City Consumer Services, Inc. v. Department of Banking

• Decision Date: 23 June 1975
• Citation: 134 N.J.Super. 588,342 A.2d 540
• Parties: CITY CONSUMER SERVICES, INC., a corporation organized under the laws of the State of New Jersey, Plaintiff-Appellant, v. DEPARTMENT OF BANKING, State of New Jersey, Defendant-Respondent.
• Court: New Jersey Superior Court — Appellate Division

Page 588

134 N.J.Super. 588

342 A.2d 540

CITY CONSUMER SERVICES, INC., a corporation organized under the laws of the State of New Jersey, Plaintiff-Appellant, v. DEPARTMENT OF BANKING, State of New Jersey, Defendant-Respondent.

Superior Court of New Jersey Appellate Division.

Argued June 3, 1975.

Decided June 23, 1975.

John P. Sheridan, Jr., Princeton, for plaintiff-appellant (Cahill, McCarthy & Hicks, Princeton, attorneys).

Michael E. Goldman, Deputy Atty. Gen., for defendant-respondent (William F. Hyland, Atty. Gen., attorney; Richard M. Conley, Deputy Atty. Gen., of counsel).

Miller, Myers, Matteo & Rabil, Cherry Hill, filed a brief for amicus curiae, N.J. Sav. League (Michael D. Matteo, Cherry Hill, on the brief).

Before Judges CARTON, CRANE and KOLE.

PER CURIAM.

This appeal involves an attack on a regulation of the Commissioner of Banking, N.J.A.C. 3:18--8.1.

The Secondary Mortgage Loan Act, N.J.S.A. 17:11A--34 Et seq. (the act), directed at potential abuses of borrowers by second mortgage lenders, subjects the lenders to licensing and other rigid supervision by the State Commissioner of Banking (Commissioner). Oxford Consumer Dis. Co. of No. Phila. v. Stefanelli, 102 N.J.Super. 549, 256 A.2d 460 (App.Div.1968), suppl'd on other grounds 104 N.J.Super. 512, 250 A.2d 593 (App.Div.1969), aff'd as mod. on other grounds 55 N.J. 489, 262 A.2d 874 (1970), app. dism. 400 U.S. 808, 91 S.Ct. 45, 27 L.Ed.2d 38 (1970); Crescent Invest. Co. v. Comm'r of Bank. & Ins. of N.J., 103 N.J.Super. 11, 246 A.2d 490 (Ch.Div.1968). ¹ The Commissioner has the authority to make 'rules and regulations to effectuate the purposes of this act and to establish and maintain ethical, fair, equitable and honest business standards for persons who are subject to any provision of (the) * * * act.' N.J.S.A. 17:11A--54(a). The regulation here challenged was adopted pursuant to this statutory provision.

It is undisputed that savings and loan associations and other banking institutions may not make directly the kind of second mortgage loans with the rate of return permitted by the act. Both federal and state chartered savings and loan associations may only engage in this kind of secondary mortgage loan business through separate service corporations. 12 U.S.C.A. § 1464(c); 12 C.F.R. § 545.9--1; N.J.S.A. 17:12B--165(7)(b), 17:12B--152, 17:12B--153; N.J.A.C. 3:27--4.6, 3:27--4.2.

Second mortgage loans by licensees under the statute may carry a 15% Per annum interest rate and by regulation of the Commissioner may have a maximum rate of 18%. N.J.S.A. 17:11A--44(a). Generally, savings and loan associations and other banking institutions, by regulation of the Commissioner, may make real estate mortgage loans with an interest rate not exceeding 9 1/2% Per year. N.J.S.A. 31:1--1.

The use of a service corporation by a savings and loan association (association) is thus of benefit to it. The rate of return on loans that may be secured by second mortgages is higher than that otherwise permitted and the ultimate profits to the association that owns the corporation is correspondingly increased. On the other hand, this profit motive may contain the seed of the very kind of potential danger to borrowers that the act was designed to forestall.

Plaintiff City Consumer Services, Inc. (Consumer) was formed as a whollyowned subsidiary service corporation of City Federal Savings and Loan Association (City Federal) pursuant to 12 U.S.C.A. § 1464(c). In January and February 1974 Consumer applied for and obtained secondary mortgage loan licenses under the act to be used at City Federal's principal place of business in Elizabeth and at City Federal's 37 branch offices. Consumer claims to have expended $4,100 in acquiring these licenses and $45,000 in initial outlay in order to engage in the secondary mortgage loan business.

Subsequent to the acquisition of the licenses, the Commissioner, after due notice and an opportunity for submission of views, adopted the regulation here involved, N.J.A.C. 3:18--8.1, on June 6, 1974. It appears that Consumer and one private citizen filed statements opposing the regulation when it was proposed. The New Jersey Mortgage Council supported the proposal.

No hearings were held prior to or subsequent to the notice of the proposed regulation; ² nor have there been reports by the Commissioner setting forth the reasons for the proposed or final regulation. These reasons, however, are embodied in the Commissioner's brief and argument on this appeal.

The regulation provides:

(a) A licensee is prohibited from engaging in the secondary mortgage loan business at a location which is utilized by a banking institution or savings and loan association as a main, branch or any other office; except that, no licensee shall be prohibited from engaging in the secondary mortgage loan business at a location utilized by a banking institution, or savings and loan association, where the office and operations of the licensee are separate, apart and distinct from the offices and operations of the banking institution or the savings and loan association and when employees of the banking institution or savings and loan association are not employed by or soliciting for the licensee.

(b) In the event a licensee is presently engaged in the secondary mortgage loan business at any such location or locations, the licensee shall have 60 days, unless extended by the Commissioner for good cause shown, to relocate its offices, subject to the approval of the Commissioner; otherwise, said license(s) shall be surrendered to the Commissioner for cancellation.

Thus, under the regulation the licensee may conduct its business at the location used by the institution, provided the office and operations of the licensee are separate from those of the institution and the latter's employees are not employed by or soliciting for the licensee.

Consumer, on this appeal, challenges the validity of the regulation on a number of grounds. The New Jersey Savings League, as Amicus curiae, has filed a brief supporting Consumer's position.

It is contended that the Commissioner had no authority under the act to promulgate the regulation and that it is otherwise invalid. We disagree.

It should be noted that it is Consumer which sought the licenses to engage in this kind of business. It has the burden of showing that the presumptively valid regulation is illegal because it is unduly onerous or otherwise unreasonable or is outside the scope of delegated authority. No such showing has been made on the present record. See Motyka v. McCorkle, supra; Cole Nat. Corp. v. State Bd. of Examiners, 57 N.J. 227, 231, 271 A.2d 421 (1970); Schwerman Trucking v. Dept. of Env. Protection, 125 N.J.Super. 14, 20, 308 A.2d 353 (App.Div.1973).

The reasons set forth by the Commissioner for adopting the regulation in our view show that it was designed to effectuate what may be reasonably considered within the purposes of the act--to establish ethical, fair and honest business standards for service corporations, affiliated with associations and other banking institutions, that must be licensed to make second mortgage loans thereunder.

One of the primary goals of the act is to insure that a potential borrower knows that he is doing business with a secondary mortgage loan licensee. In this connection it is important that such borrower is not under the misapprehension that he is dealing with a banking institution or an association, having the traditional attributes of integrity, respectability and honesty of these institutions. Thus, the act provides that a secondary mortgage loan licensee shall conspicuously display its license at each licensed place of business, N.J.S.A. 17:11A--45(b); prohibits a licensee from advertising or otherwise conveying the impression that it is licensed by or does business under the supervision of the State of New Jersey or the Department of Banking, except that a licensee may advertise that it is 'licensed pursuant to the Secondary Mortgage Loan Act,' N.J.S.A. 17:11A--46(l) (1), and forbids a licensee to advertise any name, address or telephone other than its own, or to utilize in its advertisements or oral solicitations the word 'bank' or any term inferring that the licensee is, or is associated with, a bank. N.J.S.A. 17:11A--46(l)(2) and (3). The act also requires that the application for a license state the address where the secondary mortgage loan business is to be conducted; that the license specify the licensee's principal place of business or branch office and that a licensee may only transact business at the location designated on the license. N.J.S.A. 17:11A--37(a), 17:11A--41(a), 17:11A--46(a).

Accordingly, the place where the licensee's business is located and the manner in which it is conducted are of substantial consequence in the legislative scheme and appropriately the concern of the Commissioner. Additionally, he is charged not only with the enforcement of the act but also with the supervision of the activities of banking institutions and associations. His expertise in both of these areas is plain. He is in a position to sense potential dangers both to borrowers and the banks and associations, and to enact a regulation, such as this, which may avert them.

One of the potential hazards cited by the Commissioner is the possible conflict of interest were the licensed business or its employees to operate at the location of the association or banking institution. This conclusion could have been fairly reached by him. The temptation to divert what normally might be a first mortgage loan into the more profitable service corporation's second mortgage loan portfolio is not unreal, where the institution and the licensee are at the same location and staffed by the same personnel. That kind of conduct, where it is not truly justified, not only may be harmful to the borrower but may lead him to believe that he is in fact obtaining a bank or association loan. By...