Grunbeck v . Dime Savings Bank CV-93-356-B 03/24/94 P UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Robert and Jennifer Grunbeck

v. Civil N o . 93-356-B The Dime Savings Bank of New York, FSB

O R D E R

Robert and Jennifer Grunbeck seek declaratory and injunctive

relief preventing Dime Savings Bank of New York, FSB ("Dime")

from foreclosing on their home in Milford, New Hampshire. The

Grunbecks allege that Dime's security interest in their home is

unenforceable because the promissory note it secures authorizes

Dime to charge compound interest in violation of N.H. Rev. Stat.

Ann. 397-A:14 (West 1992). Dime presently moves to dismiss the Grunbecks' suit pursuant to Fed. R. Civ. P. 12(b)(6), arguing,

inter alia, that § 501(a) of the Depository Institutions

Deregulation and Monetary Control Act of 1980, 12 U.S.C.A.

§ 1735f-7a(1) (West 1989) (the "Monetary Control Act") preempts

application of the New Hampshire statute to the Grunbecks' loan.

I. FACTS

Dime is a federally-chartered savings bank based in Uniondale, New York. In 1987, it began offering first mortgage

2 loans in New Hampshire through Dime Real Estate Services of New

Hampshire, Inc. ("Dime Real Estate"), a wholly owned subsidiary

that was incorporated in New York but licensed as a first

mortgage lender by the State of New Hampshire. Before going out

of business in July 1989, Dime Real Estate originated

approximately 1,500 adjustable rate, negative amortization

mortgage loans ("negative amortization" loans) to New Hampshire

homebuyers. Dime Real Estate routinely assigned its interest in

these loans to Dime.

In January 1988, Dime Real Estate originated a $111,000

negative amortization loan to Thomas Richards and Timothy Ray to

purchase a home in Milford, New Hampshire. As per routine, the

promissory note and mortgage instrument were immediately assigned

to Dime. In October 1990, the Grunbecks purchased the home from

Richards and Ray and agreed to assume their liability for the loan.

The Grunbecks' negative amortization loan had an adjustable

interest rate, adjustable monthly payment amounts, and the

potential for negative amortization. The original loan agreement

provided for the loan's interest rate to vary monthly at a margin

of 3% above an indexed rate set by the Federal Home Loan Bank

Board ("FHLLB"), and for the required monthly payment amounts to

3 be adjusted annually to account for any rate variations that occurred during the year. To prevent "payment shock," payment adjustments were capped at preset percentages. The agreement's negative amortization clause, however, provided that any shortfall between the required payment and the total interest due in a given month was to be "deferred" and capitalized. The adjusted principal amount then became the amount against which interest was assessed for the subsequent payment period.

In 1993, the Grunbecks stopped making their required monthly payments and Dime instituted foreclosure proceedings. The Grunbecks responded by filing an ex parte petition in Hillsborough County Superior Court seeking to enjoin the forced sale of their home. The Grunbecks alleged that Dime's security interest was illegal and void ab initio because the loan's negative amortization provisions violated N.H. Rev. Stat. Ann. 397-A:14(I) (the "simple interest" l a w ) , which states that "[a]ny first mortgage home loan . . . shall provide for the computation of interest on a simple interest basis."1 The court denied ex

1 The Grunbecks also claim that, by charging compound interest on first mortgage loans, Dime engaged in an unfair and deceptive practice in violation of N.H. Rev. Stat. Ann. 358-A, New Hampshire's consumer protection statute. They contend that the practice is "unfair" because it did not comply with the simple interest law, and that because Dime's failed to inform its

4 parte relief and scheduled a hearing. Before the hearing took

place, however, Dime removed the case pursuant to

(a).

Dime's motion to dismiss alleges that § 501(a)(1) of the

Monetary Control Act preempts application of the simple interest

statute to the Grunbeck's loan.2 In addition to briefing and

oral argument by the parties, the Department of Justice of the

State of New Hampshire (the "State") has submitted an amicus

brief addressing the issues raised by Dime's motion to dismiss.

II. DISCUSSION Section 501(a)(1) states, in pertinent part

borrowers or the New Hampshire Banking Commission of this fact, its loans had a deceptive patina of legality. 2 Dime also argues that (1) the simple interest law is preempted by § 803(c) of the Alternative Mortgage Transaction Parity Act of 1982,

(c) (1989); (2) the Grunbeck loan's negative amortization provisions do not compound interest and so do not violate the simple interest law; (3) for various reasons, the loan does not violate the New Hampshire consumer protection statute; (4) for various reasons, the Grunbecks lack standing to bring their claims; and that (5) enjoining the foreclosure sale is not an appropriate form of relief because the Grunbecks have an adequate remedy at law and have not done equity themselves because they have failed to make all principal payments due and owing. I do not address these arguments because I conclude that, as applied to the Grunbecks' loan, the simple interest statute is preempted by § 501(a)(1).

5 (1) The provisions of the constitution or the 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 3 1 , 1980; and

(C) described in section 527(b) of the National Housing Act . . . . 12 U.S.C. § 1735f.7a(1); see also

(a) (1993) 3

(substantially reproducing same). Dime alleges that the simple

interest statute is a law "limiting the rate or amount of

interest" that a lender may charge, and that its application to

the Grunbecks' loan is therefore preempted by § 501(a)(1). The

Grunbecks respond by (1) denying that the simple interest statute is a law "limiting the rate or amount of interest,"4 and (2)

3 As the relevant portions of the regulations have remained the same throughout the period at issue in this case, I cite the 1993 version for convenience. 4 The Grunbecks do not dispute that their mortgage loan satisfies the qualifications set out in § 501(a)(1)(A)-(C). First, the loan is a first mortgage loan secured by the Grunbecks' home. Second, it was originated in 1988. Third, the loan is a "federally related mortgage loan" as defined in § 527(b) of the National Housing Act (12 U.S.C.A. § 1735f-5(b)). It is secured by a single family dwelling and it is eligible for purchase by the Federal National Mortgage Loan Association and/or the Federal Home Loan Mortgage Corporation. § 1735-5(b)(1) and

6 arguing alternatively that the statute is exempted from

preemption because it is a "provision[] designed to protect

borrowers." See

(c). I conclude that the

simple interest statute's application is preempted as a matter of

law, and accordingly reject the Grunbecks' contentions.5 See

Adkins v . General Motors Corp.,

(6th Cir.

1991), cert. denied, 112 S . C t . 1936 (1992).

A. Section 501(a)(1) -- The Express Preemption Clause

Before addressing the merits of the parties' arguments, I

briefly set out the legal principles governing my analysis.

1. Preemption Doctrine

The bedrock assumption underlying the various preemption

doctrines is that "the historic police powers of the States [are]

not to be superseded by . . . Federal Act unless that [is] the

clear and manifest purpose of Congress. . . ." Cipollone v . Liggett Group, Inc., 112 S . C t . 2608, 2617 (1992) (quoting Rice

(2)(C). 5 In ruling on Dime's motion to dismiss, I review the allegations of the complaint in the light most favorable to the Grunbecks, accept all material allegations as true, and dismiss their claims only if no set of facts entitles them to relief. See, e.g., Berniger v . Meadow Green-Wildcat Corp.,

, 6 (1st Cir. 1991); Dartmouth Review v . Dartmouth College,

3 , 16 (1st Cir. 1989).

7 v . Santa Fe Elevator Corp.,

1 8 , 230 (1947) (brackets in

original)). As a result, preemption analysis essentially

requires a determination of congressional purpose.

Absent

explicitly preemptive language, such a purpose to preempt may be

inferred where Congress has completely displaced state regulation

in a specific area, or where the state law conflicts with federal

law or frustrates its purposes and objectives. Id.; Federal Sav.

& Loan Ass'n v . De La Cuesta,

4 1 , 153 (1982).

Here, my task is to construe § 501(a)(1), the Monetary

Control Act's express preemption clause. Given that there is

therefore "no need to infer congressional intent to pre-empt

state laws from the substantive provisions'" of the Act, id. at

2618 (quoting California Federal Sav. & Loan Ass'n v . Guerra,

7 2 , 282 (1987)), my inquiry is limited to 'identify[ing]

the domain expressly preempted' by the terms of the preemption clause. Id.; Greenwood Trust v . Massachusetts,

1 8 ,

823 (1st Cir. 1992), cert. denied, 113 S . C t . 974 (1993).

Because this inquiry thus is necessarily an exercise in

statutory construction, I begin my analysis with the text of

§ 501(a)(1) and assume that its ordinary meaning accurately

expresses Congress' purpose. Morales v . Trans World Airlines,

112 S . C t . 2031, 2036 (1992) (quoting FMC Corp. v . Holliday, 489

8 S . C t . 5 2 , 57 (1990)).

2. Statutory Analysis

a) The Text

As evidenced by the parties' differing positions, the phrase

"limiting the rate or amount of interest" has two plausible

meanings. Dime argues that a law prohibiting the charging of

interest on interest is a law "limiting the rate or amount of

interest" because it reduces the number of permissible methods by

which New Hampshire lenders can calculate the interest they

charge. In other words, Dime essentially construes "limiting" as

an adjective meaning "serving to restrict or restrain." Random

House Dictionary of the English Language 1115 (2d ed. 1987)

(unabridged) (defining "limiting"). The Grunbecks and the State

interpret the statute more narrowly, arguing that a law "limiting the rate or amount of interest" is a law imposing an absolute,

numerical cap on the interest that a lender may charge. They

thus essentially construe "limiting" as a verb meaning to impose

a "final, utmost or furthest boundary" on permissible interest

rates or amounts. Id. (defining "limit"). Given that the text

of § 501(a)(1) does not compel either reading of the term, I must

look beyond the text to determine the scope of Congress' intent.

See United States v . O'Neil,

9 2 , 295 (1st Cir. 1993). I

9 turn first to relevant administrative interpretations of

§ 501(a)(1).

b) Administrative Interpretations

Deference to reasonable regulatory interpretations is

"singularly appropriate" when the statutory ambiguity lies in an

area "intricately related to the agency's area of special

expertise." Bank of New York v . Hoyt,

(D.R.I. 1985) (Selya, J.)(quoting Citizen Savings Bank v . Ball,

(D.R.I. 1985)). See also Chevron U.S.A.,

Inc. v . Natural Resources Defense Council, Inc.,

3 7 ,

842-43 (1984). The deference due, however, depends upon "the

persuasive force of the interpretation, given the totality of the

attendant circumstances." Hoyt,

.

Here, the regulatory bodies charged with implementing the

Monetary Control Act have implicitly adopted the term's broad reading, by twice construing the phrase "limiting the rate or

amount of interest" to include state laws prohibiting the

charging of interest on interest. In 1984, the FHLBB issued an

opinion letter announcing its view that § 501(a)(1) and

(a) (which essentially reproduces § 501(a)(1)) preempted

state laws prohibiting the charging of interest on deferred or

compounded interest. The letter stated that

10 [a]lthough [§ 501(a)(1) and

(a)] do[] not specifically address the issue of the charging of interest on deferred interest or the compounding of interest on any loan secured by a first lien on residential real property . . . state laws which would prohibit the charging of such interest would constitute provisions 'limiting the rate or amount of interest . . . which may be charged . . . . ' O p . Off. Gen. Counsel. 1097 (Nov. 1 5 , 1984). The Office of

Thrift Supervision ("OTS"), which assumed the FHLBB's

responsibilities after it was abolished,6 also endorsed this view

in responding to a similar query in 1991. See O p . Off. Chief

Counsel 91/CC-37 (Aug. 1 6 , 1991).

Although these two opinions unequivocally support Dime's

reading of § 501(a)(1), the regulators have failed to provide any

analytical support for the conclusory passage quoted above. In

this circumstance, absolute deference would be nothing more than blind allegiance. Thus, while the FHLBB and OTS' interpretations

are entitled to some weight, they are not dispositive. I

accordingly proceed to the next logical step in my analysis --

determining which definition of "limiting" best effectuates

Congress' purpose in enacting § 501(a)(1).

6 See Financial Institutions Reform, Recovery, and Enforcement Act of 1989, § 401(h), Pub. L . N o . 101-73,

, 357;

(1989); Smith v . Fidelity Consumer Discount Co.,

0 7 , 913 n.5 (3d Cir. 1989).

11 c) Congress' Purpose in Enacting § 501(a)(1)

The title of § 501(a)(1) -- "Mortgage Usury Laws" --

attests to the overriding concern motivating the section's

passage. As expressed in the Senate Report accompanying the Act:

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 market yields are available. This artificial disruption of funds availability not only is harmful to potential homebuyers in states with such usury laws, it also frustrates national housing policies and programs.

S . Rep. N o . 3 6 8 , 96 Cong., 2d Sess. 1 8 , 1 9 , reprinted i n , 1980

U.S.C.C.A.N. 236, 254. More specifically, Congress pointed to

two concerns prompting § 501(a)(1)'s enactment --

[1] [T]he adverse effects of usury ceilings on credit availability, and [2] mortgage rate ceilings must be removed if savings and loan institutions, as directed by other provisions of [the A c t ] , are to begin to pay market rates of interest on savings deposits. 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 financial system would not be assured.

Id. at 255. In short, Congress passed § 501(a)(1) to (1) promote

the "stability and viability" of financial institutions by

allowing them to charge realistic borrowing rates and (2) to

promote national housing policy, the national secondary mortgage

market and home ownership by freeing the flow of credit from

12 state-imposed restraints. Hoyt,

; Shelton

v . Mutual Sav. & Loan Assn,

(E.D. Mich.

1990). The magnitude and scope of this purpose requires that

§ 501(a)(1) be interpreted broadly. Shelton,

.

Moreover, concluding otherwise would potentially subvert

Congress' intent that § 501(a)(1) remove state limitations

restricting the availability of first mortgage funds. Consider

the simple interest statute's potential effect on adjustable rate

lending during periods of high interest rates: without being

able to charge interest on interest, many lenders would not allow

potential borrowers to defer accrued interest; without being able

to defer accrued interest, these borrowers would lose the ability

to reduce their monthly payment amounts; without lowered monthly

payments, these borrowers would become less able to afford mortgage loans; and without financially-able borrowers, lenders

would have to either resign themselves to a reduced return on the

loans they issue or invest their first mortgage funds elsewhere.

In practice, the statute thus would limit the availability of

mortgage funds in a way comparable to a numerical cap on interest

rates.

13 The Grunbecks' more restrictive interpretation of

§ 501(a)(1) would allow such de facto limitations to escape

preemption. They contend that Congress's concerns were prompted

by a very specific problem -- state-imposed caps on interest

rates and amounts -- and that its response should be construed as

going no further than necessary to remedy this problem. The

Grunbecks and the State thus do not deny Congress' dual purpose

in enacting § 501(a)(1); they simply place a gloss on its

breadth.

This position finds some support in the legislative history

and relevant regulations. The section of Senate Report 368

twice-quoted above is entitled "Mortgage Ceilings," and its text

is laced with references to state-imposed "ceilings" on interest

rates. Moreover, the FHLBB's statement of purpose in

implementing § 501(a)(1) reads Purpose and scope. The purpose of this permanent preemption of state interest-rate ceilings applicable to Federally-related residential mortgage loans is to ensure that the availability of such loans is not impeded in states having restrictive interest limitations.

(b) (emphasis added).

This evidence undoubtedly indicates that the abolition of

state-imposed interest rate ceilings was of primary concern to

14 Congress when it enacted § 501(a)(1). The Grunbecks, however,

have failed to identify any evidence affirmatively indicating

that Congress was concerned only with interest rate ceilings. In

fact, the legislative history indicates exactly the opposite.

The relevant section of Senate Report 368 states that "[i]n

exempting mortgage loans from state usury limitations, the

Committee intends to exempt only those limitations that are

included in the annual percentage rate." 1980 U.S.C.C.A.N. at

255 (emphasis added). If Congress had been concerned solely with

limitations on the numerical rate itself, it presumably would not

be concerned with other kinds of limitations, such as interest on

interest prohibitions, that are "included" in the interest rate.

Moreover, given that the FHLBB and OTS have determined that

(a)(1) preempts state simple interest laws, see

supra Section II.B.1., the Grunbecks' restrictive reading of § 590.1(b) contradicts the implicit interpretation given this

regulation by the agencies who promulgated and apply i t .

In sum, consistency with the scope and importance of

Congress' purpose requires that § 501(a)(1)'s preemption of state

usury laws be interpreted broadly. See Shelton,

. While the Grunbecks point to evidence indicating that

Congress was primarily concerned with eliminating restrictive

15 interest rate ceilings, this evidence does not establish that

Congress intended to so limit the application of § 501(a)(1). On

balance, I therefore conclude that Congress's purpose in enacting

§ 501(a)(1) is best served by adopting the broad reading of the

term "limiting." Given the closeness of the case, however, I go

on to consider two other extrinsic considerations relied on by

the parties. d) Interpretations of Similar Language In National Bank Act

Previous interpretations of similar language in similar

legislation are useful interpretive aids, both as persuasive

precedent and as indicators of Congress' understanding of the

contested phraseology at the time the legislation was enacted.

See, e.g., Greenwood Trust, 971 F.2d at 827 (interpreting terms in § 521 of Monetary Control Act in light of previous

interpretations of similar language contained in National Bank

A c t ) ; Fourchon, Inc. v . Louisiana Nat. Leasing Corp.,

(5th Cir. 1984) (construing phrase "rate of interest"

in Preferred Ship Mortgage Act in accordance with previous

construction of similar phrase in National Bank Act to preempt

state law prohibiting charging of interest on interest). Here,

Dime argues that construing the phrase "laws limiting the rate or

16 amount of interest" to include state prohibitions on charging

compound interest derives strong support from the Supreme Court's

previous interpretation of similar language in the National Bank

Act of 1864, Ch. 106,

(codified, as amended, in

scattered sections of 12 U.S.C.) (the "Bank A c t " ) . I agree.

Section 85 of the Bank Act, provides that national banks may take, receive, reserve, and charge on any loan or discount made, or upon any notes, bills of exchange, or other evidence of debt, interest at the rate allowed by the laws of the State, Territory, or District where the bank is located, or at a rate of 1 per centum in excess of the discount rate on ninety-day commercial paper in effect at the Federal reserve bank in the Federal reserve district where the bank is located, whichever may be the greater, and no more, except that where by the laws of any State a different rate is limited for banks organized under state laws, the rate so limited shall be allowed for associations organized or existing in any such state under this chapter.

5 . Section 85 thus essentially provides that national banks may charge the interest rates allowed by the laws

of the state in which they are located, and "no more". To

establish these limits, § 85 subsumes state laws limiting the

rate of interest that a lender may charge. Section 86 then

provides for the imposition of civil penalties for intentionally

"usurious" transactions -- those transactions involving the

"taking, receiving, reserving or charging a rate of interest

greater than is allowed by section 85 . . . ."

6 .

17 In Citizens' Nat. Bank v . Donnell,

(1904), the

Supreme Court considered whether a state prohibition on charging

compound interest was a law limiting the rate of interest that

national banks in that state could charge pursuant to a

predecessor to § 85. 7

. The facts of the case

were simple: the state law at issue provided that "interest

shall not be compounded oftener than once in a year," and the

defendant bank had charged plaintiff interest on interest several

times in one year.

. Attempting to escape § 86's

civil penalties, the bank essentially argued that the state law

was not a law limiting the rate of interest that could be charged

under § 85 was because it merely limited the mode by which

interest was calculated, not the rate or amount assessed. Id.

The Supreme Court summarily rejected this argument, stating that

the law limited interest rates because "[t]he rate of interest which a man receives is greater when he is allowed to compound

than when he is not ...." Id. at 374. The Court then concluded

that, by charging interest in excess of these state-imposed

limitations, the bank had committed usury and was liable to the

7 At the time of the Supreme Court's decision, §§ 85 and 86 were codified at U.S. Rev. Stat. §§ 5197 and 5198. Despite subsequent amendments, the relevant language of §§ 5197 and 5198 remains the same.

18 plaintiff under § 8 6 . Id.; see also Acker v . Provident National

Bank,

(3d Cir. 1975); Partain v . First

National Bank,

6 7 , 173-75 (5th Cir. 1972).

The Supreme Court's holding in Donnell bolsters Dime's

reading of § 501(a)(1) in two respects. First, it offers

persuasive support for construing "laws limiting the rate or

amount of interest" to include laws prohibiting compound

interest. See Fourchon,

(relying on Donnell

to hold that phrase "rate of interest" in Preferred Ship Mortgage

Act preempted state law prohibiting charging of interest on

interest). Second, it indicates that such laws also qualify as

state "usury laws" which the title to § 501(a)(1) indicates

Congress intended to preempt. See also Partain, 467 F.2d at 173-

7 5 ; Acker,

. Accordingly, Congress' use of the

phrase "limiting the rate and amount of interest" in § 501(a)(1), as well as its use of the term "usury laws" in the Senate Report

and in section headings in the Monetary Control Act, make it

unlikely that Congress intended state interest on interest

prohibitions to escape preemption by § 501(a)(1).

e) Harmony with the Parity Act

The State invokes the Alternative Mortgage Transaction

Parity Act of 1982 (the "Parity A c t " ) ,

et seq.,

19 in a final creative effort to avoid preemption under the Monetary

Control Act. 8 Before the Parity Act was passed, federal

regulations authorized only federally-chartered depository

institutions to engage in alternatives to fixed-rate, fixed-term

mortgage transactions. The Parity Act ended this preferential

treatment by authorizing any lender who qualifies as a "housing

creditor" under the Act to "make, purchase, and enforce

alternative mortgage transactions"9 so long as the lender

complies with certain OTS regulations imposing detailed

disclosure requirements and other conditions. See

(a);

and 563.99(3). If a lender

complies with these regulations, it may engage in alternative

8 Although I do not agree with all of the arguments contained in the State's brief, it was clear and informative. Moreover, it raised several important points that the parties in this case failed to bring to my attention. Accordingly, I commend the State for the quality of its advocacy. 9 Negative amortization loans such as the Grunbecks' potentially qualify as alternative mortgage loans under the Parity Act because: (1) the Act's definition of "alternative mortgage transaction" includes "a loan or credit sale secured by an interest in residential property . . . involving . . . variations [on interest rates] not common to traditional fixed- rate, fixed-term transactions . . .",

(1); and (2) the implementing OTS regulations specifically authorize transactions that contemplate "the deferral and capitalization of interest" on first mortgage loans.

(a).

20 mortgage transactions "notwithstanding any state constitution,

law or regulation."

(c). 10

The State's Parity Act argument has three steps. First, the

State concedes that the Parity Act will preempt New Hampshire's

simple interest statute when a qualifying lender issues a

negative amortization loan that complies with the Act's

disclosure requirements. Second, it contends that the incentive

to comply with these disclosure requirements -- preemption --

would be meaningless if lenders could claim preemption for the

same transactions under another statute without making the

required disclosures. Finally, it concludes that construing the

Monetary Control Act to preempt the simple interest statute would

therefore be "illogical and contrary to public policy" because

doing so would leave lenders with no incentive to comply with the

Parity Act. See American Tobacco C o . v . Patterson,

3 ,

10 Dime contends that the Parity Act's preemption clause provides an alternative basis for dismissal. The Grunbecks respond that the Parity Act is inapplicable because Dime is not a "housing creditor." The State concedes that the simple interest statute may not be enforced to prevent lenders who comply with the Parity Act from engaging in alternative mortgage transactions but argues that Dime cannot invoke the Parity Act's preemption clause because it has not established that it complied with the Act's disclosure requirements. I do not reach the Parity Act preemption issue because I hold that the simple interest statute is preempted by the Monetary Control Act.

21 71 (1982) (statutes "should be interpreted to avoid untenable

distinctions and unreasonable results whenever possible"); United

States v . Burns, n . 93-1251, 1994 WESTLAW 26989, *3 (1st Cir.,

Feb. 8 , 1994) (slip o p . ) .

The fatal flaw in the State's argument is that it construes

both the nature of the transactions covered by the Parity Act and

the scope of the Act's preemption clause too narrowly. First,

negative amortization provisions are not the only characteristics

that qualify a loan as an alternative mortgage transaction.

Thus, the Act's preemption clause would still provide an

important incentive for lenders to engage in other types of

alternative mortgage transactions even if simple interest

statutes are preempted by the Monetary Control Act. Second,

unlike the Monetary Control Act, which preempts only laws

"limiting the rate and amount of interest" or similar charges, the Parity Act preempts any state laws that are inconsistent with

a qualifying lender's right to issue alternative mortgage loans.

Simple interest laws are merely one of several categories of such

inconsistent state laws. These two factors indicate that the

Parity Act and the Monetary Control Act serve related but

distinctly different functions. Construing the Monetary Control

Act to preempt simple interest laws thus does not eliminate the

22 incentive for lenders to comply with the Parity Act's disclosure requirements. As a result, it deprives neither Act of meaning to recognize that their preemption provisions may overlap. B. The Saving Clause --

(c) As a fall-back position, the Grunbecks and the State argue that, even if the simple interest statute is a law "limiting the rate or amount of interest," it is exempted from preemption by a regulation attempting to shield "state laws on prepayment charges, attorneys' fees, late charges or other provisions designed to protect borrowers" from preemption under § 501(a)(1).

(c) (emphasis added). The Grunbecks and the State primarily contend that the simple interest statue is a borrower protection provision because it represents New Hampshire's determination that compound interest provisions are "not as clear and straightforward an accrual formula as a simple interest calculation," and thus they pose a danger to borrowers. I agree that compound interest loans pose serious risks for unsophisticated or unwary borrowers. Nevertheless, this protective purpose, however worthy, does not qualify the simple interest statute for exemption from § 501(a)(1). 11

11 This case presents a situation in which both the Monetary Control Act and the simple interest statute serve important but

23 Two factors compel this conclusion. First, logic dictates

that restrictive state laws otherwise subject to preemption under

§ 501(a)(1) cannot escape the statute's reach merely because they

can be justified in terms of their intended beneficial effects on

the state's citizenry. If this were the case, the saving

regulation would swallow the statutory preemption clause,

rendering illusory its stabilizing effect on financial

institutions and its liberating effect on the flow of credit in

the residential mortgage market. Second, and more importantly,

established principles of statutory interpretation dictate that,

to the extent that

(c) is interpreted to exempt

state laws "limiting the rate or amount of interest" from

preemption under § 501(a)(1), the regulation conflicts with the

statute's express language and is therefore void. See Shelton,

(citing Board of Governors v . Dimension Financial Corp.,

(1986)).

Not surprisingly, given these two factors, the FHLBB and OTS

have opined that state laws prohibiting the charging of interest

competing public policy concerns. Given the scope and breadth of the Monetary Control Act's preemption provision, I can only conclude that Congress determined that the policies underlying the Monetary Control Act override the consumer protection purpose served by the simple interest statute.

24 on deferred interest or the compounding of interest "are not

consumer protection provisions of the type contemplated by [

(c)]." O p . Off. Gen. Counsel 1097 (Nov. 1 5 , 1984);

O p . Off. Chief Counsel, 91/CC-37 (Aug. 1 6 , 1991). I agree.

III. CONCLUSION

To summarize, this is a close case. As used in § 501(a)(1),

the phrase "laws limiting the amount and rate of interest" is

susceptible to two plausible interpretations. The broad

interpretation includes any laws that serve to restrain or

restrict the rate or amount of interest that a lender may charge,

and the narrow interpretation excludes all but those laws

imposing ceilings or caps on interest rates and amounts.

Undoubtedly, preemption clauses should be construed "cautiously and with due regard for state sovereignty," especially in such

areas of historical state power as banking and consumer

protection. Greenwood Trust, 971 F.2d at 828. However, where

"Congress has acted within its authority and its intent to

displace state law is clear," concerns about state sovereignty do

not override this intent. Id.; see also Mendes v . Medtronic,

Inc., N o . 93-1911, at 7 ,

(March 7 ,

1994) (slip o p . ) . Given that the relevant regulatory bodies have

25 adopted the broad definition of § 501(a)(1), that this definition

best serves Congress' purpose, and that it is strongly supported

by Supreme Court precedent construing similar terms in a similar

Act, I conclude that the broad meaning of the phrase best mirrors

Congress' intent. I therefore hold that, because N.H. Rev. Stat.

Ann. 397-A:14(I) restricts the method by which lenders may

calculate interest charges and thereby potentially limits their

return on their investment, it is a "law[] limiting the rate or

amount of interest" that a lender may charge and is consequently

preempted by § 501(a)(1) of the Monetary Control Act.12 Dime's

Motion to Dismiss with Prejudice (document n o . 5 ) is granted.

SO ORDERED.

Paul Barbadoro United States District Judge March , 1994 c c : Walter Maroney Douglas Verge Jewel Kline George Dickson

12 I also dismiss the Grunbecks' Consumer Protection Act claim because it is dependent upon Dime's alleged violation of the simple interest statute.

26 UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW HAMPSHIRE

Robert and Jennifer Grunbeck

v. Civil N o . 93-356-B

The Dime Savings Bank of New York, FSB

O R D E R

In light of my Order of March , 1994, the Grunbecks'

Motion for Leave to Amend (document n o . 10) is moot.

SO ORDERED.

Paul Barbadoro United States District Judge March 2 4 , 1994 cc: Walter Maroney Douglas Verge Jewel Kline George Dickson