction with the sequence of events relating to the “opt-out” mechanism provided by Congress when it enacted the underlying legislation. Ante at 58-59,
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. Congress enacted the law including that provision in 1982, some fourteen years before the suspect 1996 regulation was promulgated. Ante at 58-59,
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,
Justice VERNIERO and Justice WALLACE join in this opinion.
For reversal and reinstatement — Chief Justice PORITZ and Justices LONG, LaVECCHIA and ALBIN — 4.
For affirmance — Justices VERNIERO, ZAZZALI and WALLACE — 3.