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
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.
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.
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."
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
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.
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
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."
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.
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
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.
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
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
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.
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
(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
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
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.
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-
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).
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
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.
(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.
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.