State Prepayment Penalty Rules

State Housing Creditors Must Follow

New Jersey State Prepayment Penalty Rules

Dateline: February, 2003

Federal Law Overview - the Alternative Mortgage Transaction Parity Act:

In 1982, Congress enacted the Alternative Mortgage Transaction Parity Act (“AMTPA”) to provide non-federal lenders parity with federally-chartered lending institutions by preempting state limitations on alternative mortgage transactions. Alternative mortgage transactions include those types of loans that vary from conventional fixed-rate, fixed term mortgage loans, such as variable rate and balloon loans. Under AMTPA, state-chartered housing creditors[1] are permitted to make, purchase and enforce alternative mortgage transactions if the creditors comply with regulations governing such transactions issued by federal regulators notwithstanding “any State constitution, law or regulation”. Housing creditors other than state chartered commercial banks and state chartered credit unions that wish to make alternative mortgage transactions must comply with regulations promulgated by the Office of Thrift Supervision (OTS). State chartered commercial banks and credit unions must comply with regulations of the Office of the Comptroller of the Currency (OCC) and the National Credit Union Administration (NCUA), respectively.

Under AMTPA, state chartered housing creditors were allowed to “side-step” state limitations on application of prepayment fees on alternative mortgage transactions by relying on the preemption of the federal regulations over the state statutes regarding the enforceability of such fees. States had a limited period to opt out of the AMTPA preemption, but only five did so: Maine, Massachusetts, New York, South Carolina and Wisconsin. New Jersey did not opt out of the AMTPA preemption and therefore New Jersey state housing creditors enjoyed the ability to charge prepayment penalties allowable under federal statute, albeit the restrictions on same under New Jersey state law.

New Jersey Law Overview - Real Property Code, Licensed Lender Act:

New Jersey law restricts the ability of a mortgage lender to impose a fee on a borrower upon the prepayment of a mortgage loan pursuant to the New Jersey Real Property Code, N.J.S.A. 46:10B-1 et. seq., and under its Licensed Lender Act, N.J.S.A. 17:11C-1 et. seq.

The Real Property Code allows a borrower to prepay a “mortgage loan” at any time without a fee. N.J.S.A. 46:10B-2. A “mortgage loan” is defined by that statute to include loans secured by an interest in real property upon which is erected or to be erected, in whole or in part with the proceeds of such loan, a structure containing a one- to six-family dwelling which has an interest rate in excess of 6% per year. N.J.S.A. 46:10B-1.

Under N.J.S.A. 46:10B-3, certain partial pre-payments are authorized. This statute provides as follows:

"A mortgagor shall have the right during any 6 month period beginning with the date of the mortgage loan, to pay, without charge or penalty, an additional $50.00 or multiples thereof on account of the principal amount owing on a mortgage loan, provided that the additional sums so paid and the principal payments required to be made by the terms of such mortgage loan during such 6 month period do not together exceed in any such 6 month period 33 1/3% of the face amount of such mortgage loan. The right to make additional payments as provided by this section shall not be cumulative, and to the extent that it is exercised during any 6 month period, shall lapse."

The New Jersey Real Property Code provides that these prepayment fee provisions do not apply to “mortgage loans” in which the prepayment is governed by any other New Jersey or United States statute. N.J.S.A. 46:10B-9. Further, this statute provides that no prepayment fees are allowable where the mortgage loan is made pursuant to a state or federal statute which expressly authorizes interest charges in excess of 6% per annum.

The Licensed Lender Act, N.J.S.A. 17:11C-1 et. seq. implements the licensing and regulates the practices of first- and subordinate-lien residential mortgage lenders in the State of New Jersey. The Act prohibits these types of lenders from charging fees other than those expressly authorized by the Act. N.J.S.A. 17:11C-23 and -28. Prepayment fees are not expressly authorized and therefore would appear to be prohibited. A lender who violates The Licensed Lender Act may have its license revoked or suspend by the Commissioner of Banking and Insurance. N.J.S.A. 17:11C-18(a). A lender may also be prohibited from collecting interest, costs or other charges with respect to a loan if they are found to be in violation of the Act. N.J.S.A. 17:11C-29(a). Moreover, if a lender is found to have willfully violated the Act, that lender may be forced to pay to the borrower three times the amount of the costs or charges collected that was not expressly authorized by the Act. Id.

While state-chartered housing creditors were formerly able to use the preemptive benefit of AMTPA to protect themselves from these state restrictions on prepayment penalties, on September 25, 2002, the Office of Thrift Supervision announced a final rule that removes prepayment fee rules applicable to state housing creditors under AMTPA as part of its attempt to crack down on predatory lending violations. This ruling which went into effect July 1, 2003, now requires state-chartered housing creditors to once again be subject to state rules on prepayment fees rather than the OTS’s rules after July 1, 2003. In making this ruling, the OTS reasoned that prepayment fee provisions were not essential or intrinsic to the ability to offer alternative mortgages. In addition, some data presented indicated that including prepayment penalty provisions may have allowed some state housing creditors to engage in lending practices which fall outside the scope of certain state consumer protection laws.

The final rule makes no changes to the preemption laws governing federal associations and confirms the continued preemption of state laws for operating subsidiaries of federal associations. The same is true for state commercial banks and state credit unions who may continue to enjoy the preemptive benefits of AMTPA so long as they comply with the applicable regulations designated by the OCC and NCUA, respectively.

[1] A “housing creditor” is a depository institution, a lender approved by HUD for participation in certain mortgage insurance programs, “any person who regularly makes loans, credit sales or advances secured by interests in properties referred to in [AMTPA]; or…any transferee of any of them.” To qualify as a state housing creditor and take advantage of preemption, AMTPA specifically provides that the creditor must be “licensed under applicable State law and [remain or become] subject to the applicable regulatory requirements and enforcement mechanisms provided by State law.” 12 U.S.C. 3802(2).

This Article is a service of the Creditors’ Rights Department of Fein, Such, Kahn & Shepard, P.C., 7 Century Drive, Suite 201, Parsippany, NJ 07960. Phone: 973-538-4700. Website: www.feinsuch.com. It does not constitute legal advice nor create an attorney-client relationship. For more information contact Shareholder Vincent DiMaiolo, Jr., Esq. at vdimaiolo@feinsuch.com.

© 2003, Fein, Such, Kahn & Shepard, P.C., all rights reserved. Permission is granted to reproduce and redistribute this article so long as (i) the entire article, including all headings and the copyright notice are included in the reproduction, and (ii) no fee or other charge is imposed.