USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
____________________
No. 94-1479
ROBERT AND JENNIFER GRUNBECK,
Plaintiffs, Appellants,
v.
THE DIME SAVINGS BANK OF NEW YORK, FSB,
Defendant, Appellee.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
[Hon. Paul J. Barbadoro, U.S. District Judge] ___________________
____________________
Torruella, Chief Judge, ___________
Campbell, Senior Circuit Judge, ____________________
and Cyr, Circuit Judge. _____________
____________________
Jewel N. Klein, with whom Holstein, Mack & Klein, George P. ________________ ________________________ _________
Dickson and Law Offices of George Dickson were on brief for _______ _________________________________
appellants.
Douglas G. Verge, with whom Richard P. Hazelton and Sheehan, _________________ _____________________ ________
Phinney, Bass & Green were on brief for appellee. _____________________
____________________
January 23, 1996
____________________
CYR, Circuit Judge. The interesting issue of first CYR, Circuit Judge _____________
impression presented in this case is whether section 501(a)(1) of
the Depository Institutions Deregulation and Monetary Control Act
of 1980, 12 U.S.C. 1735f-7a(a)(1) (1988) ("Monetary Control
Act"), preempts New Hampshire Rev. Stat. Ann. 397-A:14(I) (West
Supp. 1994) ("Simple Interest Statute" or "SIS"). In a thought-
ful and comprehensive opinion, the district court ruled that the
Simple Interest Statute, as applied to a residential mortgage
loan permitting negative amortization, is preempted by section
501(a)(1).
I I
BACKGROUND BACKGROUND __________
On January 15, 1988, Dime Real Estate Services - New
Hampshire, Inc. ("Dime Real Estate NH") made a thirty-year
adjustable rate loan to Timothy Ray and Thomas F. Richards in the
approximate amount of $111,000, secured by a first mortgage on
their residence in Milford, New Hampshire. Dime Real Estate NH,
incorporated in New York and licensed to extend loans in New
Hampshire, is a wholly-owned subsidiary of Dime Savings Bank of
New York, FSB ("Dime Savings"), a federally-chartered savings
institution also incorporated in New York. The Ray and Richards
note, which contained a provision permitting negative amortiza-
tion, was assigned to Dime Savings the day it was made.
The interest rate was fixed at 7.75% for the first six
months, adjustable monthly thereafter at a margin of 3% above the
"monthly median cost of funds" ratio, as determined by the
2
Federal Home Loan Bank Board ("FHLBB"), and rounded to the
nearest one-eighth of one percentage point. The interest rate
was capped, by agreement, at 9.75% for the second six months, and
13.875% thereafter. The note afforded protection from unantici-
pated variable interest rate increases by permitting the borrower
to pay either the total principal and interest due for the month, ______
or a lower "minimum required payment amount." In the event the __ _____
borrower elected to make the lower "minimum required payment,"
however, the interest remaining unpaid for that month would be
added onto the loan principal, resulting in "negative amortiza-
tion," and the interest due the following month would be calcu-
lated on the basis of the higher adjusted loan principal.
On October 31, 1990, Ray and Richards conveyed their
Milford residence, subject to the Dime Savings mortgage, to
appellants Robert and Jennifer Grunbeck, who occupied it as their
principal residence. After the Grunbecks ceased payments on the
mortgage in 1993, Dime Savings instituted foreclosure proceed-
ings. The Grunbecks responded with an Ex Parte Petition for
Injunctive Relief in New Hampshire state court, claiming, inter _____
alia, that the negative amortization provision "compounded" ____
interest and, therefore, violated the Simple Interest Statute.1
____________________
1The Simple Interest Statute provides:
Any first mortgage home loan made under the
provisions of this chapter [Chapter 397-A:
Licensing of Nondepository First Mortgage
Bankers and Brokers of Title 35 Banks and
Banking; Loan Associations; Credit Unions]
shall provide for the computation of interest
on a simple interest basis.
3
Dime Savings promptly removed the case to federal district court,
see 28 U.S.C. 1441, 1446; see also id. 1332 (diversity ___ ___ ____ ___
jurisdiction), then moved to dismiss on the ground, amongst
others,2 that section 501(a)(1) of the Monetary Control Act
preempts the Simple Interest Statute. In due course the district
court entered judgment for Dime Savings, see Grunbeck v. Dime ___ ________ ____
Sav. Bank of New York, FSB, 848 F. Supp. 294, (D.N.H. 1994), and __________________________
the Grunbecks appealed.
II II
DISCUSSION DISCUSSION __________
A. Standard of Review A. Standard of Review __________________
We review Rule 12(b)(6) dismissals de novo, crediting __ ____
all well-pleaded allegations. Clarke v. Kentucky Fried Chicken ______ ______________________
of Cal., Inc., 57 F.3d 21, 22 n.1 (1st Cir. 1995). For present _____________
purposes, therefore, we accept the allegation that the negative
amortization provision in the loan agreement "compounds" interest
and thus contravenes the Simple Interest Statute. Accordingly,
____________________
N.H. Rev. Stat. Ann. 397-A:14(I).
2Dime Savings presented additional defensive claims below,
including that (1) the SIS is preempted by 804(c) of the
Alternative Mortgage Transaction Parity Act of 1982, 12 U.S.C.
3803(c) (1988), (2) the negative amortization provision in the
Dime Savings note does not "compound" interest and, therefore,
does not violate the SIS, and 3) for various reasons, the Grun-
becks lack "standing" to challenge the SIS. The district court
bypassed these claims, and dismissed on the Monetary Control Act
preemption ground. Grunbeck v. Dime Sav. Bank of New York, FSB, ________ ________________________________
848 F. Supp. 294, 296 n.2 (D.N.H. 1994). We do not address these
claims. In particular, we bypass the "standing" claim because
the undeveloped record does not enable its reliable determina-
tion.
4
we turn to consider whether the statute, so construed, is pre-
empted by section 501(a)(1).3
B. Monetary Control Act Preemption B. Monetary Control Act Preemption _______________________________
Congress' power to preempt state law derives from the
Supremacy Clause of the United States Constitution. E.E.O.C. v. ________
Massachusetts, 987 F.2d 64, 67 (1st Cir. 1993). "[I]n any _____________
preemption analysis, 'the question of whether federal law pre-
empts a state statute is one of congressional intent.'" Green- ______
wood Trust Co. v. Massachusetts, 971 F.2d 818, 823 (1st Cir. _______________ _____________
1992), cert. denied, 113 S. Ct. 974 (1993) (quoting French v. Pan _____ ______ ______ ___
Am Express, Inc., 869 F.2d 1, 2 (1st Cir. 1989)). Although the ________________
preemption power is not liberally exercised by Congress, id. ___
(citing Gregory v. Ashcroft, 111 S. Ct. 2395, 2400 (1991)), if a ________ ________
federal statute includes an express preemption provision the
court need only determine its scope. Id. (citing Cipollone v. ___ _________
Liggett Group, Inc., 112 S. Ct. 2608, 2618 (1992)). ___________________
1. Rules of Construction 1. Rules of Construction _____________________
The scope of an express preemption provision is
gleaned, first and foremost, from the language of the federal
statute, employing traditional rules of statutory construction.
____________________
3The district court construed the SIS as a ban on "compound
interest," or "charg[ing] interest on interest." Grunbeck, 848 ________
F. Supp. at 296 n.2, 298-300, 302-03. The parties do not dispute
its construction. In addition, the State of New Hampshire
asserted in its amicus memorandum below, that "The New Hampshire
Banking Department has construed the [SIS] as banning regulated
mortgage companies from using any computational method other than
simple interest in loan products including, specifically,
assessments of interest on deferred interest unless the
practice is permitted by overriding federal law."
5
CSX Transp., Inc. v. Easterwood, 113 S. Ct. 1732, 1737 (1993) _________________ __________
("If the statute contains an express pre-emption clause, the task
of statutory construction must in the first instance focus on the
plain wording of the clause, which necessarily contains the best
evidence of Congress' pre-emptive intent."). Of course, if the
statutory language is ambiguous, Burlington N. R.R. Co. v. ________________________
Oklahoma Tax Comm'n, 481 U.S. 454, 461 (1987), or would work an ___________________
unreasonable result, we may consult relevant legislative history,
Cabral v. INS, 15 F.3d 193, 194 (1st Cir. 1994), to confirm an ______ ___
interpretation indicated by the plain language. Strickland v. __________
Commissioner, Maine Dep't. of Human Servs., 48 F.3d 12, 17 (1st ___________________________________________
Cir.), cert. denied, 116 S. Ct. 145 (1995), (citing INS v. ____ ______ ___
Cardoza-Fonseca, 480 U.S. 421, 432-43, 446 (1987)). _______________
Where Congress has spoken directly to the issue, an
interpretation rendered by the agency responsible for administer-
ing the statute is entitled to no special deference. Chevron, ________
U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. ____________ _______________________________________
837, 842 (1984). In all events, the courts will reject an agency
interpretation which conflicts with congressional intent. Id. at __
843 n.9. Finally, we attribute "ordinary meaning" to plain
statutory terms, see Greenwood Trust, 971 F.2d at 824 (citing ___ _______________
Morales v. Trans World Airlines, Inc., 112 S. Ct. 2031, 2036 _______ ____________________________
(1992)), but may reject an express preemption claim absent a
sufficiently clear license to trespass on state sovereignty. See ___
E.E.O.C., 987 F.2d at 68 (citing Gregory, 111 S. Ct. at 2401). ________ _______
The Monetary Control Act preemption provision relied
6
upon by the district court states in relevant part:
The provisions of the constitution or laws of ____
any State expressly limiting the rate or _________ ________ ___ ____ __
amount of interest, discount points, finance ______ __ ________
charges, or other charges which may be _____ ___ __
charged, taken, received, or reserved shall _______ _____
not apply to any loan, mortgage, credit sale, ___ _____ __ ___ ____ ________
or advance which is _____ __
(A) secured by a first lien on _______ __ _ _____ ____ __
residential real property . . .; ___________ ____ ________
(B) made after March 31, 1980; and
(C) described in section 527(b) of
the National Housing Act . . . .
12 U.S.C. 1735f-7a(a)(1) (emphasis added).4 Like the district
court, see Grunbeck, 848 F. Supp. at 297-98, the parties focus ___ ________
their preemption analyses primarily on the phrase "limiting the
rate or amount of interest."
As Dime Savings views the matter, the SIS plainly
"limits" the "rate or amount of interest" received in the sense
that more interest would be paid by the borrower were "compound- ____
ing" not banned under the SIS; and the SIS effectively "limits"
the "amount" of interest the lender can recover in the sense that
the lender could earn more interest were it permitted to charge
interest at the same "rate" calculated on a compound basis. ____ __________ __ _ ________ _____
These arguments rest on the implicit premise that the
"amount" of interest the lender may charge is "limited" by the
SIS. On the contrary, the SIS imposes no restriction on either
the "rate" or the "amount" of interest the borrower may be
charged, but merely requires that any interest rate or amount ___
____________________
4The Grunbecks do not dispute that the Dime Savings mortgage
loan meets the three criteria set out in s (A)-(C). Grunbeck, ________
848 F. Supp. at 297 n.4.
7
agreed to by the parties be computed on a "simple interest" ________
basis. Thus, nothing in the SIS prevents a lender from contract-
ing for whatever simple interest rate will exact an interest ______
return equal to or greater than whatever rate and amount of
interest would be recoverable through compounding. The SIS
leaves entirely to the parties the rate and amount of simple
interest to be exacted.
The Dime Savings interpretation blurs the distinction
between the terms "rate" and "amount" of interest, as used in
section 501(a)(1). It assumes that the central question _______
whether the SIS limits the "rate" of interest is to be re- ______
solved through reference to the effect the SIS ban against ______
charging interest on interest might have upon the "amount" of
interest the lender may be able to command in the marketplace. ___ ______ ___ __ ____ __ _______ __ ___ ___________
Not only does this assumption implicitly acknowledge that the SIS
itself imposes no statutory limit on the simple interest "rate" _________ _____
lenders may charge, but it alters the fundamental focus of the
preemption debate by inquiring whether the SIS might make it more
difficult for lenders to command in a better-informed market-
place (i.e., wherein a "simple interest" calculation is mandato-
ry) either the rate or amount of interest otherwise obtainable
by "compounding."5
____________________
5As the district court observed, "without being able to
charge interest on interest, many lenders would not allow poten-
tial borrowers to defer accrued interest." Grunbeck, 848 F. ________
Supp. at 299. In other words, many lenders might choose not to ______
compensate by increasing the simple interest rate, and might not
permit borrowers to defer interest payments on which no interest ______
could be charged. Although unimpeachable, these considerations
8
No less importantly, the shift in analytic focus
attending the Dime Savings' assumption undermines the required
"plain language" interpretation, see Morales v. Trans World ___ _______ ____________
Airlines, Inc., 504 U.S. 374, 383-84 (1992), by extirpating ______________
from the pivotal section 501(a) clause: "expressly limiting the
rate or amount of interest" the important modifier "express-
ly." Thus, the preemption inquiry urged by Dime Savings would
focus not on whether the "express" language of the SIS "limit[s]"
the rate or amount of interest which the lender may charge, but
on broad-gauged assessments concerning the likely impact the SIS ______
ban on compounding would have on home-mortgage lenders and the
industry at large.
When engaged in the task of statutory interpretation,
"[c]ourts . . . should . . . attempt to give meaning to each word
and phrase." See United States v. Flores, 968 F.2d 1366, 1371 ___ ______________ ______
(1st Cir. 1992). Thus, in our view the district court mistakenly
inquired whether the SIS ban against charging interest on inter-
est could affect the amount of interest lenders might command in _____ ______
____________________
are inapposite to the present discussion.
First, were a lender to opt not to permit deferments of
interest payments, it nonetheless would receive both the rate and
amount of simple interest for which it contracted on all monies
loaned. Second, in any such transaction it could not be said
that the SIS, either directly or effectively, limited the legal ___
rate or amount of interest chargeable by the lender. To be sure,
lenders who chose not to offset the SIS ban by raising the simple
interest rate, or chose not to permit deferments of interest
payments, would realize less total interest income as a result of
their lending decision. But as the State noted in its amicus
memorandum below, "[t]o the extent that this requirement may
affect the total amount of interest potentially realizable under
the Dime [Savings] loan, such effect is incidental to the re-
quirement and cannot be viewed as an 'express' usury ceiling."
9
the marketplace, thereby not only eliding the term "expressly"
but overlooking the term "limiting" however defined.6
Moreover, the language Congress employed in section
501(a)(1) "expressly limiting the rate or amount of interest"
contrasts sharply with the preemption language in companion
section 521 of the Monetary Control Act, whereby Congress pre-
empted all state legislation "with respect to interest rates" in ____ _______ __
order to protect federally insured State-chartered banks from
State regulation of credit card transactions. See 12 U.S.C. ___
1831d(a) (emphasis added). See also Greenwood Trust, 971 F.2d at ___ ____ _______________
830 n.10 ("[S]ection 501 addresses different categories of
lenders and loans and contains materially different preemption
terms than does section 521."). Thus, it is important to recog-
____________________
6In parsing the 501(a)(1) text, the district court recog-
nized that the parties' differing views as to the significance of
the term "limiting" accounted for their widely divergent inter-
pretations. The court observed that "Dime [Savings] essentially
construes 'limiting' as an adjective meaning 'serving to restrict
or restrain.' . . . The Grunbecks and the State ... essentially
construe 'limiting' as a verb meaning to impose a 'final, utmost
or furthest boundary' on permissible interest rates or amounts."
Grunbeck, 848 F. Supp. at 298. ________
In our view, however, the plain statutory language cannot be
read as Dime Savings suggests, without ignoring the term "ex- ________
pressly," see Flores, 968 F.2d at 1371, and without disregarding ___ ______ ____________
the "ordinary meaning" of the term "limiting," see Greenwood ___ _________
Trust, 971 F.2d at 824. The SIS itself, as distinguished from _____ __ _____________ ____
market forces, does not "serve to . . . restrain" either the rate ______ ______
or amount of simple interest which may be obtained, since the
lender remains free to compensate by increasing the simple
interest rate. Thus, the SIS does not "expressly" limit "the
rate or amount of interest." Nor, in the alternative, does the
SIS as distinguished from market forces "limit" the rate or _____________ ____ ______ ______
amount of interest if "limit" means a "final, utmost or furthest
boundary" on the rate or amount of interest, since the SIS
imposes no ceiling whatsoever on either the rate or amount of _______
simple interest that may be exacted.
10
nize that the Congress which enacted the Monetary Control Act was
acutely aware that its choice of the distinctive terminology
"expressly limiting" would serve as the primary interpretive
tool through which its preemptive intent would be revealed to the
courts. See BFP v. Resolution Trust Corp., 114 S. Ct. 1757, 1761 ___ ___ ______________________
(1994) (Congress is presumed to act with intent and purpose when
it uses particular language in one section of a statute and not
in another.).7
____________________
7The district court drew encouragement for its preemption
ruling from "[p]revious interpretations of similar language in
similar legislation," with particular reference to the National
Bank Act of 1864, ch. 106, 13 Stat. 99 (codified as amended in
various sections of Title 12, United States Code). Grunbeck, 848 ________
F. Supp. at 300. Section 85 of the National Bank Act provided
that "a bank may charge 'interest at the rate allowed by the laws
of the State, . . . where the bank is located and no more.'"
Citizens' Nat'l Bank of Kansas City v. Donnell, 195 U.S. 369, 373 ___________________________________ _______
(1904). Section 86 stated that "taking, receiving, or charging
'a rate of interest greater than is allowed by the preceding
section, when knowingly done, shall be deemed a forfeiture of the
entire interest which the note, bill, or other evidence of debt
carries with it, or which has been agreed to be paid thereon.'"
Id. ___
The district court expressed the view that Donnell supports _______
a broad reading of 501(a)(1), in two respects.
First, it offers persuasive support for con-
struing "laws limiting the rate or amount of
interest" to include laws prohibiting com-
pound interest. . . . Second, it indicates
that such laws also qualify as state "usury
laws" which the title to 501(a)(1) indi-
cates Congress intended to preempt.
Grunbeck, 848 F. Supp. at 301. We think the district court ________
misapprehended the purport of Donnell, as well as its bearing _______
upon the question before us.
First, the National Bank Act is largely inapposite to 501 501
of the Monetary Control Act. In drafting 501, Congress did not
borrow language from the National Bank Act. On the other hand,
Congress did borrow language from the National Bank Act in
drafting 521 of the Monetary Control Act. Greenwood Trust, 971 521 _______________
F.2d at 827. "[S]ection 521 was conceived as an offspring of
11
2. Legislative History 2. Legislative History ___________________
Even assuming ambiguity in the phrase "expressly
limiting the rate or amount of interest," see Cabral, 15 F.3d at ___ ______
194, relevant legislative history clearly reflects a congres-
sional intention to confine the scope of section 501(a)(1)
preemption to state laws which impose express ceilings on the ________
rate or amount of interest which may be charged, as distinguished
from bans against charging interest on interest or compounding. ____
The legislative aim in enacting section 501 focused on "state
usury ceilings," S. Rep. No. 368, 96th Cong., 2d Sess. 18-19, ________
reprinted in 1980 U.S.C.C.A.N. 236, 254-55 (emphasis added), with _________ __
particular emphasis on state usury laws which restrict interest
rates to below-market levels and result in artificial disruptions ____________ __________ ___________
in the supply of home-loan mortgage funds.
The Committee finds that where state usury
laws require mortgage rates below market
levels of interest, mortgage funds in those
states will not be readily available and
those funds will flow to other states where
____________________
section 85 of the Bank Act . . . ." Id. at 830 n.10. Thus, the ___
Monetary Control Act includes two separate and dramatically
different preemption provisions. Id. Consequently, an interpre- __
tation of the progenitor of 521, i.e., the National Bank Act, 521
affords little, if any, insight into the 501 preemption provi- 501
sion at issue in the present case. Second, Donnell is _______
inapposite to the present inquiry not only because it construed
an unrelated statute 85 of the National Bank Act but
because the SIS does not "expressly limit[] the rate or amount of _________
interest" even assuming that a ban against compounding can be ___
considered a limitation on the rate of interest "allowed by the __________
laws of the State . . . ." Donnell, 195 U.S. at 373. Indeed, it _______
is surpassingly awkward to ascribe meaning to the term "express-
ly" if the SIS ban against compounding is considered an "ex- ___ ___
press[] limit[ation on] the rate or amount of interest" which may _____ ___________ ____ __ ______
be charged, since no rate or amount of "interest on interest" may __
be charged under the SIS.
12
market yields are available. This artificial
disruption of funds availability not only is
harmful to potential homebuyers in states
with usury laws, it also frustrates national
housing policies and programs.
Id. at 254. Congress thus sought to facilitate first-mortgage ___
home loans at market rates, in order to enable an adequate credit
supply and strengthen the financial system.
In addition to the adverse effects of
usury ceilings on credit availability, mort- _____ ________
gage rate ceilings must be removed if savings ________
and loan institutions . . . are to begin to
pay market rates of interest on savings de-
posits. Without enhancing the ability of
institutions to achieve market rates on both
sides of their balance sheets, the stability
and continued viability of our nation's fi-
nancial system would not be assured.
Id. at 255 (emphasis added). ___
The district court correctly noted that Congress
intended to preempt state laws imposing usury ceilings, Grunbeck, ________ ________
848 F. Supp. at 299, but nonetheless concluded that "the [SIS] .
. . would limit the availability of mortgage funds in a way __ _ ___
comparable to a numerical cap on interest rates." Id. (emphasis __________ __ ___
added). True, demand for home mortgage credit could be reduced
were lenders to decline to defer interest payments, even though
the SIS does not place a ceiling on simple interest rates. But
though potential homebuyers might borrow less (or not at all)
were lenders to decline to defer interest payments or demand too
high a rate or amount of simple interest for doing so, the
potential homebuyer's decision would be the result of market
forces, the phenomenon Congress set out to facilitate in its ___ __________ ________ ___ ___ __ __________ __ ___
enactment of section 501(a)(1). That is to say, the SIS ban _________ __ _______ _________
13
against charging interest on interest would neither "require _______
mortgage rates below market levels of interest," nor cause _____
"artificial disruption in funds availability." See 1980 U.S.C.- __________ ___
C.A.N. at 254 (emphasis added).
Moreover, market adjustments in simple interest rates,
which New Hampshire home mortgage lenders are free to adopt under
the SIS, tend to promote equilibrium between credit supply and
credit demand. In contrast, lenders may be forced from a credit ______
marketplace governed by interest rate ceilings where the only ________
alternative is to make loans at interest rates below the levels
obtainable in competing loan markets. Credit supply is artifi- __ _______
cially disrupted in such a lending environment because credit ______ _________
demand tends to go unmet where borrowers are attracted by below- ______
market interest rates but lenders are not. As a result, credit ___ _______ ___ ___
demand and credit supply are less likely to attain equilibrium at
the usury-ceiling level. In these respects at least, a ban on
compounding is in no sense comparable to a mortgage interest rate
ceiling.8 Thus, an outright ban against charging interest on
____________________
8As a "[p]revious interpretation of similar language in
similar legislation," the district court cited to "Fourchon, Inc. ______________
v. Louisiana Nat'l Leasing Corp., 723 F.2d 376, 381-83 (5th Cir. _____________________________
1984) (construing phrase 'rate of interest' in [ 926(d) of the]
Preferred Ship Mortgage Act in accordance with previous construc-
tion of similar phrase in National Bank Act to preempt state law
prohibiting charging of interest on interest)." Grunbeck, 848 F. ________
Supp. at 300. But the policies subserved by 926(d) of the
Preferred Ship Mortgage Act are much broader than those underly-
ing 501 of the Monetary Control Act. "The Preferred Ship
Mortgage Act was designed to avoid parochial limitations on the
ready availability of credit to the shipping industry by wholly ______
and completely superseding state law and practice in every ___ __________ ___________
respect." Fourchon, 723 F.2d at 387 (Shaw, J., dissenting) ________
(emphasis added). "[T]he policies behind the Preferred Ship
14
interest does not work the adverse effects on the credit market-
place which concerned Congress in section 501(a)(1), viz.,
artificial disruptions in credit availability caused by State __________
ceilings on interest rates resulting in below-market rates. ________ ____________
Accordingly, we believe the relevant legislative history provides
sturdy support for the view that the important modifier "express-
ly" may not be read out of section 501(a)(1) and the term "limit-
ing" is not to be equated with "banning."
Congress also signaled its narrow preemptive intent
under section 501(a)(1) by insulating these mortgage loans from
state usury limitations only, and not from other state-law _____ ___________ ____
limitations encompassed within the "annual percentage rate" nor
other state-law limitations designed to protect borrowers:
In exempting mortgage loans from state usury
limitations, the Committee intends to exempt
only those limitations that are included in
the annual percentage rate. The Committee
does not intend to exempt limitations on
prepayment charges, attorney fees, late char-
ges or similar limitations designed to pro- __ _______ ___________ ________ __ ____
tect borrowers. ____ _________
1980 U.S.C.C.A.N. at 255 (emphasis added). The district court
concluded, without elaboration, that "interest on interest
prohibitions . . . are 'included' in the interest rate." Grun- _____
beck, 848 F. Supp. at 300. Dime Savings so contends on appeal, ____
____________________
Mortgage Act support an expansive interpretation of the term
'rate of interest' in section 926(d)." Fourchon, 723 F.2d at ________
382. As discussed above, however, see Section B.2, the policies ___
underlying 501 of the Monetary Control Act do not support a
broad interpretation of the term "rate or amount of interest."
Consequently, the Fourchon interpretation affords little insight ________
into the preemptive intent underlying 501 of the Monetary
Control Act.
15
maintaining that the SIS ban against charging interest on inter-
est is included in the "annual interest rate." We cannot agree.
In the first place, a ban against compounding interest
affords significant consumer protections to homebuyers. Charging
interest on deferred interest under a residential mortgage not
only increases the "unseen" costs of home ownership but erodes _____
home equity. Moreover, the relevant legislative history address-
es "state usury limitations" only. The SIS, on the other hand, ___________
is no mere "limitation" but an outright ban against calculating
interest on interest. The ordinary meaning of the term "limit-
ing" is either as the district court and Dime Savings view it
"serving to restrict or restrain" or as the Grunbecks urge
to enforce a "final, utmost or furthest boundary." Id. at ___
298. But the SIS does not merely "limit," nor does it simply ___
"restrain," compounding; it prohibits it. Thus, the "plain _________
language" interpretation advocated by Dime Savings cannot be
endorsed without disregarding the ordinary meanings of the
distinctive terms "ban" or "prohibit" and "limit" or "restrain."
See Greenwood Trust, 971 F.2d at 824. ___ _______________
3. Administrative Regulations and Opinions 3. Administrative Regulations and Opinions _______________________________________
Congress authorized the FHLBB and its successor, the
Office of Thrift Supervision ("OTS"), "to issue rules and regula-
tions and to publish interpretations governing the implementation
of [section 501]." 12 U.S.C. 1735f-7a(f). Judicial review of
an agency's interpretation of the statute it administers impli-
cates two preliminary inquiries. Strickland, 48 F.3d at 16 __________
16
(citing Chevron, 467 U.S. at 842-43). The first is whether _______
Congress has "directly spoken to the precise question at issue."
Id. (quoting Chevron, 467 U.S. at 842) (internal quotation marks ___ _______
omitted). If not, we inquire "whether the agency's answer is
based on a permissible construction of the statute." Id. (quot- ___
ing Chevron, 467 U.S. at 843) (internal quotation marks omitted). _______
Although we accord deference to the agency's interpretation, the
final word on statutory interpretation is for the courts.
Chevron, 467 U.S. at 843 n.9 ("The judiciary is the final author- _______
ity on issues of statutory construction and must reject adminis-
trative constructions which are contrary to clear congressional
intent."). Furthermore, "[i]f a court, employing traditional
tools of statutory construction, ascertains that Congress had an
intention on the precise question at issue, that intention is the
law and must be given effect." Id. Where an agency interpreta- ___
tion is based exclusively on its reading of the bare statutory
language, no special deference is due. See Strickland, 48 F.3d ___ __________
at 16. Furthermore, if "the statute itself, viewed in connection
with the statutory design and the legislative history, reveals an
unequivocal answer to the interpretive question, the court's
inquiry ends." Id. at 17. __
a. FHLBB Regulations a. FHLBB Regulations _________________
The FHLBB has issued administrative regulations for the
implementation of section 501, see 12 C.F.R. Part 590 (1988), ___
which focus upon the effect of interest ceilings on the avail- ________
ability of mortgage credit. "The purpose of this permanent
17
preemption of state interest-rate ceilings applicable to Federal- ________
ly-related residential mortgage loans is to ensure that the
availability of such loans is not impeded in states having
restrictive interest limitations. . . ." 12 C.F.R. 590.1(b)
(emphasis added). The FHLBB has reaffirmed that "[n]othing in
this section preempts limitations in state laws on prepayment
charges, attorneys' fees, late charges or other provisions
designed to protect borrowers." Id. 590.3(c). ___
A statute that imposes an outright ban against com-
pounding does not place a "ceiling" on interest rates or amounts.
See supra pps. 12-14. Moreover, assuming it may affect loan ___ _____
demand, a ban against charging interest on interest does not
artificially disrupt the availability of home mortgage credit. ____________ _______
See supra at pps. 12-15. Finally, given the commercial reali- ___ _____
ties, it is reasonably clear that the SIS ban against charging
interest on interest not only affords important protections to
homebuyers but does so without "expressly limiting" interest
rates.
b. The FHLBB and OTS Opinions b. The FHLBB and OTS Opinions __________________________
In response to an inquiry in 1984 as to whether "Michi-
gan laws regarding the charging of interest on deferred interest"
were preempted by section 501, the FHLBB opined that "state laws
which would prohibit the charging of [interest on] interest would
constitute provisions 'limiting the rate or amount of interest .
. . which may be charged. . . .' It is our opinion that such
charges are not consumer protection provisions of the type
18
contemplated by 12 C.F.R. 590.2(c) (1984) such as limitations
on prepayment charges, attorney's fees and late charges." Op.
Off. Gen. Counsel, FHLBB 1097 (November 15, 1984). In 1991, the
OTS followed suit with an opinion reaffirming the 1984 FHLBB
opinion that a state statute regulating "compounding" is preempt-
ed by section 501. Op. Off. Chief Counsel, OTS 91/CC-37 (Aug.
16, 1991).
We agree with the district court that these opinions
are not controlling. See Grunbeck, 848 F. Supp. at 298 ("Al- ___ ________
though these two opinions unequivocally support [Dime Savings']
reading of 501(a)(1), the regulators have failed to provide any
analytical support for [their conclusion]. In this circumstance,
absolute deference would be nothing more than blind al-
legiance."). The district court's observations are plainly
correct. Neither regulatory body tendered a rationale for its _________
opinion. The FHLBB the first to address the question
neither described, nor cited, the Michigan provision to which its
opinion related.9 And neither agency parsed the section 501(a)-
(1) preemption clause language.
As deference ultimately "depends on the persuasiveness
of the agency's position," Strickland, 48 F.3d at 18, we agree __________
that none is due in this instance. The interpretation adopted by
____________________
9The OTS indicated that the party requesting its opinion had
represented that Michigan has no statute on the subject and that
the Michigan provision relating to "interest on interest" origi-
nated in uncited caselaw announced around the turn of the centu-
ry.
19
these agencies disregarded entirely the term "expressly" which
plainly constrains the scope of the section 501(a)(1) preemption
clause and overlooked the relevant legislative history explic-
itly declaring a congressional intention to preempt state usury-
law ceilings as distinguished from bans on compounding ________
which result in artificial disruptions in home-mortgage loan
credit by mandating below-market interest rates. Finally, even ____________
assuming the FHLBB interpretation were apposite to the present
discussion, in the respect that the Michigan provision with which
it dealt imposed a ban on compounding, there is no explicit
indication that either agency considered the significant consumer
protections, see supra at 15, afforded by state bans such as ___ _____
the SIS against charging interest on interest. For these and
other reasons discussed at length in this opinion, we conclude
that the agency interpretation relied on by Dime Savings is
unpersuasive and entitled to no deference in the present context.
c. The Parity Act c. The Parity Act ______________
The district court rejected the State's argument that
passage of the Alternative Mortgage Transaction Parity Act of
1982 ("Parity Act"), 12 U.S.C. 3801 et seq., two years after __ ___
passage of the Monetary Control Act, supports a narrow construc-
tion of the preemptive scope of section 501(a)(1). Grunbeck, 848 ________
F. Supp. at 301-02. We nonetheless believe that significant
insight can be gleaned from the Parity Act.
The Parity Act preempts State bans on certain "alterna-
20
tive mortgage transactions,"10 by which is meant "all manner of
mortgage instruments that do not conform to the traditional
fully-amortized, fixed-interest-rate mortgage loan." First _____
Gibraltar Bank, FSB v. Morales, 19 F.3d 1032, 1037 (5th Cir. ____________________ _______
1994), cert. denied, 115 S. Ct. 204, vacated on other grounds, 42 _____ ______ _______ __ _____ _______
F.3d 895 (5th Cir. 1995) (per curiam). Common forms of "alterna-
tive mortgage transactions" include adjustable interest rate
mortgages, which may permit negative amortization, and graduated
payment mortgages, which may temporarily lower the mortgage
payment to less than the monthly interest due, resulting in
planned negative amortization whereby interest is charged on the
deferred interest. Id. (citing generally to Grant S. Nelson & ___
Dale A. Whitman, Real Estate Transfer, Finance, and Development _______________________________________________
1000-13 (4th ed. 1992)). Other planned negative amortization
____________________
10The term "alternative mortgage transaction" means a
residential mortgage loan
(A) in which the interest rate or
finance charge may be adjusted or
renegotiated;
(B) involving a fixed-rate, but
which implicitly permits rate ad-
justments by having the debt mature
at the end of an interval shorter
than the term of the amortization
schedule; or
(C) involving any similar type of
rate, method of determining return,
term, repayment, or other variation
not common to traditional fixed-
rate, fixed-term transactions, in-
cluding without limitation, trans-
actions that involve the sharing of
equity or appreciation;
described and defined by applicable regula-
tion.
12 U.S.C. 3802(1).
21
provisions include the reverse annuity mortgage ("RAM") and the
credit conversion mortgage, both of which charge interest on
deferred interest. Id. "An alternative mortgage transaction may ___
be made by a housing creditor in accordance with [section 3803],
notwithstanding any State constitution, law or regulation." 12
U.S.C. 3803(c). It is a requirement of section 3803 that for
"housing creditors [other than banks and credit unions] . . .
transactions [must be] made in accordance with regulations
governing alternative mortgage transactions as issued by the
[OTS] . . . ." Id. 3803(a)(3). These OTS regulations, see 12 ___ ___
C.F.R. 545.33(f)(4)-(11) (1988), impose, inter alia, substan- _____ ____
tial lender disclosure requirements relating to features unique
to alternative mortgage transactions.
The State argued below that it would be "'illogical and
contrary to public policy'" for Congress to require as a
precondition to preemption under the Parity Act that negative
amortization loans conform with OTS disclosure regulations "if
lenders could claim preemption for the same transactions under
[the Monetary Control Act] without making the required disclo-
sures." Grunbeck, 848 F. Supp. at 302. Although, as the dis- ________
trict court correctly observed, "[c]onstruing the Monetary
Control Act to preempt simple interest laws does not eliminate _________
the incentive for lenders to comply with the Parity Act's disclo-
sure requirements," id. (emphasis added),11 it must also be __
____________________
11The court explained that "negative amortization provisions
are not the only characteristics that qualify a loan as an
alternative mortgage transaction," and, further, that "[s]imple
22
noted that negative amortization provisions whereby interest is
assessed on deferred interest are common features in various _______
forms of alternative mortgage transactions; e.g., graduated _____
payment mortgages, RAMs, and credit conversion mortgages.
Because a ban against charging interest on interest would pre-
clude a central feature common to many forms of alternative
mortgage transactions, simple interest statutes unquestionably
infringe upon alternative mortgage loans, even though they do not
impose an outright ban. Thus, as the State contends, construing
the Monetary Control Act so as to preempt simple interest laws,
such as the SIS, would significantly reduce these alternative ______
mortgage lenders' incentive to comply with the Parity Act disclo-
sure requirements. Whether or not illogical, there can be little
question that this result would conflict with the policy underly-
ing the Parity Act and, thus, with the intent of Congress.
As the district court noted, "the Parity Act and the
Monetary Control Act serve related but distinctly different
functions." Id. The Parity Act represents a congressional ___
response to a concern, amongst others, that State bans on mort-
gages other than traditional fixed-rate mortgages would reduce
the overall availability of mortgage credit, since fixed-rate
mortgages had become relatively more expensive as the result of
increased interest-rate volatility.
The Congress hereby finds that
____________________
interest laws are merely one of several categories of" state laws
"inconsistent with a qualifying lender's right to issue alterna-
tive mortgage loans." Id. ___
23
(1) increasingly volatile and dy-
namic changes in interest rates
have seriously impaired the ability
of housing creditors to provide
consumers with fixed-term, fixed-
rate credit secured by interests in
real property, cooperative housing,
manufactured homes, and other dwel-
lings;
(2) alternative mortgage transac-
tions are essential to the provi-
sion of an adequate supply of cred-
it secured by residential property
necessary to meet the demand ex-
pected in the 1980's; . . . .
12 U.S.C. 3801(a). These concerns prompted Congress to autho-
rize State-chartered housing lenders, such as Dime Real Estate _____
NH, to enter into alternative mortgage transactions.
It is the purpose of [the Parity Act] to ...
provide [nonfederally chartered housing cred- ____________
itors] . . . parity with federally chartered
institutions by authorizing all housing cred-
itors to make, purchase, and enforce alterna-
tive mortgage transactions so long as the
transactions are in conformity with the regu-
lations issued by the Federal agencies.
Id. at 3801(b). See also First Gibraltar Bank, FSB, 19 F.3d at ___ ___ ____ _________________________
1043. Thus, the purpose of the Parity Act was to preempt State
bans on alternative mortgage transactions, including adjustable ____
rate mortgages permitting negative amortization whereby interest
may be charged on deferred interest payments.12
In the Monetary Control Act, on the other hand, Con-
gress was responding to the very different concern that State
____________________
12The parties do not dispute that the Dime Savings loan is
an "alternative mortgage transaction," though they disagree
whether the loan was made in accordance with OTS regulations. We
do not resolve the Dime Savings' Parity Act preemption claim as
applied to the present loan, however, since it has not yet been
considered by the district court.
24
interest-rate ceilings were depressing home-mortgage interest ________
rates to below-market levels, thereby artificially disrupting the ____________
availability of funds for both traditional fixed-rate mortgages
and "alternative mortgage transactions." The latter concern
prompted Congress to preempt only state laws "expressly limiting
the rate or amount of interest." Thus, section 501(a)(1) of the
Monetary Control Act was not aimed at preempting State laws, such
as the SIS, which prohibit "alternative mortgage transactions"
permitting negative amortization whereby interest may be charged
on deferred interest.
III III
CONCLUSION CONCLUSION __________
We hold that the New Hampshire Simple Interest Statute,
as applied to the Dime Savings loan, is not preempted by section
501(a)(1) of the Monetary Control Act. Consequently, we remand
to permit the district court to consider the remaining issues
relating to the petition to enjoin foreclosure on the Grunbeck
residence.
The judgment is vacated and the case is remanded for The judgment is vacated and the case is remanded for _______________________________________________________
further proceedings consistent with this opinion. Costs are further proceedings consistent with this opinion. Costs are ___________________________________________________ __________
awarded to appellants. awarded to appellants. _____________________
25