New Jersey Court Says Federal Thrift Regulator Cannot Pre-Empt Prepay Laws

A New Jersey Appellate Court has ruled that the Office of Thrift Supervision does not have the right to pre-empt state laws forbidding prepayment penalties on residential mortgages.

In the case in question, a borrower sued Equity One after the company charged him a prepayment penalty. A New Jersey Trial Court ruled for Equity One, saying that the New Jersey state law disallowing such penalties was pre- empted by OTS regulations. The recent decision by the Superior Court of the New Jersey Appellate Division overturns the ruling on the grounds that the OTS rule oversteps the authority given to the agency by the 1982 Alternative Mortgage Transaction Parity Act.

As part of the Parity Act, OTS established a rule in 1996 that said it would pre-empt all state laws regarding prepayment penalties and late fees. Last year, the federal agency removed the rule, originally effective Jan. 1 of this year. After complaints from the mortgage industry, that date was delayed to allow mortgage lenders more time to comply with state regulations. Currently, OTS pre-emption is set to end on July 1.

It appears that OTS' removal of the 1996 rule will be challenged by the National Home Equity Mortgage Association, who claims that OTS has exceeded its authority by eliminating the Parity Act's pre-emption.

Leonard Bernstein, a lawyer for Equity One, said that he would be filing a motion for reconsideration on the grounds that the 1996 rule should be upheld. He stated that "it is unusual for a state to reject such clear authority" as the 1996 OTS rule. Mr. Bernstein also cited a previous decision in a Virginia case, Face v. NHEMA, where the 4th Circuit Court of Appeals decided that the OTS rule allowed NHEMA to block the state of Virginia from enforcing a limit on prepayment penalties. The United States Supreme Court refused to hear that case.

But Lewis Adler, legal counsel for Mark Glukowsky, said that things have changed since that case. Most importantly, he said, is the fact that OTS itself has reversed the 1996 rule.

"(The) Glukowsky (case) says, 'Look , the OTS says they were wrong ... We agree with them.' It's not every day you see a federal agency say, 'you know, we screwed up six years ago.'"

While Equity One's legal team prepares to challenge the decision, Mr. Adler is looking to expand the Glukowsky decision into a class-action suit.

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