A Perplexing Exercise in Interpreting an Administrative Regulation

US Bank, N.A. v. Hough, 210 N.J. 187 (2012).  There seems to be infinite room for judges, or Justices, to disagree about how to interpret statutes or regulations.  Sometimes, there are differences even where the administrative agency that promulgated the regulations has weighed in.

In this case, the Supreme Court was called on to interpret N.J.A.C. 5:80-26.18(e), a provision that applies when a lender issues an excessive loan that is secured by an affordable housing unit (that is, a low- or moderate-income unit under the Mount Laurel doctrine), in violation of regulations promulgated under the Fair Housing Act, N.J.S.A. 52:27D-301 to -329.19.  That regulation states that “[a]ny loan issued in violation of [the regulatory scheme] shall be void as against public policy.”

The case arose out of a foreclosure action that US Bank brought against Hough, the owner of an affordable housing unit.  Hough had obtained a loan to buy the property.  Later, she refinanced with US Bank’s predecessor.  The refinance, however, was for an amount that exceeded 95% of the maximum allowable resale price of the unit, which violated a Housing Mortgage Finance Agency (“HMFA”) regulation, N.J.A.C. 5:80-26.8(b).  Hough also gave a mortgage that secured that full amount.

When US Bank sued, Hough moved to dismiss the foreclosure action on the grounds that the loan, with its associated mortgage, violated the regulation.  The Chancery Division denied dismissal, finding that it would create an unwarranted windfall to Hough.  The Appellate Division reversed, adopting HMFA’s view, which the agency expressed in response to the Appellate Division’s request, that a violation of N.J.A.C. 5:80-26.18(e) voids the mortgage but not the loan.  Thus, US Bank could seek repayment of the full loan but lost its security interest as a mortgagee.

The Supreme Court granted review and reached a different conclusion by a 5-1 vote.  Justice Albin wrote for the majority.  Justice Lavecchia dissented.

The majority held that the plain language of N.J.A.C. 5:80-26.18(e) meant that the loan, not the mortgage, was void if the regulatory scheme was not followed.  The contrary view of HMFA, though deserving of deference in the normal case, would not be followed here because it was “plainly unreasonable.”  But there was no reason why Hough should not be responsible for the lawful portion of the loan, up to 95% of the maximum resale price of her unit, and no basis to disturb the mortgage up to that amount.  The loan and mortgage above that amount, however, would be voided and could not be enforced.

Justice Lavecchia’s dissent found that HMFA’s view should have been followed.  She rejected the majority’s view that HMFA’s interpretation was “plainly unreasonable.”

It is not often that a court finds an administrative agency’s view of its own regulation to be “plainly unreasonable” and refuses to follow that interpretation.  Even less frequently do Justices disagree as to what is “plainly unreasonable,” a subject on which it seems most jurists would agree in most cases.  This case shows, however, that there are some such instances, even if they are rare.  The result gives comfort to those who seek to persuade a court to differ with an agency, however difficult that often is to achieve.