NEW JERSEY PROHIBITION AGAINST PREPAYMENT PENALTIES PREEMPTED BY OTS REGULATIONS
In Glukowsky v. Equity One, Inc., 2004 WL 1159735 (N.J. May 26, 2004), the New Jersey Supreme Court held that the prohibition against prepayment penalties under the New Jersey Prepayment Law (“NJPL”) was preempted by former Office of Thrift Supervision (“OTS”) regulations, which gave state-chartered housing lenders power to charge prepayment penalties in alternative mortgage transactions (“AMTs”).
In Glukowsky, the plaintiff obtained a “balloon” mortgage loan from Equity One, Inc., which loan qualified as an AMT under the Alternative Mortgage Transaction Parity Act of 1982, 12 U.S.C. 3801 et seq. (“Parity Act”). When the plaintiff subsequently sold the property securing the loan, Equity One exercised its right under the loan contract to demand full payment and impose a prepayment penalty. The plaintiff filed suit against Equity One, claiming that imposing such a fee violated, among other things, the NJPL. The lender filed a motion to dismiss, arguing that OTS regulations preempt any state law, including the NJPL, that prohibits a state-chartered lending institution from charging a prepayment penalty on an AMT. At the time of suit and prior to its amendment in 2002, Section 560.220 of the OTS regulations had extended Section 560.34 of the OTS regulations, which permits federally-chartered housing lenders to impose prepayment penalties, to state-chartered housing lenders.
The trial court agreed with Equity One and dismissed the plaintiffs complaint on the grounds of federal preemption. The appellate court, however, held that the OTS exceeded its authority under the Parity Act when promulgating Section 560.220, and thus reversed the trial court. The supreme court disagreed and reversed the appellate court. In support of its conclusion, the supreme court indicated that the OTSs enactment of Section 560.220 should be given deference unless it acted outside the scope of its authority or arbitrarily. According to the supreme court, the OTS did not act in either manner because at the time of enactment, it was reasonable to conclude that Section 560.220 would promote the main goal of the Parity Act, that being achieving parity between state-chartered and federally-chartered housing lenders. The supreme court also indicated that in the interests of judicial comity, it should give due consideration to the interpretation of the Parity Act by federal courts, which had uniformly concluded that the OTS acted within its authority by promulgating regulations preempting state laws governing prepayment penalties. For these reasons, the supreme court refused to invalidate Section 560.220, and thus, held that the NJPL was preempted by federal law.
FTC SEEKS COMMENTS ON PROPOSED REGULATION TO LIMIT MARKETING SOLICITATIONS FROM AFFILIATES The Federal Trade Commission is seeking public comment on proposed regulations implementing the affiliate marketing provisions in Section 214 of the Fair and Accurate Credit Transactions Act. Section 214 (i) adds a new section to the Fair Credit Reporting Act regarding affiliate sharing (see 15 U.S.C. 1681s-3) and (ii) requires the federal banking agencies, the National Credit Union Administration and the Securities and Exchange Commission to make rules implementing Section 214 in coordination with one another. The proposed regulations, which would be added as a new Part 680 of Title 16 of the Code of Federal Regulations, would generally prohibit a company from using certain information received from an affiliate to market products or services to a consumer unless the consumer first has been given notice and an opportunity to opt out of receiving such solicitations.
Comments must be received by July 20, 2004. Please do not hesitate to contact us for more information about the proposed regulations or assistance in drafting comment letters.