Appeal from the Order of the Department of Banking in case of In Re: The Farmers Bank and Trust Company of Hummelstown, dated June 2, 1978.
Herbert A. Schaffner, with him Reynolds, Bihl and Schaffner, for petitioner.
Bonnie Jean McRobbie, Assistant Attorney Genwith her John E. Nanorta, Assistant Attorney General, and Gerald Gornish, Acting Attorney General, for respondent.
President Judge Bowman and Judges Wilkinson, Jr., Mencer, Rogers, Blatt, DiSalle and MacPhail. Judges Crumlish, Jr. and Craig did not participate. Opinion by Judge Mencer.
[ 43 Pa. Commw. Page 326]
The Department of Banking (Department), by order dated June 2, 1978, directed The Farmers Bank and Trust Company of Hummelstown (Farmers Bank) to reduce the interest rate applicable to 24 mortgages to the rate originally contracted, to continue that interest rate during the entire life of the loans, and to refund to the affected mortgagors any excess interest paid to the Farmers Bank. The Farmers Bank petitioned for review in the nature of an appeal of this June 2, 1978 order.
[ 43 Pa. Commw. Page 327]
Farmers Bank has always carried residential mortgages in its loan portfolio. Prior to the entry into the closing for such a loan, the bank causes the real estate that will serve as collateral for the loan to be appraised and that appraisal becomes a part of each loan file. Thus, for each loan, a ratio can be determined between the amount of the loan and the value of the real estate collateral. Uniformly, before 1977, the bank would write the terms for such a loan by indicating the monthly payments that would be required to pay off the loan, those payments first applied to interest due and the balance to principal reduction, and the number of years for which payments would be required would generally be from 10 to 20 years. Thus, a mortgage loan might be for $14,000 at 7 percent interest, the monthly payment would be $108.55, and this monthly payment would amortize the loan completely in 20 years. Yet the loan documents would contain a statement as follows: "The total amount of mortgage shall be due and payable three years*fn1 from the date of execution hereof." (Footnote added.)
It is Farmers Bank's position that this type of loan repayment language protected its shareholders and depositors by permitting the bank to adjust interest rates if the original rates appeared unfair in the light of later economic conditions. Prior to 1974,*fn2 the
[ 43 Pa. Commw. Page 328]
Department never criticized Farmers Bank for such mortgage document language.
On August 8, 1974, the Board of the Farmers Bank decided to raise the interest rates on mortgages that were below 7 1/2 percent to that figure, and letters were sent to 242 mortgagors of the Farmers Bank notifying those mortgagors of the bank's action. The letter evidences that no "call" was made and in fact the bank did not, in any of these instances, demand the loan balance to be paid off. As a result of this letter, complaints were made by mortgagors to the Department.
The Department considered Farmers Bank's action against the background of Section 310(a)(i)(A) and (B) of the Banking Code of 1965, Act of November 30, 1965, P.L. 847, as amended (Banking ...