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National Home Equity Mortgage Association v. Office of Thrift Supervision

July 13, 2004

NATIONAL HOME EQUITY MORTGAGE ASSOCIATION, APPELLANT
v.
OFFICE OF THRIFT SUPERVISION, ET AL., APPELLEES



Appeal from the United States District Court for the District of Columbia (No. 02cv02506)

Before: Ginsburg, Chief Judge, and Henderson and Randolph, Circuit Judges.

The opinion of the court was delivered by: Ginsburg, Chief Judge

Argued April 6, 2004

The National Home Equity Mortgage Association seeks an order declaring invalid a final rule promulgated by the Office of Thrift Supervision pursuant to the Alternative Mortgage Transaction Parity Act, 12 U.S.C. §§ 3801 et. seq. The challenged rule designates certain OTS regulations as applicable and others as inapplicable to nonfederally chartered housing creditors that engage in "alternative mortgage transactions." The district court granted summary judgment in favor of the OTS, 271 F. Supp. 2d 264 (D.D.C. 2003), and the NHEMA appeals. We conclude the OTS did not exceed its statutory authority in promulgating the rule and hence we affirm the judgment of the district court.

I. Background

The NHEMA is a trade association of non-prime mortgage lenders, here representing state chartered housing creditors, including both non-depository lenders and depository institutions other than commercial banks and credit unions. The Association petitions for review of a final rule in which the OTS designated certain of its regulations as applicable and others as inapplicable to nonfederally chartered creditors that engage in "alternative mortgage transactions" (AMTs). See 67 Fed. Reg. 60,542 (Sept. 26, 2002). An AMT is a mortgage loan for which the term or interest rate or both are adjustable rather than fixed. See 12 U.S.C. § 3802(1).

The Congress passed the Parity Act in 1982 in order to "eliminate the discriminatory impact that [regulations authorizing federally chartered depository institutions to engage in alternative mortgage financing] have upon nonfederally chartered housing creditors," and to provide for parity between the two types of lenders "by authorizing all housing creditors to make, purchase, and enforce alternative mortgage transactions so long as the transactions are in conformity with" federal regulations. Id. § 3801(b). Section 804(c) of the Act provides:

An alternative mortgage transaction may be made by a housing creditor in accordance with this section notwithstanding any State constitution, law, or regulation.

Id. § 3803(c). The Act also authorized the OTS, the Office of the Comptroller of the Currency, and the National Credit Union Administration to identify, describe, and publish those portions or provisions of their respective regulations that are inappropriate for (and thus inapplicable to), or that need to be conformed for the use of, nonfederally chartered housing creditors.

Pub. L. 97-320, § 807(b), reprinted in 12 U.S.C. § 3801 note. Pursuant to this authority, in 1983 the Federal Home Loan Bank Board (OTS's predecessor) promulgated a final rule in which it identified certain of its regulations, including those that describe and define AMTs, as applicable to nonfederally chartered creditors. 48 Fed. Reg. 23,032, 23,053 (May 23, 1983). The Bank Board understood its role as making applicable to state chartered housing creditors only those regulations that were "an integral part of, and particular to" AMTs entered into by federally chartered housing creditors, and not those regulations that governed all types of mortgage loans. Id.

This regulatory scheme remained substantially unchanged until 1996, when the OTS added to the list of regulations applicable to nonfederally chartered creditors those governing late fees and prepayment penalties. The former allows federal thrifts to include a late fee provision in their loan contracts, subject to certain limitations upon the collection and application of such fees. 12 C.F.R. § 560.33. The latter permits federal thrifts to impose a fee for prepayments and specifies how such payments shall be applied to the balance of the loan. Id. § 560.34. As a result of this change, state chartered housing creditors could levy prepayment penalties and late fees without regard to state laws limiting or prohibiting such charges.

Within a few years of this change the OTS became aware that the application of its late fee and prepayment penalty regulations to housing creditors might be contributing to predatory lending practices in the subprime mortgage market. In April 2000 the OTS issued an Advance Notice of Proposed Rulemaking in which it aired that concern. See 65 Fed. Reg. 17,811, 17,813 (Apr. 5, 2000). Although the agency recognized that subprime lending helps borrowers who would not otherwise qualify for a mortgage loan, it wanted to discourage rather than to enable predatory practices. Id. at 17,814/2. To that end, the agency sought public comments regarding, among other things, the extent to which housing creditors were "engaging in predatory or abusive mortgage lending practices that would be contrary to existing state law but for the provisions of the Parity Act and OTS's implementation thereof." Id. at 17,816/2.

The OTS next issued a Notice of Proposed Rulemaking that would make the late fee and prepayment penalty regulations inapplicable to state chartered housing creditors. In the NPR, the agency noted the rising incidence of potentially predatory lending practices and preliminarily found the two regulations at issue were not "essential or intrinsic" to a creditor's ability to engage in AMTs. See 67 Fed. Reg. 20,468, 20,471 (Apr. 25, 2002). In contrast, the OTS proposed to continue applying to state chartered housing creditors its rules regarding adjustments and disclosures to borrowers entering into AMTs. Id.

Pursuant to its authority under ยง 807(b), the OTS then promulgated a final rule making its prepayment penalty and late fee regulations inapplicable to state chartered housing creditors, see 67 Fed. Reg. 60,542-55, on the ground that those regulations are "not essential or intrinsic" to a lender's ability to engage in AMTs. Id. at 60,544. As a result, state chartered housing creditors again have to comply ...


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