Mortgage Bankers Ass'n of New Jersey v. New Jersey Real Estate Com'n

• Decision Date: 26 April 1985
• Citation: 200 N.J.Super. 584,491 A.2d 1317
• Parties: The MORTGAGE BANKERS ASSOCIATION OF NEW JERSEY, Appellant, v. The NEW JERSEY REAL ESTATE COMMISSION, Respondent.
• Court: New Jersey Superior Court — Appellate Division

Page 584

200 N.J.Super. 584

491 A.2d 1317

The MORTGAGE BANKERS ASSOCIATION OF NEW JERSEY, Appellant, v. The NEW JERSEY REAL ESTATE COMMISSION, Respondent.

Superior Court of New Jersey Appellate Division.

Argued Feb. 5, 1985.

Decided April 26, 1985.

E. Robert Levy, Union for appellant (Levy & Lybeck, Union attorneys; E. Robert Levy, Union, of counsel and on the brief; Clark E. Alpert, Union, on the brief).

Sarah T. Darrow, Deputy Atty. Gen., for respondent (Irwin I. Kimmelman, Atty. Gen., attorney; James J. Ciancia, Asst. Atty. Gen., of counsel; Sarah T. Darrow, Deputy Atty. Gen., on the brief).

Henry A. Hart, Washington, D.C., pro hac vice for intervenor-respondent The First Boston Capital Group, Inc. (Robinson, Wayne, Levin, Riccio & LaSala, Newark, attorneys; Henry A. Hart, Washington, D.C., and Ronald L. Lord, of counsel and on the brief; John B. Livelli, Newark, on the brief).

Albert J. Peasco, Jr., New Brunswick, for intervenors ERA Mortg., Inc. and Electronic Realty Associates, Inc. (Weiner & Hendler, New Brunswick, attorneys; Robert B. Hendler and Albert J. Peasco, Jr., New Brunswick, on the brief).

Before Judges PRESSLER, BRODY and COHEN.

The opinion of the court was delivered by

PRESSLER, P.J.A.D.

This appeal raises important questions respecting a real estate broker's involvement in the mortgage financing which a prospective buyer requires in order to purchase residential property from the broker's primary principal, the seller. More particularly, the substantive issue is whether the broker, who will be receiving a commission from the seller for negotiating the sale, is prohibited by N.J.S.A. 45:15-17(i) from also earning a consideration for assisting the buyer in obtaining the necessary financing.

The issue comes to us by way of an appeal by the Mortgage Bankers Association (MBA) of a declaratory ruling by the New Jersey Real Estate Commission which concluded that the cited statutory provision does not bar the broker's double compensation for services rendered in respect of both the sale and the financing. We reverse the ruling. First we conclude that it is contrary to the mandate of N.J.S.A. 45:15-17(i). Even if it were not, we are satisfied that its nature, scope and public import are of a magnitude which would have required the Commission to have acted by an exercise of its rule-making power. We also express considerable concern about the efficacy of the Commission's unilateral action in view of the overlapping jurisdiction of the Commissioner of Banking.

Explanation of the questions raised by this appeal requires reference to the factual, procedural and legislative circumstances culminating in the Commissioner's ruling. MBA is a trade association whose members are mortgage bankers and mortgage brokers licensed pursuant to N.J.S.A. 17:11B-1, et seq. The general business of a mortgage banker is to grant loans secured by a mortgage and then to sell the obligation at a discount. Since the sale is typically to an out-of-state capital source, the mortgage banker is effectively importing capital into the state. See N.J.S.A. 17:11B-1(c). And see New York Times, March 27, 1985, at D1, D8. The mortgage banker makes his profit by charging the borrower discount points as the consideration for granting the loan. A point is one percent of the loan. He also charges the borrower a variety of additional fees for processing and consummating the loan. See N.J.S.A. 17:11B-13(b). The business of the mortgage broker is to bring together, for a consideration, the primary borrower and a mortgage lender. N.J.S.A. 17:11B-1(d).

Prior to the enactment in 1981 of N.J.S.A. 17:11B-1 et seq. (Mortgage Bankers Act), which places the mortgage, banking and brokerage business under the administrative jurisdiction and regulatory control of the Commissioner of Banking, mortgage bankers and brokers were subject only to the control of the Real Estate Commission pursuant to N.J.S.A. 45:15-1 et seq. See, e.g., George H. Weinrott & Co. v. Burlington Housing Corp., 22 N.J.Super. 91, 91 A.2d 660 (Ch.Div.1952). Consequently, mortgage bankers and brokers held only a real estate broker's license, were ordinarily also engaged in the real estate brokerage business either directly or indirectly by way of an affiliate firm, and were unregulated by state law in respect of the amounts and categories of fees and costs which they could charge for granting a mortgage loan.

As interest rates escalated during the last decade, available mortgage funds within the state became scarcer, and the home-buying public found it increasingly difficult to obtain mortgage financing from traditional sources regulated by the Commissioner of Banking, namely, the savings and loan institutions and the savings and commercial banks. Cf. Application of Howard Savings Institution of Newark, 32 N.J. 29, 159 A.2d 113 (1960); Suburban S. & L. Assn. v. Comm'r of Banking, 150 N.J.Super. 339, 375 A.2d 1185 (App.Div.1977). The mortgage banking community responded to the home buyers' need, increasing its share of the home mortgage market and indeed coming to dominate that market even after it was reentered by the depository banks. These phenomena and the abuses they spawned were well-documented in the joint public hearings conducted by the Senate Labor, Industry and Professions Committee and the Assembly Banking and Insurance Committee on the bills enacted as N.J.S.A. 17:11B-1, et seq. See Public Hearings on S-975 and A-755, A Bill to Provide for the Licensing and Regulation of Mortgage Bankers, Mortgage Brokers and Mortgage Solicitors by the Commissioner of Banking (March 19 and April 3, 1980).

The leitmotif of those hearings was the capacity for abuse and overreaching inherent in the mortgage banking industry's uncontrolled fee structure. While various federal home-financing programs and applicable federal legislation address some of these concerns by limiting specific categories of charges in particular transactions, primarily FHA and VA insured loans, and by requiring disclosure in other transactions, it nevertheless appeared that there were sufficient interstices in the federal regulatory scheme to permit substantial overreaching by mortgage lenders in the absence of state control.

The heart of the bill, and the subject of the most vociferous protest by the mortgage banking industry, which opposed the bill, was section 13b, which accorded the Commissioner the power to establish fee guidelines. As enacted, however, that section imposed even stricter controls on the proposed fee structure by specifying the categories of chargeable fees, prohibiting the charging of any other categories of fees and subjecting to the fee structure loans insured or guaranteed by an agency of the federal government to the extent applicable federal law or regulation does not otherwise require. See N.J.S.A. 17:11B-13(b), (c) and (d). ¹ Although N.J.S.A. 17:11B- 13(b) authorized the Commissioner of Banking to establish guidelines, by rules and regulations, to determine the reasonableness of permissible fees, the regulations actually promulgated omit any specific monetary guidelines. See N.J.A.C. 3:38-1.1, et seq.

It was also evident to the legislative committees that the vulnerability of the home-buying public to overreaching on the part of the mortgage banker is very much intensified when the borrower relies on the real estate broker, who negotiated the sale in the first instance, to assist him in obtaining his mortgage financing. See, e.g., Public Hearing, supra, March 19, 1980, at p. 6A. It is that perception and its validity which is the crux of the issue here.

By way of general focusing of the problem, it is clear that when a real estate broker functions in his typical role as agent for the seller, he has an obvious self-interest in seeing to it that the prospective buyer can procure mortgage financing. Since the vast majority of home purchases are financed by the mortgage loan obtained by the buyer, the ability of the buyer to obtain that loan is critical not only to the consummation of the sale between buyer and seller but also to the broker's right to payment of his commission by the seller. That, of course, is so because the broker's right to his commission is dependent, if not upon actual consummation of the sale, then at least upon his production of a buyer who is willing, ready and able. See generally Ellsworth Dobbs, Inc. v. Johnson, 50 N.J. 528, 236 A.2d 843 (1967). In either case, the buyer's financial ability, ordinarily dependent on the mortgage loan, is the key to the fulfillment of the economic expectations of all three. Thus, if not technically part of the sales transaction itself, the buyer's mortgage transaction is nevertheless an integral, indispensable and contemporaneous functional component of the sales transaction.

To some extent the buyer, seller and broker have a mutuality of interest in the buyer's obtaining of a mortgage loan. The buyer cannot buy without it, the seller cannot sell without it, and the broker cannot realize his commission on the sale without it. But the respective interests of each of these three are not altogether congruent, and to the extent they do not overlap there is a substantial potential for conflict of interest and self-dealing on the part of the broker. That potential is enhanced if the broker is able to profit from the mortgage transaction as well as from the sales transaction. This is true because, irrespective of the broker-seller agency relationship, the buyer ordinarily believes that the broker is acting for him when he assists him in obtaining mortgage financing. As one member of the Assembly Committee expressed it, the buyer is the broker's "captive audience" vis-a-vis his required mortgage financing (Statement of Assemblyman Kosco, March 19, 1980 at 6A).

This "captive audience" characterization proceeded from the assumption, supported by the hearing testimony, that the average home buyer is relatively...