The opinion of the court was delivered by: KNAPP
WHITMAN KNAPP, District Judge.
This action challenges the constitutionality of a recently enacted New York statute -- Chapter 119, of the Laws of 1974 (codified as Section 14-b of the Banking Law, McKinney's Consol.Laws, c. 2, and Section 5-601 of the General Obligations Law, McKinney's Consol.Laws, c. 24A)
-- which requires mortgage lending institutions to pay interest of at least two percent on certain "escrow accounts." A three-judge court was convened pursuant to 28 U.S.C. §§ 2281 and 2284, after a motion to dismiss had been denied. See 383 F. Supp. 1294.
Plaintiff, the Federal National Mortgage Association (FNMA), is a United States Government-sponsored private corporation organized pursuant to 12 U.S.C. § 1716 et seq. The complaint seeks preliminary and permanent injunctive relief enjoining the enforcement of Chapter 119, and a declaratory judgment that the statute is unconstitutional as applied. Defendants oppose the grant of any relief and urge the court to dismiss the complaint.
Specifically, plaintiff contends that as applied to FNMA, Chapter 119 is unconstitutional in several respects: (1) insofar as it requires FNMA to pay interest on escrow accounts established pursuant to contracts entered into prior to April 1, 1974 -- all of which are silent as to the requirement of such interest payments -- the statute violates the contract clause, Article I, Section 10 of the Constitution; (2) insofar as it requires FNMA to pay interest on escrow accounts under mortgage contracts which are silent as to the payment of interest, but exempts from such requirement all mortgage contracts entered into prior to April 1, 1974 which expressly provide that no such interest shall be paid, the statute constitutes invidious discrimination and denies plaintiff equal protection of the laws in violation of the Fourteenth Amendment; (3) insofar as it imposes any obligation on FNMA to pay interest on escrow accounts, the statute improperly regulates and burdens the operations of a federal instrumentality in violation of Article VI of the Constitution; and (4) insofar as Section 10.2(c)(1) of the General Rules and Regulations of the New York State Banking Board
operates to require FNMA to pay two percent interest on escrow funds received under terms of mortgage contracts dated after April 1, 1974, but which are held by servicers rather than FNMA, it deprives FNMA of an exemption conferred by Section 14-b(4)(iii) of the Banking Law in violation of the Due Process Clause of the Fourteenth Amendment.
We hold that all of plaintiff's constitutional arguments must be rejected, and that its application for permanent injunctive relief and a declaratory judgment must be denied.
This case was submitted to this three-judge court pursuant to an agreed statement of facts. FNMA is a United States Government-sponsored private corporation organized under 12 U.S.C. § 1716 et seq. As mandated by Congress, FNMA provides supplementary assistance to the secondary market for home mortgages by providing a degree of liquidity for mortgage investments, thereby improving the distribution of investment capital available for home mortgage financing. See 12 U.S.C. § 1716(a) and § 1719(a)(1). The Secretary of Housing and Urban Development has general regulatory power over FNMA to ensure that the corporation does in fact carry out its Congressionally-mandated functions. See 12 U.S.C. § 1723a(h). Generally, FNMA assists the secondary mortgage market by buying mortgages from investors and mortgage companies which originate such mortgages and service those mortgages sold to FNMA for a fee (commonly referred to in the trade as "Servicers"). Currently, FNMA owns only FHA-insured or VA-guaranteed mortgages in New York.
Under the standard mortgage contract utilized by the homeowner-mortgagor and the original mortgagee (i.e. the contract which FNMA purchases), the mortgagor is required to make monthly payments to cover various annual charges for insurance premiums and taxes. These payments, which are required to protect the mortgagee's interest in case the property is damaged or foreclosed, are held in escrow by the mortgagee, and are then paid by the mortgagee when the insurance premiums or taxes fall due. It is upon these escrow accounts that Chapter 119 requires interest payments to be made to the homeowner by the mortgage lending institution.
It is undisputed that FNMA receives only a portion of the escrow payments collected by its servicers. On mortgages purchased prior to August 10, 1970, FNMA receives sixty percent of the escrow payments. To the extent that such mortgages are still being paid off, FNMA still receives these funds. Chapter 119, if applicable to FNMA, would have the effect of requiring FNMA to pay at least two percent interest on those escrow accounts to the original mortgagor. To the extent FNMA receives the escrow funds, it now uses the money as part of its working capital.
With respect to mortgages acquired after August 10, 1970, FNMA does not receive any of the escrow payments. Its servicers retain the payments and use them as they see fit. Therefore, for post August 10, 1970 mortgages dated prior to April 1, 1974, FNMA would be exempt from paying interest under Chapter 119. See Section 14-b(4)(iii) of Chapter 119, and Section 10.2(c)(1) of the regulations promulgated thereunder. Under the above regulations, however, the exemption would not extend to mortgages dated after April 1, 1974 and serviced pursuant to a servicing contract dated prior to April 1, 1974. Thus, on these mortgages, FNMA would be required to pay interest on these escrow accounts even though it receives none of the escrow monies.
For the reasons stated in the companion case of Jamaica Savings Bank v. Lefkowitz (E.D.N.Y.1975) 390 F. Supp. 1357 (three-judge court), we reject plaintiff's claim that Chapter 119 violates the Contract ...