National Home Equity Mortg. Ass'n v. Face

• Decision Date: 10 September 1999
• Docket Number: No. Civ.A.3:99CV398.,Civ.A.3:99CV398.
• Citation: 64 F.Supp.2d 584
• Court: U.S. District Court — Eastern District of Virginia
• Parties: NATIONAL HOME EQUITY MORTGAGE ASSOCIATION, Plaintiff, v. E. Joseph FACE, Jr., Commissioner of Financial Institutions, Bureau of Financial Institutions, Virginia State Corporation Commission, Susan E. Hancock, Deputy Commissioner, Consumer Finance, Bureau of Financial Institutions, Virginia State Corporation Commission, Defendants, Mark L. Earley, Attorney General of Virginia, Intervenor-Defendant.

64 F.Supp.2d 584

NATIONAL HOME EQUITY MORTGAGE ASSOCIATION, Plaintiff, v. E. Joseph FACE, Jr., Commissioner of Financial Institutions, Bureau of Financial Institutions, Virginia State Corporation Commission Susan E. Hancock, Deputy Commissioner, Consumer Finance, Bureau of Financial Institutions, Virginia State Corporation Commission, Defendants Mark L. Earley, Attorney General of Virginia, Intervenor-Defendant.

No. Civ.A.3:99CV398.

United States District Court, E.D. Virginia, Richmond Division.

September 10, 1999.

COPYRIGHT MATERIAL OMITTED

Earle Duncan Getchell, Jr., McGuire, Woods, Battle & Boothe, Richmond, VA, for National Home Equity Mortgage Association, plaintiff.

James Constantine Dimitri, State Corporation Commission, Office of General Counsel, Richmond, VA, Robert A. Dybing, Shuford, Rubin & Gibney, P.C., Richmond, VA, William Frederick Schutt, State Corporation Commission, Richmond, VA, William H. Chambliss, State Corporation Commission, Richmond, VA, for E. Joseph Face, Jr., Susan E. Hancock, defendants.

Martha Blevins Brissette, Mark Lawrence Earley, Judith W. Jagdmann, Office of the Attorney General, Richmond, VA, for Mark L. Earley, movant.

MEMORANDUM OPINION

RICHARD L. WILLIAMS, Senior District Judge.

This matter is before the Court on the parties' cross motions for summary judgment regarding the Alternative Mortgage Transaction Parity Act of 1982, 12 U.S.C. §§ 3801-06, ("the Parity Act") and whether it preempts Virginia laws limiting prepayment penalties. National Home Equity Mortgage Association ("NHEMA" or "plaintiff") has filed a motion for summary judgment asserting that the Parity Act preempts Virginia laws. Defendants E. Joseph Face, Jr., Commissioner of Financial Institutions, Bureau of Financial Institutions, Virginia State Corporation Commission, and Susan E. Hancock, Deputy Commissioner, Consumer Finance, Bureau of Financial Institutions, Virginia State Corporation Commission ("SCC defendants") and Intervenor-Defendant Mark L. Earley, Attorney General of Virginia ("the Attorney General") have also filed motions for summary judgment, both asserting that the Parity Act does not apply to Virginia's statutory prepayment penalty limits. Responses have been filed to each of these motions and, accordingly, the motions are ripe.

Summary judgment may be granted if, after consideration of such items as depositions, affidavits or certifications, and after viewing the facts in the light most favorable to the non-moving party, "there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The parties concede, and the Court agrees, that no material facts are in dispute and that summary judgment is appropriate. For the reasons stated below, the Court grants plaintiff's motion for summary judgment, denies SCC defendants' motion for summary judgment, and denies the Attorney General's motion for summary judgment. The Court permanently enjoins defendants from enforcing their announced position that the Parity Act does not preempt Virginia state law limiting prepayment penalties on alternative mortgage transactions.

I. FACTUAL BACKGROUND

The plaintiff, NHEMA, is the largest national trade association focusing primarily on the home equity lending market. Members of this voluntary trade association include banks, mortgage lending corporations, secured equity lenders, law firms, title insurers, consulting firms, and appraisal services corporations. NHEMA membership includes entities that are currently licensed by the Bureau of Financial Institutions, Virginia State Corporation Commission, to conduct business in the Commonwealth of Virginia, and that also qualify as housing creditors under the Parity Act, 12 U.S.C. §§ 3801-06, and are thus subject to its provisions.

The Parity Act was passed by Congress in 1982 in order "to eliminate the discriminatory impact ... [that federal] regulations have upon nonfederally chartered housing creditors and provide them with parity with federally chartered institutions. ..." 12 U.S.C. § 3801(b). The Parity Act afforded housing creditors¹ the general authority to make, purchase, and enforce alternative mortgage transactions ("AMTs"). 12 U.S.C. § 3803. An AMT describes a residential-based loan or credit sale in which the lender may raise the interest rate, renegotiate the finance charge, or implicitly adjust the mortgage rate by allowing debt to mature faster than anticipated in the original amortization schedule.²

The Parity Act's provision that all housing creditors have general authority to make, purchase, and enforce AMTs applies only to transactions made in accordance with regulations issued by the Director of the Office of Thrift Supervision ("OTS") governing federal savings and loan associations. 12 U.S.C. § 3803(a)(3). The Director of the OTS has rulemaking authority pursuant to 12 U.S.C. §§ 1463(a) and 1464(a) to regulate federally chartered savings and loan organizations. The Director of the OTS has given savings and loan organizations federal rights to charge prepayment penalties without regard to state laws and has ruled that state laws regulating prepayment penalties are preempted. 12 C.F.R. §§ 560.2(a), (b)(5).

The Parity Act includes a preemption provision which states that an AMT "may be made by a housing creditor in accordance with this section, notwithstanding any State constitution, law, or regulation." 12 U.S.C. § 3803(c) (emphasis added). Congress expressly allowed each state the opportunity to opt out of the Parity Act's preemption provision between October 15, 1982 and October 15, 1985 by enacting, or adopting by referendum or constitutional amendment, a new law, stating explicitly and by its terms that the state did not want the Parity Act to preempt state laws regarding AMTs. 12 U.S.C § 3804. During this time period, the Commonwealth of Virginia did not opt out of the Parity Act's preemption provision and did not in any way indicate that it wished Virginia state laws to govern AMTs instead of the federal Parity Act.

The Virginia General Assembly recodified statutes limiting prepayment penalties in 1987. Sections 6.1-330.83 and 6.1-330.85 of the Code of Virginia limit the amount of prepayment penalties that can be charged to two percent of the prepayment amount and forbid any penalties when the prepayment is due to refinancing with the same lender or to default. These code sections do not reference the Parity Act and were recodified after the Parity Act's opt-out time had expired.

In an official newsletter distributed to Virginia mortgage and consumer finance licensees, SCC defendants announced or permitted to be announced that the Bureau of Financial Institutions of the Virginia State Corporation Commission believes that the Parity Act does not preempt Virginia statutory laws limiting prepayment penalties for AMTs. Federal Preemption of Virginia's Prepayment Penalty Laws:, Compliance Connection, April 1999, at 1 [hereinafter Federal Preemption]. This announcement stated:

Bureau examiners will continue to cite violations of Virginia statutes relating to prepayment penalties. Licensees found in violation will be required to refund prepayment penalties collected, in excess of the state law limits. In addition, notification ... must be provided to current borrowers so they will be aware that any higher penalty cannot be enforced. ... A copy of the notification must be made a part of the permanent loan file, and investors who have purchased loans providing for penalties in excess of the penalty set forth in the Virginia Code must be notified.

In addition to possible revocation of license, such violations can be referred to the Attorney General's office for investigation pursuant to Virginia Code § 6.1-430.

Federal Preemption at 3.

II. LEGAL ANALYSIS

A. Preemption

The primary issue for determination involves preemption and specifically whether the Parity Act preempts Virginia laws regarding limits on prepayment penalties. Plaintiff argues that when Virginia failed to timely opt out of federal preemption of the Parity Act, and when state-chartered housing creditors comply with the list of federal regulations that the OTS deems appropriate for them to follow, they can avail themselves of express federal preemption under 12 U.S.C. § 3803(c) "notwithstanding any State constitution, law or regulation." The plaintiff relies on an opinion issued by the OTS in 1996 that concluded that the Parity Act should be interpreted as preempting a Wisconsin state statutory restriction on prepayment penalties. Effect of Parity Act on Wisconsin Prepayment Penalty Statute, OTS Op. Chief Counsel, 1996 OTS LEXIS 19 (April 30, 1996). The plaintiff also relies on a rulemaking by the OTS which clarified that prepayment penalties are covered by the Parity Act. See 61 Fed.Reg. 50,951, 50,954, adopting new regulation 12 C.F.R. § 560.220 which identifies 12 C.F.R. 560.34 as a regulation applicable to AMTs. In addition, an opinion of the Maryland Attorney General has ruled the same as the OTS opinion. 82 Md.Op. Att'y Gen. No. 97-018 (August 19, 1997). In contrast, SCC defendants and the Virginia Attorney General argue that the Parity Act's preemption provision does not apply to Virginia's statutory prepayment penalty limits.

Simply stated, Congress gave the states a choice — the states could choose to be regulated by the federal regime under the Parity Act, or the states could choose to opt out of the preemption provision of the Parity Act and continue the state's own regime. 12 U.S.C. § 3804. Virginia did not opt out during the requisite time period, and only now objects to the federal regime because the OTS has clarified that prepayment penalties are covered by the Parity Act. This Court holds that the Parity Act preempts the Virginia laws that attempt to limit prepayment penalties.

The OTS...