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KATHLEEN TOOLAN AND GERARD TOOLAN ON BEHALF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED v. TREVOSE FEDERAL SAVINGS AND LOAN ASSOCIATION (02/20/81)

SUPERIOR COURT OF PENNSYLVANIA


filed: February 20, 1981.

KATHLEEN TOOLAN AND GERARD TOOLAN ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, APPELLANTS,
v.
TREVOSE FEDERAL SAVINGS AND LOAN ASSOCIATION

No. 2790 October Term, 1978, Appeal from Order of the Court of Common Pleas of Montgomery County, No. 77-21648 Sustaining Defendant's Preliminary Objections in the Nature of a Demurrer.

COUNSEL

Jeffrey S. Kahn, Norristown, for appellants.

John J. Kerrigan, Jr., Newtown, for appellee.

Spaeth, Stranahan, and Sugerman, JJ.*fn* Spaeth, J., concurs in the result.

Author: Stranahan

[ 288 Pa. Super. Page 212]

This matter is an appeal from an order of the Court of Common Pleas of Montgomery County sustaining the appellee's demur to the appellants' complaint. We affirm that order.

[ 288 Pa. Super. Page 213]

By demurring to the appellants' complaint, the appellee has admitted every well pled fact contained in that complaint for purposes of this appeal. Reardon v. Wilbur, 441 Pa. 551, 272 A.2d 888 (1971).

Those facts are as follows: Sometime in August of 1975, Gerard and Kathleen Toolan entered into a residential mortgage agreement with The Trevose Federal Savings and Loan Association (hereinafter Trevose). That agreement contained a prepayment penalty clause.

On July 7, 1977, the Toolans paid in full the outstanding balance on their mortgage. In paying off their mortgage at that time, the Toolans prepaid a substantial portion of that mortgage. Trevose charged the Toolans a prepayment penalty of $1,335.83 for doing so. The Toolans paid that penalty.

On December 16, 1977, the Toolans filed a class action suit against Trevose.*fn1 In their complaint, the Toolans alleged that Trevose violated section 405 of The Act of January 30, 1974, P.L. 13, No. 6, sec. 101 et seq. by imposing and collecting a penalty for prepayment of a residential mortgage.*fn2

Trevose filed a preliminary objection in the nature of a demurrer to that complaint. Trevose asserted that, as a Federal savings and loan association, it was subject to the rules and regulations promulgated by the Federal Home Loan Bank Board.*fn3 The Federal Home Loan Bank Board, pursuant to the rule making power granted it in section 5(a)(1) of The Home Owners' Loan Act of 1933, *fn4 as amended,

[ 288 Pa. Super. Page 214]

    enacted rule 555.15(c).*fn5 That rule specifically provides that a Federal savings and loan association can charge a penalty for prepayment of a residential mortgage regardless of any conflicting state law.*fn6 Trevose contended that it was not subject to section 405 because rule 555.15(c) preempts section 405.*fn7

The lower court found that rule 555.15(c) did preempt section 405 and sustained Trevose's demurrer to the complaint.

The Toolans concede that, if rule 555.15(c) is valid, then it preempts section 405. The Toolans contend, however, that rule 555.15(c) is void because The Federal Home Loan Bank Board exceeded the scope of its rule making authority when it enacted that rule. The Toolans base this contention on the position that rule 555.15(c) conflicts with section 5 of The Federal Home Loan Bank Act of 1932.*fn8

Section 5 of the Act provides: No institution shall be admitted to or retained in membership (as a Federal Home Loan Bank) or granted the privilege of nonmember borrowers, if the combined total of the amounts paid to it for interest, commission, bonus, discount, premium and other similar charges, less a proper deduction for all dividends,

[ 288 Pa. Super. Page 215]

    refunds, and cash credits of all kinds, creates an actual net cost to the home owner in excess of the lawful contract rate of interest applicable to such transactions, or, in case there is no lawful contract rate of interest applicable to such transactions, in excess of such rates as may be prescribed in writing by the Board acting in its discretion from time to time. This section applies only to home loan mortgage loans on single family dwellings.

Initially, the Toolans point out that section 5 is applicable to Federal Savings and Loan Associations because, by statute, every Federal Savings and Loan Association is a member of a Federal Home Loan Bank.*fn9 The Toolans then make two assertions. First they assert that section 5 means that a member of a Federal Home Loan Bank must abide by the laws on interest and other related charges of the state in which it is doing business. Second, they assert that the definition of "other related charges" includes prepayment penalties. Hence, the Toolans contend, rule 555.15(c) conflicts with section 5 of The Federal Home Loan Bank Act of 1932 and is therefore void.


*fn* President Judge John Q. Stranahan of the Court of Common Pleas of Mercer County, Pennsylvania and Judge Leonard Sugerman of the Court of Common Pleas of Chester County, Pennsylvania are sitting by designation.


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