National Home Equity Mortgage Ass'n v. Face

PUBLISHED

UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

NATIONAL HOME EQUITY MORTGAGE 
ASSOCIATION,
Plaintiff-Appellee,
v.
E. JOSEPH FACE, JR., Commissioner
of Financial Institutions, Bureau of
Financial Institutions, Virginia State
Corporation Commission; SUSAN E.
HANCOCK, Deputy Commissioner,  No. 99-2331
Consumer Finance, Bureau of
Financial Institutions, Virginia State
Corporation Commission,
Defendants-Appellants,
and
MARK L. EARLEY,
Defendant.

2 NATIONAL HOME EQUITY v. FACE

NATIONAL HOME EQUITY MORTGAGE 
ASSOCIATION,
Plaintiff-Appellee,
v.
MARK L. EARLEY,
Defendant-Appellant,
and
E. JOSEPH FACE, JR., Commissioner  No. 99-2386
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.

Appeals from the United States District Court
for the Eastern District of Virginia, at Richmond.
Richard L. Williams, Senior District Judge.
(CA-99-398-3)

Argued: October 30, 2000

Decided: February 7, 2001

Before NIEMEYER and LUTTIG, Circuit Judges, and
Alexander WILLIAMS, Jr., United States District Judge
for the District of Maryland, sitting by designation.

Affirmed by published opinion. Judge Niemeyer wrote the opinion,
in which Judge Luttig and Judge Williams joined.
 NATIONAL HOME EQUITY v. FACE 3
COUNSEL

ARGUED: Robert A. Dybing, SHUFORD, RUBIN & GIBNEY,
Richmond, Virginia, for Appellants. Earle Duncan Getchell, Jr.,
MCGUIRE, WOODS, BATTLE & BOOTHE, L.L.P., Richmond,
Virginia, for Appellee. ON BRIEF: James C. Dimitri, William F.
Schutt, STATE CORPORATION COMMISSION OF VIRGINIA,
Richmond, Virginia; Martha B. Brissette, OFFICE OF THE ATTOR-
NEY GENERAL OF VIRGINIA, Richmond, Virginia, for Appel-
lants. Robert L. Hodges, William H. Baxter, II, MCGUIRE, WOODS,
BATTLE & BOOTHE, L.L.P., Richmond, Virginia, for Appellee.

OPINION

NIEMEYER, Circuit Judge:

We must decide whether a non-federally chartered housing creditor
in Virginia may, by complying with the Alternative Mortgage Trans-
action Parity Act of 1982, include in a home loan agreement an obli-
gation to pay a prepayment fee that exceeds the limits imposed by
Virginia Code §§ 6.1-330.83 and 6.1-380.85. For the reasons that fol-
low, we hold that, subject to the non-federally chartered lender’s com-
pliance with federal law, it may charge a prepayment fee, despite any
limitation imposed by the Virginia Code, because in that circumstance
the federal law preempts state law by virtue of § 804(c) of the Parity
Act, 12 U.S.C. § 3803(c). Accordingly, we affirm the district court’s
judgment reaching the same conclusion.

I

The late 1970s and early 1980s witnessed an alarming deterioration
in the number of home mortgage lending institutions — "housing
creditors" — in part because of their inability to adjust their long-term
mortgage portfolios to the high and widely fluctuating short-term
deposit interest rates. In response, Congress enacted the Garn-St. Ger-
main Depository Institutions Act of 1982 "to revitalize the housing
industry by strengthening the financial stability of home mortgage
lending institutions and ensuring the availability of home mortgage
4 NATIONAL HOME EQUITY v. FACE
loans." Pub. L. No. 97-320, 96 Stat. 1469 (1982). Title VIII of that
act, titled the "Alternative Mortgage Transaction Parity Act of 1982"
(the "Parity Act"), was included to "authorize[ ] non-federally char-
tered housing creditors to offer alternative mortgages in accordance
with the Federal regulations issued by the appropriate Federal regula-
tory agencies. Thus, those creditors will have parity with federally
chartered institutions." Sen. Conf. Rep. No. 97-641, at 94 (1982),
reprinted in 1982 U.S.C.C.A.A.N. 3128, 3137; see also 12 U.S.C.
§ 3801(b). "Alternative mortgages" were understood to refer to those
mortgages in which interest rates could be adjusted or renegotiated,
in which the maturity date could be shortened, or which included
other variations "not common to traditional fixed-rate, fixed-term
transactions." Parity Act, § 803(1), 12 U.S.C. § 3802(1).

The practical effect of the statutory scheme is to permit a non-
federally chartered housing creditor to make a loan either under state
law, in which case the loan transaction remains subject to the full
range of state regulations, or under federal law, in which case the loan
transaction becomes subject to federal regulations governing similar
loans by federally chartered lending institutions. Non-federally char-
tered housing creditors exercise this regulatory "option" by affirma-
tively complying with substantive federal regulations identified by the
Office of Thrift Supervision. In return for exercising this option, the
non-federally chartered housing creditor is promised parity with fed-
erally chartered lenders. See 12 U.S.C. § 3803. As the Senate Report
relevant to the Act observes, the Parity Act "does not place non-
federally chartered housing creditors under the supervision of the fed-
eral agencies, but instead merely enables them to follow a federal pro-
gram as an alternative to state law." S. Rep. No. 97-463, at 55 (1982).

In April 1999, The Compliance Connection, the official newsletter
of Virginia’s State Corporation Commission, announced its position
that the Parity Act did not preempt Virginia statutory law limiting
prepayment penalties. The newsletter explained that "Congress
explicitly restricted the [Office of Thrift Supervision’s] authority to
preemption of only such state laws as related to features ‘. . . not com-
mon to traditional fixed-rate, fixed-term transactions . . . .’ The Vir-
ginia statutes applicable to prepayment penalties . . . govern a
longstanding feature of conventional mortgage lending which Con-
gress left to state law . . . ." The newsletter announced that the Bureau
 NATIONAL HOME EQUITY v. FACE 5
of Financial Institutions "will continue to cite violations of Virginia
statutes relating to prepayment penalties." It noted that licensees
would have to notify borrowers of Virginia’s prepayment penalty lim-
its and to refund prepayment penalties. The letter also stated, "In addi-
tion 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."

In response to this announcement from Virginia officials, the
National Home Equity Mortgage Association, a trade association that
includes as members non-federally chartered housing creditors, com-
menced this action seeking a declaratory judgment and an injunction
prohibiting Virginia officials from enforcing Virginia’s prepayment
penalty provisions for loans made under the Parity Act. After the
Attorney General for the Commonwealth of Virginia intervened, the
district court, on cross-motions for summary judgment, entered judg-
ment in favor of the Mortgage Association and permanently enjoined
Virginia officials "from enforcing their announced position that the
Parity Act does not preempt Virginia state law limiting prepayment
penalties on alternative mortgage transactions." This appeal followed.

II

Virginia argues principally that the scope of preemption effected
by the Parity Act does not preclude it from regulating prepayment
penalties in alternative mortgage transactions. It argues,

[S]tate laws that do not prevent or interfere with [alternative
mortgage transactions] are not preempted. Congress defined
[alternative mortgage transactions] in § 3802(1) to be loans
involving terms "not common to traditional fixed-rate,
fixed-term transactions." Prepayment penalties were obvi-
ously not included in this definition, because they were and
are common to traditional real estate financing. Hence,
because the Virginia Statutes do not interfere with the mak-
ing of [alternative mortgage transactions], they are not pre-
empted.

To decide whether the Parity Act preempts Virginia’s statutes regu-
lating prepayment penalties, we must first identify the basic principles
of preemption that are applicable.
6 NATIONAL HOME EQUITY v. FACE
The Supremacy Clause of the United States Constitution mandates
that "the Laws of the United States . . . shall be the supreme Law of
the Land; and the Judges in every State shall be bound thereby, any
Thing in the Constitution or Laws of any State to the Contrary not-
withstanding." U.S. Const. art. VI, cl. 2. Thus, "federal legislation, if
enacted pursuant to Congress’ constitutionally delegated authority,
can nullify conflicting state or local actions." Worm v. American Cya-
namid Co., 970 F.2d 1301, 1304-05 (4th Cir. 1992). "Consideration
of issues arising under the Supremacy Clause ‘start[s] with the
assumption that the historic police powers of the States [are] not to
be superseded by . . . Federal Act unless that [is] the clear and mani-
fest purpose of Congress.’" Cipollone v. Liggett Group, Inc., 505 U.S.
504, 516 (1992) (quoting Rice v. Santa Fe Elevator Corp., 331 U.S.
218, 230 (1947) (alterations in original)). The "ultimate touchstone"
of preemption analysis is the intent of Congress. Malone v. White
Motor Corp., 435 U.S. 497, 504 (1978). Even when Congress’ intent
is unclear, state law must nevertheless yield when it conflicts with
federal law. In making the determination of whether state law con-
flicts with federal law, the test to apply is whether "it is impossible
to comply with both state and federal law" or whether "the state law
stands as an obstacle to the accomplishment of the full purposes and
objectives" of the relevant federal law. Silkwood v. Kerr-McGee
Corp., 464 U.S. 238, 248 (1984); see also Feikema v. Texaco, Inc.,
16 F.3d 1408, 1413 (4th Cir. 1994).

In enacting the Parity Act, Congress clearly intended to preempt
state law to the extent it authorized non-federally chartered housing
creditors to take advantage of the federal regulations for alternative
mortgage transactions that govern federally chartered lending institu-
tions.* Section 802(a)(3) of the Parity Act states that the Office of

*The Office of Thrift Supervision has used the rule-making authority
conferred on it by §§ 4(a) and 5(a) of the Home Owners Loan Act
("HOLA"), 12 U.S.C. §§ 1463(a)(2), 1464(a), to permit federally char-
tered thrifts to charge prepayment penalties as specified in the lending
documents, regardless of whether the loan is a traditional fixed-interest
loan or an alternative mortgage transaction. See 12 C.F.R.
§§ 560.2(b)(5), 560.34. Virginia does not contend that federally char-
tered institutions must comply with state limitations on prepayment pen-
alties.
 NATIONAL HOME EQUITY v. FACE 7
Thrift Supervision ("OTS"), formerly known as the Federal Home
Loan Bank Board, as well as other agencies, "have recognized the
importance of alternative mortgage transactions and have adopted
regulations authorizing federally chartered depository institutions to
engage in alternative mortgage financing." 12 U.S.C. § 3801(a)(3).
And § 3801 continues, "It is the purpose of this title to eliminate the
discriminatory impact that those regulations have upon nonfederally
chartered housing creditors and provide them with parity with feder-
ally chartered institutions by authorizing all housing creditors to make
. . . alternative mortgage transactions so long as the transactions are
in conformity with the regulations issued by the Federal agencies." Id.
§ 3801(b).

The operative language of the Parity Act, contained in 12 U.S.C.
§ 3803, provides that state-chartered deposit institutions and other
non-federally chartered housing creditors "may make . . . alternative
mortgage transactions" to the extent that they are "made in accor-
dance with [federal] regulations governing alternative mortgage trans-
actions . . . for federally chartered savings and loan associations" and
that the regulations are legally issued by the OTS or other relevant
agency. Id. § 3803(a)(3). And critically, the same section provides
that a non-federally chartered housing creditor may make an alterna-
tive mortgage transaction pursuant to applicable federal regulations
"notwithstanding any State constitution, law, or regulation." Id.
§ 3803(c). Thus, to the extent that a non-federally chartered housing
creditor makes a loan in compliance with federal regulations for alter-
native mortgage transactions, it may do so despite contrary state law.

The particular issue presented in this case is whether a non-
federally chartered institution in Virginia may require and enforce a
prepayment fee in a mortgage agreement notwithstanding Virginia’s
limitation on prepayment penalties as contained in Virginia Code
§§ 6.1-330.83 and 6.1-330.85. The resolution of this issue depends on
whether the OTS has issued regulations authorizing prepayment fees
as part of its regulations for alternative mortgage transactions,
because if it has authorized the collection of prepayment fees in alter-
native mortgage transactions, then Virginia may not apply its law pro-
scribing such prepayment fees if the non-federally chartered housing
creditor has otherwise complied with the requirements of the Parity
Act. Although a non-federally chartered lender could, under federal
8 NATIONAL HOME EQUITY v. FACE
law, forego charging a prepayment fee and thereby comply with Vir-
ginia law, to deny the lender the right to make that election by prohib-
iting it from charging a fee in excess of Virginia’s caps would
frustrate the federal law’s purpose of giving the state-chartered lender
parity with the federally chartered lender and therefore would conflict
with federal law. See Silkwood, 464 U.S. at 248.

Because it is undisputed that federally chartered thrifts are autho-
rized by federal law to charge prepayment penalties by contract, the
narrow question we must answer is whether the regulation of prepay-
ment penalties is part and parcel of the federal regulations governing
alternative mortgage transactions. Here, history is a persuasive indica-
tor.

Prior to the enactment of the Parity Act, the Federal Home Loan
Bank Board, the predecessor to the OTS, had adopted several regula-
tions governing alternative mortgage transactions. Not only did these
regulations permit rate adjustments, balloon payments, and other vari-
ations in interest and amortization rates, but they also regulated the
prepayment of interest by prohibiting a prepayment penalty unless the
loan agreement included: "(1) a prepayment penalty, (2) an interest
rate that, after loan closing and after any interest-rate adjustment
remains fixed for a period of at least five years, and (3) only such
increases in the loan balance as a result from the deferral and capital-
ization of interest pursuant to § 545.6-2(a)(2)(iv) of this Part." 12
C.F.R. § 545.8-5(b) (1983). This regulation also placed a limit on the
size of a prepayment penalty that could be collected. In providing
notice of this regulation, first promulgated in August 1982, the Fed-
eral Home Loan Bank Board stated:

The proposed amendments would have permitted the impo-
sition of a penalty for the prepayment of all or any part of
a loan only if the loan carried a fixed interest rate and per-
mitted no adjustments except to the loan balance resulting
from the deferral and capitalization of interest. The Board’s
previous alternative mortgage instrument regulations . . .
required associations to permit borrowers to prepay such
loans in whole or in part at any time without penalty.

The final regulation retains the proposed amendments
with one change. Associations will be permitted to impose
 NATIONAL HOME EQUITY v. FACE 9
a prepayment penalty if the loan contract provides that, after
loan closing and after each interest rate adjustment, the
interest rate remains fixed for a period of at least five years.

Home Loan Amendments, 47 Fed. reg. 36,612, 36,615 (Aug. 23,
1982) (summary of contents) (emphasis added). This explanation pro-
vided by the Board in connection with its 1982-83 regulations clearly
places the regulation of prepayment penalties within the regulation of
"alternative mortgage instruments."

In its current federal regulation, OTS continues to regulate prepay-
ment penalties as part of the alternative mortgage transaction regula-
tions. Section 560.220, entitled "Alternative Mortgage Parity Act,"
provides that non-federally chartered housing creditors

may make alternative mortgage transactions as defined by
[12 U.S.C. § 3803] and further defined and described by
applicable regulations identified in this section, notwith-
standing any state constitution, law, or regulation. In accor-
dance with section 807(b) of Public Law 97-320, 12 U.S.C.
§ 3801 note, §§ 560.33 [Late charges], 560.34 [Prepay-
ments], 560.35 [adjustments to home loans], and 560.210
[Disclosures for variable rate transactions] of this part are
identified as appropriate and applicable to exercise of this
authority and all regulations not so identified are deemed
inappropriate and inapplicable.

12 C.F.R. § 560.220 (emphasis added).

Thus, the Parity Act and the regulations, to which it explicitly
refers, provide that when a non-federally chartered housing creditor
elects to be governed by federal law and complies with that law, it
may charge a contractually specified prepayment fee as authorized by
federal law, despite the fact that Virginia law provides otherwise. Any
other rule would contradict the explicit language of 12 U.S.C.
§ 3803(c) which provides that "[a]n alternative mortgage transaction
may be made by a housing creditor in accordance with this section,
notwithstanding any State constitution, law, or regulation." It would
also deny the non-federally chartered housing creditor parity with fed-
eral institutions when entering into alternative mortgage transactions.
10 NATIONAL HOME EQUITY v. FACE
Virginia argues that the definition of an alternative mortgage trans-
action in 12 U.S.C. § 3802(1) is limited to transactions with terms that
are "not common to traditional fixed-rate, fixed-term transactions"
and therefore does not include transactions involving prepayment
penalties because such penalties are common to fixed-rate loans. That
clause, however, refers to the essential nature of an alternative mort-
gage as including variable rates of interest or amortization. It does not
specify the terms that such a transaction may or may not include or
what regulations may apply. Most importantly, it does not limit the
scope of the preemptive force of § 3803(c). That scope is defined in
§ 3803, which provides that non-federally chartered housing creditors
"may make . . . alternative mortgage transactions" as defined in
§ 3802(1), and that if they do, they must be made "in accordance with
regulations governing alternative mortgage transactions as issued by
the Director of the Office of Thrift Supervision for federally chartered
savings and loan associations." Id. § 3803(a)(3). And, defining the
scope of preemption, subsection (c) provides that a loan made within
the scope of such regulations may be made despite a conflicting state
provision. It is undisputed that the regulations for making alternative
mortgage transactions not only regulate the prepayment of interest,
but also explicitly authorize the collection of prepayment penalties if
they are agreed to in the loan agreement. See 12 C.F.R. §§ 560.34,
560.220.

Virginia also argues that the federal agencies’ imperfect implemen-
tation of § 807(b) of the Parity Act indicates the lack of relevance of
federal prepayment regulations to alternative mortgage transactions.
Section 807(b) provides that the Federal Home Loan Bank Board, as
well as other agencies, are required to "publish those portions or pro-
visions of their respective regulations that are inappropriate for (and
thus inapplicable to), or that need to be conformed for the use of, the
non-federally chartered housing creditors to which their respective
regulations apply." 12 U.S.C. § 3801 note (emphasis added). The Fed-
eral Home Loan Bank Board’s implementation of § 807(b) published
the regulations that were applicable, rather than those inapplicable as
directed by the statute, and then it omitted its regulation of prepay-
ment penalties. Virginia argues that this omission indicates that pre-
payment penalty regulations are not intended to be part of the
alternative mortgage transaction regulations.
 NATIONAL HOME EQUITY v. FACE 11
First, it must be noted that current regulations implementing
§ 807(b) do not omit prepayment penalty regulations from the list of
regulations applicable to alternative mortgage transactions. See 12
C.F.R. § 560.220. Second, Virginia can derive little benefit from the
original omission. Section 807(b) is not a provision that defines the
scope of federal preemption. Rather, it defines the gate through which
the non-federally chartered housing creditors must pass in order to
obtain the benefits of the Parity Act. If a state lender conforms to the
regulations listed in the regulation implementing § 807(b), then it will
enjoy the preemptive protection that the Act grants in 12 U.S.C.
§ 3803(c). Accordingly, the implementation of § 807(b) provides Vir-
ginia with little support.

Finally, Virginia argues that the OTS was without authority to
adopt 12 C.F.R. § 560.220 because 12 U.S.C. § 3803(a) is not an
authorizing provision, but rather presumes the preexistence of regula-
tions. Any regulation referred to in § 3803, it argues, must be autho-
rized elsewhere. Again, this argument misconstrues the role of 12
C.F.R. § 560.220. That regulation was not authorized by § 3803(a),
but by the Home Owners’ Loan Act ("HOLA"), 12 U.S.C. § 1461 et
seq., and it was adopted pursuant to HOLA as directed by § 807(b)
of the Parity Act, which instructs non-federally chartered institutions
how to take advantage of the Parity Act. The regulations referred to
in § 3803(a) were indeed adopted originally by the Federal Home
Loan Bank Board and later by the OTS and other implicated agencies
pursuant to their authorizing statutes. In the case of the OTS, the regu-
lations were adopted explicitly under HOLA, as authorized pursuant
to 12 U.S.C. §§ 1463(a)(2) and 1464(a); see also 12 C.F.R. §§ 560.1,
560.2 (generally drawing on 12 U.S.C. § 1462 et seq. for authority to
adopt regulations involving alternative mortgage transactions). Thus,
we reject Virginia’s argument challenging 12 C.F.R. § 560.220.

In sum, we hold that non-federally chartered housing creditors in
Virginia — as they are defined in 12 U.S.C. § 3802(2) — may elect
to have their alternative mortgage transactions governed by the fed-
eral law applicable to federally chartered housing creditors engaging
in similar transactions by complying with that law, and when they do,
that law, which includes 12 C.F.R. § 560.34 (regulating prepayments
and authorizing a prepayment fee), preempts Virginia Code §§ 6.1-
330.83 and 6.1-330.85, which limits the imposition of prepayment
12 NATIONAL HOME EQUITY v. FACE
penalties. This conclusion is required by 12 U.S.C. § 3803 and is
clearly consistent with the raison d’etre of the Parity Act — giving
State-chartered lending institutions parity with federally chartered
lending institutions. See 12 U.S.C. § 3801(b).

For the foregoing reasons, the judgment of the district court is

AFFIRMED.