HAROLD J. MINNETT v. COMMERCE BANK, N.A., et al.

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-6430-03T26430-03T2

HAROLD J. MINNETT,

Plaintiff-Appellant,

v.

COMMERCE BANK, N.A., and

EQUITY ONE, INC.,

Defendants-Respondents.

__________________________________________

 

Argued September 21, 2005 -- Decided

Before Judges Conley, Winkelstein and Sapp-Peterson.

On appeal from the Superior Court of New Jersey, Law Division, Camden County, docket no. 1854-03.

Lewis G. Alder argued the cause for appellant (Louis D. Fletcher, attorney; Mr. Adler, Roger C. Matson and Mr. Fletcher, on the brief).

Michael K. Sullivan argued the cause for respondents (Blank Rome, attorneys for respondents; Mr. Sullivan and J. Llewellyn Matthews, of counsel; Mr. Sullivan, on the brief).

PER CURIAM

Plaintiff appeals summary judgments granted defendants and the resulting dismissal of his multi-count amended complaint alleging violations of various New Jersey banking laws and the New Jersey Consumer Fraud Act. At issue are points charged plaintiff at the origination of a second-mortgage loan defendant Commerce Bank (CB) gave him and a prepayment fee incurred when he prepaid the loan. In two separate rulings, the motion judge concluded plaintiff's state law claims were preempted by 85 of the National Bank Act. 12 U.S.C. 85. He further concluded that the points and prepayment fee could lawfully be charged under certain various state banking laws.

We agree that the state law claims are preempted. Plaintiff's complaint does not allege a violation of the National Bank Act. Had it done so, an analysis of the various state banking laws would become necessary. Because the complaint did not allege a federal violation, it is not necessary for us to engage in an extensive discussion of those laws, notwithstanding the extended discourse thereon by the parties and the motion judge. In this respect, we touch upon only the claim that pursuant to the federal favored lender's rule, N.J.S.A. 17:9a-24B.1 (Parity Act) and N.J.A.C. 3:10-7.1, state chartered banks and savings banks are authorized to charge the points and prepayment fee at issue here. We express tentative agreement with this proposition but do not definitively resolve it.

The facts are simple. CB is a national bank chartered by the federal government and is headquartered in Cherry Hill, Camden County, New Jersey. On August 16, 2001, plaintiff obtained a $36,000 loan secured by a secondary mortgage on his home in Voorhees, New Jersey. CB charged plaintiff four points, or $1464, at the origination of the loan. In addition, the loan documents contained a prepayment fee in the event the loan was paid off in the first five years. The loan eventually was assigned to defendant Equity One which charged plaintiff $1,824.56 when he prepaid it.

In finding that plaintiff's state law claims against CB were preempted, the motion judge wrote in his May 13, 2004, letter opinion:

Importantly, the National Bank Act provides the exclusive remedy for violations of 12 U.S.C. section 85 by national banks, such as Commerce, and section 85 "unquestionably pre-empts" state law for interest related violations. See Beneficial National Bank v. Anderson, [ 539 U.S. 1, 8-11,] 123 S. Ct. 2058, 2063-64, [ 156 L. Ed. 2d 1, 9-11] (2003). This court places particular importance on the fact that the United States Supreme Court in Beneficial emphasized that the Supreme Court ". . . recognized the special nature of federally chartered banks. Uniform rules limiting the liability of national banks and prescribing exclusive remedies for their overcharges are an integral part of a banking system . . ." Id. at 2064. (Emphasis added).

We agree with the judge's analysis of the pertinent federal precedent.

In Beneficial, the Supreme Court held that 12 U.S.C. 85 "sets forth the substantive limits on rates of interest that national banks may charge[,]" and that 12 U.S.C. 86 "sets forth the elements of a usury claim against a national bank." Beneficial Nat'l Bank v. Anderson, supra, 539 U.S. at 9, 123 S. Ct. at 2063, 156 L. Ed. 2d at 9. The Court clarified further, "[b]ecause 85 and 86 provide the exclusive cause of action for such claims, there is, in short, no such thing as a state-law claim of usury against a national bank." Id., 539 U.S. at 11, 123 S. Ct. at 2064, 156 L. Ed. 2d at 10. Thus, the National Bank Act preempts any claims based on state law as to the lawfulness of interest charged by a national bank. Id., 539 U.S. at 11, 123 S. Ct. at 2063-64, 156 L. Ed. 2d at 10. This is because: "Uniform rules limiting the liability of national banks and prescribing exclusive remedies for their overcharges are an integral part" of the banking system and ensure the independence of national banks from state controls that may impair their federal powers. Id., 539 U.S. at 10, 123 S. Ct. at 2064, 156 L. Ed 2d at 10. "To the extent the enumerated federal rates of interest are greater than permissible state rates, state usury laws must, of course, give way to the federal statute." Marquette Nat'l Bank of Minneapolis v. First of Omaha Serv. Corp., 439 U.S. 299, 319 n.31, 99 S. Ct. 540, 551 n.31, 59 L. Ed. 2d 534, 548 n.31 (1978).

12 U.S.C. 85 governs the "interest" a national bank may charge. The Office of the Comptroller of the Currency (OCC), a bureau of the United States Department of the Treasury, charters, regulates and supervises all national banks and has defined "interest" as follows:

The term "interest" as used in 12 U.S.C. [ ] 85 includes any payment compensating a creditor or prospective creditor for an extension of credit, making available of a line of credit, or any default or breach by a borrower of a condition upon which credit was extended. It includes, among other things, the following fees connected with credit extension or availability: numerical periodic rates, late fees, creditor-imposed not sufficient funds (NSF), fees charged when a borrower tenders payment on a debt with a check drawn on insufficient funds, overlimit fees, annual fees, cash advance fees, and membership fees. It does not ordinarily include appraisal fees, premiums and commissions attributable to insurance guaranteeing repayment of any extension of credit, finders' fees, fees for document preparation or notarization, or fees incurred to obtain credit reports.

[12 C.F.R. 7.4001(a) (emphasis added).]

This definition is much more expansive than just the time-based percentage rates typically thought of as "interest." Compare Sherman v. Citibank, 143 N.J. 35, 62-63 (1995), rev'd, Smiley v. Citibank, 517 U.S. 735, 116 S. Ct. 1730, 135 L. Ed. 2d 28 (1996). See Smiley v. Citibank, 517 U.S. 735, 745, 116 S. Ct. 1730, 1736, 135 L. Ed. 2d 25, 34 (1996) ("It would be surprising to find [a requirement that interest be expressed as a function of time and amount owing] in the Act, if only because it would be so pointless. Any flat charge may, of course, readily be converted to a percentage charge."). And, of course, the OCC's interpretation is entitled to judicial deference. Smiley v. Citibank, supra, 517 U.S. at 739-45, 116 S. Ct. at 1733-34, 135 L. Ed. 2d at 30-34 ("'The Comptroller [of the Currency] is charged with the enforcement of banking laws to an extent that warrants the invocation of this principle with respect to his deliberative conclusions as to the meaning of these laws'") (quoting NationsBank of N. Carolina v. Variables Annuity Life Ins. Co., 513 U.S. 251, 256-57, 115 S. Ct. 810, 813, 130 L. Ed. 2d 740, 747 (1995)). See also Glukowsky v. Equity One, Inc., 180 N.J. 49, 65 (2004), cert. denied, ___ U.S. ___, 125 S. Ct. 864, 160 L. Ed. 2d 770 (2005).

Prepayment fees fall within the confines of 85 and 86. In this respect, OCC's Interpretive Letter Number 744 states:

A borrower who, at the time of receiving a loan does not anticipate prepaying the loan, can reap the benefits of the lower interest rate while the bank remains protected against the losses incurred as a result of an unanticipated need by the borrower to prepay. As a result, prepayment penalties fit within the section 7.4001(a) definition of "interest" as including any payment compensating the creditor for an extension of credit.

[OCC Interp. Ltr. 744 (Aug. 21, 1996).]

See also OCC Interp. Ltr. 803 (Oct. 7, 1997) (fees for prepaying a fixed rate option and for early closure of the amount constitute interest within the meaning of 85).

That origination points charged by federal banks are also governed by 12 U.S.C. 85 is evident. OCC Interp. Ltr. 803 (Oct. 7, 1997) (account opening fees and fees for exercising a fixed rate option); OCC Interp. Letter 670 (Feb. 17, 1995) (annual fees constitute 85 "interest" "without reference to whether such fees . . . are denominated by state law to constitute interest . . . ."). This is because origination points fall squarely within the scope of 85's "interest" as articulated by the OCC and accepted by the United States Supreme Court. See Smiley v. Citibank, supra, 517 U.S. at 745, 116 S. Ct. at 1735, 135 L. Ed. 2d at 34 ( 85 interest is the "compensation . . . fixed by the parties, for the use or forbearance of money" that compensates the bank for the risks undertaken in connection with the use of its money and for other costs and risks associated with establishing and maintaining a loan.).

We are satisfied, then, that plaintiff's state banking law claims are preempted. Because plaintiff's New Jersey Consumer Fraud Act claim is premised upon his state banking law claims, that claim, too, is preempted. Rosenberg v. Washington Mut. Bank, 369 N.J. Super. 456, 463 (App. Div. 2004). See also Glukowsky v. Equity One, Inc., supra, 180 N.J. at 72 (concluding that New Jersey's Prepayment Penalty Law, N.J.S.A. 46:10B-2, was preempted by a federal Office of Thrift Supervision regulation promulgated under the federal Parity Act, 12 U.S.C.A. 3801 -06, and reinstating trial court's dismissal of complaint alleging a violation of New Jersey's Prepayment Penalty Law and Consumer Fraud Act). We pause to note that federal preemption here is by way of express federal law. This, therefore, is not a situation in which state law claims may survive federal preemption where no intrusion upon the preempted area would occur. See for example, Smith v. SBC Commc'ns, Inc., 178 N.J. 265 (2004); Richardson v. Standard Guar. Ins. Co., 371 N.J. Super. 449, 474 (App. Div. 2004).

With this said, we acknowledge that had plaintiff alleged a violation of the National Bank Act, an analysis of state law would have been required. 12 U.S.C. 85 ("Any association may . . . charge on any loan . . . interest at the rate allowed by the laws of the State . . . where the bank is located . . . ." (emphasis added)). In this respect, we are inclined to think that the prepayment fee and origination points might, at the least, be chargeable by some state banks pursuant to N.J.S.A. 17:9A-24b.1. This statute, enacted in 2000, was intended to place New Jersey banks and savings banks on a more equal playing field with their federal and out-of-state counterparts. N.J.S.A. 17:9A-24b.1 states in pertinent part:

Notwithstanding the provisions of . . . any other law, banks and savings banks may exercise those powers, rights, benefits or privileges now or hereafter authorized for national or out-of-state banks or for Federal or out-of-state savings banks or savings associations either directly or through a financial subsidiary or other subsidiary, to the same extent and, subject to the same limitations as national or out-of-state banks or Federal or out-of-state savings banks or savings associations, may exercise those powers, rights, benefits or privileges, provided that before exercising any power, right, benefit or privilege of an out-of-state bank or out-of-state savings bank or savings association, the commissioner has adopted a regulation approving an exercise of that power, right, benefit or privilege by banks and savings banks generally . . . . The commissioner shall have the authority to adopt rules and regulations pursuant to this section, which rules and regulations shall have as their objective the placing of banks and savings banks on a substantially competitive parity with national and out-of-state banks and Federal and out-of-state savings banks and savings associations.

[N.J.S.A. 17:9A-24b.1.]

Thus, this parity statute provides that state banks may exercise the "powers, rights, benefits or privileges" that any national or out-of-state bank can exercise so long as the Commissioner of Banking and Insurance has promulgated a regulation to that effect.

The Commissioner of Banking and Insurance has done so. Pertinent here, N.J.A.C. 3:10-7.1 provides:

[New Jersey chartered] [b]anks may make secondary mortgage loans on the same terms and conditions under which national banks may make such loans pursuant to Federal law.

[N.J.A.C. 3:10-7.1.]

Thus, the Commissioner has given New Jersey banks "a substantial parity . . . [with] national banks" with respect to secondary mortgage loans. N.J.A.C. 3:10-7.4.

Pursuant to 85 of the National Bank Act, national banks are considered "most favored lenders" and may "export" the most favorable interest laws of states in which they are located to its customers in more restrictive states, including New Jersey. Smiley v. Citibank, supra, 517 U.S. at 744, 116 S. Ct. at 1735, 135 L. Ed. 2d at 33 (allowing national banks to "export" late fees allowable in a national bank's "home state" to loans to an out-of-state customer even though customer's "home state" does not allow such fees). Accord Marquette Nat'l Bank of Minneapolis v. First of Omaha Serv. Corp., supra, 439 U.S. at 312-13, 99 S. Ct. at 547-49, 58 L. Ed. 2d at 534.

At the least, there are two neighboring states which permit origination and prepayment charges on mortgage loans. In Delaware, a lender may charge up to ten percent of the principal of loans secured by real estate as "loan origination points." 3.3.1 Del. Code Regs. 5-2203. A Delaware lender may also charge an unlimited amount of "loan discount points" to reduce the periodic interest rate applicable to a mortgage loan. 3.3.2 Del. Code Regs. 5-2203. In New Hampshire, lenders may charge fees and points in conjunction with services rendered in the origination, closing and servicing of loans so long as disclosed in writing to the borrower, and lenders are permitted to collect prepayment penalties. N.H. Rev. Stat. Ann. 398-A:2 (III),(VII).

Because the federal "most favored lender" doctrine would permit national banks located in these states to assess New Jersey's customers with an origination fee and a prepayment fee, notwithstanding N.J.S.A. 46:10B-2, N.J.S.A. 46:10B-10, N.J.S.A. 17:3B-22, N.J.A.C. 3:15-10.1, or any other New Jersey legislation, N.J.S.A. 17:9A-24b.1 and N.J.A.C. 3:10-7.1 would seem to permit New Jersey banks to do likewise.

We are reluctant, however, to engage in a more dispositive or elaborate discussion of the various state law issues. Needless to say, a conclusion that state banks can wholesale violate state law limits upon prepayment and origination fees because of a national bank's most favored lender status would have broad ranging implications. Particularly in the absence of any participation by the Attorney General and/or the Commissioner of Banking and Insurance, see Glukowsky v. Equity One, Inc., supra, 180 N.J. at 72, we decline to engage in any further or more definitive discourse on the subject. The same is true for CB's various other state law contentions.

 
The dismissal of plaintiff's complaint on the basis of preemption is affirmed.

As assignee of the loan documents, Equity One did no more than exercise the contractual term negotiated by CB. Plaintiff's appellate brief contains no arguments relating to Equity One. Therefore, we address solely the contentions against CB.

The May 13, 2004, opinion disposes of motions for summary judgment concerning the origination points claim. At the same time, the judge granted plaintiff's motion to amend the complaint to encompass the prepayment fee claim. Summary judgment as to that claim was granted in an oral decision on June 24, 2004, which, ultimately, relied upon the May 13, 2004, written opinion.

(continued)

(continued)

12

A-6430-03T2

October 3, 2005