In what is believed to be a case of first impression nationally, a New Jersey state court, by order entered Jan. 18, 2002, dismissed a class action complaint alleging that the defendant-mortgage holder charged a prepayment fee in connection with a 15-year fixed-rate home mortgage balloon loan in violation of New Jersey's prepayment penalty prohibition. (Glukowsky v. Equity One Inc., Docket No. GLO-L-872-01). 

The motion was based on the federal preemption provided by the Alternative Mortgage Transactions Parity Act of 1982, which says that non-federally chartered housing creditors may make "alternative mortgage transactions" in accordance with regulations adopted by the Office of Thrift Supervision "notwithstanding any State constitution, law or regulation" (so long as the state did not "opt-out" of the Parity Act within three years after its enactment). OTS regulations specifically permit housing creditors to include provisions for prepayment fees in their loan documents in connection with alternative mortgage transactions, and to enforce those provisions.

Prepayment fee limitations

Two prior federal court decisions had held that the Parity Act preempted state prepayment fee limitations in connection with adjustable-rate loans, characterized as the "quintessential alternative mortgage transaction." See National Home Equity Mortgage Ass'n. v. Face, 239 F. 3d 633 (4th Cir.), cert. denied 122 S. Ct. 58 (2001), and Shinn v. Encore Mortgage Services, 96 F. Supp. 2d 419 (D.N.J. 2000). The Glukowsky case, however, involves a fixed-rate loan that was payable in full at the end of 15 years but for which the monthly payments were calculated using a 30-year amortization schedule. Thus, if the borrower made all payments as scheduled, there would still be due a substantial "balloon payment" at the end of 15 years.

Plaintiff principally maintained that such a loan was not an "alternative mortgage transaction." The Parity Act defines an "alternative mortgage transaction" as including, in pertinent part, any loan "involving a fixed-rate, but which implicitly permits rate adjustments by having the debt mature at the end of an interval shorter than the term of the amortization schedule." Plaintiff argued that for a loan to fit within this definition, it must give the borrower the option to refinance the balloon payment due at the end of the loan term. By dismissing the action, the trial judge obviously rejected this argument.

Novel arguments

Additional novel arguments raised by plaintiff and rejected by the court include (1) that the federal regulation preempting state due-on-sale clauses (which does not allow for prepayment fees) should be deemed applicable (because plaintiff prepaid his loan only after being advised by the servicer that he was in default and that foreclosure could ensue) and (2) that the preemption on first-lien interest rate limitations found in the Depository Institutions Deregulation and Monetary Control Act of 1980, which expressly excludes state prepayment penalty limitations from its preemptive effects, somehow negates the Parity Act preemption.

 

An appeal of the court's dismissal of the action has been filed.