Federal rules do not preempt state regulation of mortgage prepayment fees

Law Reporter, Oct 2003

CONSUMER PROTECTION

Glukowsky v. Equity One, Inc., 821 A.2d 485 (N.J. Super. Ct. App. Div. 2003).

A New Jersey appellate court held that state consumer protection laws regulating prepayment fees on mortgages are not preempted by federal law.

Here, Glukowsky secured a residential mortgage from Equity One. He later sold the mortgaged property. At that time, he paid the remaining loan balance plus a prepayment fee amounting to 2 percent of the principal balance of the loan. The prepayment fee was calculated under the terms of a "prepayment rider" to the mortgage contract. Glukowsky filed suit alleging that prepayment fees, regardless of their amount, violate several New Jersey consumer protection laws. The trial court dismissed the complaint, holding that the state law claims were preempted by federal statutes and regulations that permit such fees.

Reversing in part, the appellate court found a direct conflict between state and federal law regarding whether prepayment penalties may be charged in these types of "alternative mortgage transactions" (AMTs). New Jersey explicitly prohibits state-chartered housing creditors from collecting prepayment penalties with respect to any residential mortgage transaction. On the other hand, the court observed, a 1996 federal regulation issued by the Office of Thrift Supervision (OTS) permits such prepayment fees. At the time, the OTS expressly stated that this regulation was intended to preempt state law to the contrary.

However, the court continued, in 2002 the OTS published a Notice of Proposed Rulemaking in which it repudiated its earlier regulation and put forth a number of arguments that indicate it acted arbitrarily and exceeded the authority delegated to it by Congress. The OTS stated that, in its opinion, its earlier decisions in this matter were not well-reasoned.

In its current opinion, as expressed in its final rulemaking, the OTS may not regulate those aspects of AMTs that are applicable to real estate lending in general-such as prepayment fees-which the OTS does not believe are essential for parity between federally chartered and state chartered housing lenders. Based on this latest determination by OTS, the court found, there is no evidence that Congress intended to place state housing creditors under the supervision of federal agencies. Indeed, Congress left room for state action by specifically reserving certain areas to the states. Therefore, no federal statute or valid regulation preempts the New Jersey laws on which plaintiff sought to rely in this case, the court concluded.

Accordingly, the court remanded.

Plaintiffs' Counsel

* Lewis G. Adler, Roger C. Mattson, and Louis D. Fletcher, all of Woodbury, N.J.