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decided: July 8, 1983.


No. 81-3-470, Appeal from the Order of the Superior Court dated February 20, 1982 at No. 2790 October Term, 1978 affirming the Court of Common Pleas of Montgomery County, No. 77-21648


Jeffrey S. Kahn, Norristown, for appellants.

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

Roberts, C.j., and Nix, Larsen, Flaherty, McDermott, Hutchinson and Zappala, JJ. Roberts, C.j., concurs in the result of this matter. Larsen, J., dissents.

Author: Mcdermott

[ 501 Pa. Page 479]


This is an appeal from an order of the Superior Court*fn1 affirming an order of the Court of Common Pleas of Montgomery County, sustaining appellee's demurrer to the appellants' complaint on grounds of federal pre-emption.

[ 501 Pa. Page 480]

The facts of this case are not in dispute.*fn2 In August, 1975, Gerald and Kathleen Toolan entered into a residential mortgage agreement with the Trevose Federal Savings and Loan Association (hereinafter "Trevose"), a federally chartered institution, authorized under the Home Owners' Loan Act of 1933 (hereinafter "HOLA").*fn3 That agreement contained a prepayment penalty clause which provided that "the Mortgagee is hereby given the option to demand and receive in addition to accrued interest, one hundred eighty (180) days interest on the amount of any prepayment which, together with other such prepayments made during the preceding twelve months (12), would exceed twenty per centum (20%) of the original principal debt."

On July 7, 1977, the Toolans paid the outstanding balance on their mortgage. This payment constituted a substantial prepayment in excess of twenty per cent of the original loan. Consequently Trevose demanded, and the Toolans paid, a prepayment penalty of $1,335.83.

On December 16, 1977 the Toolans filed a class action suit against Trevose,*fn4 alleging that Trevose violated Section 405 of the Loan Interest and Protection Law,*fn5 41 P.S. § 405, by imposing and collecting a penalty for prepayment of a residential mortgage.*fn6

[ 501 Pa. Page 481]

Trevose filed preliminary objections in the nature of a demurrer to that complaint, asserting that as a federally chartered savings and loan association it was governed by the Federal Home Loan Bank Board (hereinafter "Board"),*fn7 and not subject to Section 405, 41 P.S. § 405. Pursuant to its rule-making authority the Board had previously promulgated rules which specifically permitted prepayment penalties regardless of conflicting state law.*fn8 In response, appellants argued that the Board exceeded its statutory authority in promulgating these rules, and that the prepayment penalty in this case violated Section 5 of the Federal Home Loan

[ 501 Pa. Page 482]

Bank Act*fn9, (hereinafter "Bank Act") 12 U.S.C. § 1425, as amended.

The Court of Common Pleas of Montgomery County, per Moss, J. sustained the demurrer and dismissed the complaint, holding that the federal regulations pre-empted Section 405, 41 P.S. § 405; and that Section 5 of the Bank Act conferred no private right of action upon the plaintiffs. Implicit in their decision was a rejection of appellants' contention that the regulations were promulgated in excess of the Board's statutory authority.

On appeal the Superior Court affirmed, holding that the regulations were valid, and that there existed no conflict between those regulations and the Bank Act. The court did not address appellants' contention that the imposition of the prepayment penalty in this case resulted in a charge in excess of that permitted by Section 5 of the Bank Act, 12 U.S.C. § 1425, as amended. From that decision appellants petitioned this Court, and we granted allocatur. We now affirm.

The pre-emption doctrine has its roots in the Supremacy Clause of the United States Constitution, Art. VI, cl. 2. Pre-emption may be either express or implied, Jones v. Rath Packing Co., 430 U.S. 519, 525, 97 S.Ct. 1305, 1309, 51 L.Ed.2d 604 (1977), rehearing denied 431 U.S. 925, 97 S.Ct. 2201, 53 L.Ed.2d 240 (1977), and may be inferred where "the scheme of federal regulations (is) so pervasive as to make reasonable the inference that Congress left no room for the States to supplant it." Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230, 67 S.Ct. 1146, 1152, 91 L.Ed. 1447 (1947). Even where Congress has not completely displaced state regulation in a specific area, state law is nullified to the extent that it actually conflicts with federal law. Fidelity Federal Savings & Loan Association v. delaCuesta, 458 U.S. 141, 102 S.Ct. 3014, 73 L.Ed.2d 664 (1982). Federal law includes federal regulations, and they have no less pre-emptive

[ 501 Pa. Page 483]

    effect than federal statutes. Id. at 153, 102 S.Ct. at 3022, 73 L.Ed.2d at 675.

Our scope of review in passing on the validity of a federal regulation is limited to whether it "represents a reasonable accommodation of conflicting policies that were committed to the agency's care," and whether the regulation is arbitrary or in excess of the agency's statutory authority. United States v. Shimer, 367 U.S. 374, 383, 81 S.Ct. 1554, 1560, 6 L.Ed.2d 908 (1961).

The first question then is whether prepayment penalties were intended to fall within the purview of the Federal Home Bank Board. At least one court has answered this question in the affirmative. See Meyers v. Beverly Hills Federal Savings and Loan Association, 499 F.2d 1145 (9th Cir.1974). While we are not bound by this decision, we nonetheless find it persuasive. In addition, the United States Supreme Court's recent decision in delaCuesta, supra, confirmed the wisdom of this holding. See 458 U.S. at 151, n. 9, 102 S.Ct. at 3021, n. 9, 73 L.Ed.2d at 674, n. 9.

In delaCuesta, the Court held that the regulation of due-on-sale clauses was within the Board's jurisdiction, and that the Board's regulations regarding due-on-sale clauses pre-empted conflicting state law. The majority extensively analyzed the history of the HOLA, and concluded that "Congress gave the Board plenary authority to issue regulations governing federal savings and loans," and expressed "no limits on the Board's authority to regulate the lending practices of federal savings and loans." Id. at 160, 102 S.Ct. at 3026, 73 L.Ed.2d at 680.*fn10

The Court also impliedly approved of the Board's regulation of other facets of savings and loans practices, including:

[ 501 Pa. Page 484]

"fair credit requirements, the types and amounts of loans, collateral required, repayment schedules, initial loan charges, assignment of rents, escrow accounts and interest paid on those accounts, late charges, servicing of loans and loan payments and prepayments." (emphasis added.) Id. at 167, n. 20, 102 S.Ct. at 3029, n. 20, 73 L.Ed.2d at, 684, n. 20.

Therefore we hold that the regulation of prepayment penalties is within the authority of the Federal Home Loan Bank Board, and that Rules 545.8-5(b) and 555.15 pre-empt Section 405 of the Loan Interest and Protection Law, supra.

The second issue raised by appellants is whether the imposition of the prepayment penalty in this case violated Section 5 of the Bank Act, 12 U.S.C. § 1425, as amended.*fn11 Assuming arguendo that this prepayment penalty was violative, we are nonetheless without the power to offer appellants the requested relief, since a violation of this section confers upon appellants no right to bring a private cause of action.*fn12 Chevalier v. Baird Savings Association, 371 F.Supp. 1282

[ 501 Pa. Page 485]

(E.D.Pa.1974). See Goldstone v. South Shore Federal and Loan Association, 402 F.Supp. 1291 (E.D.N.Y. 1975); Cooper v. Baldwin-Bellmore Savings and Loan Association, 390 F.Supp. 874 (E.D.N.Y.1975). Appellants' remedy if any, would lie in a complaint filed with the Board. See 12 U.S.C. § 1464(d); Murphy v. Colonial Federal Savings and Loan Association, 388 F.2d 609 (2d Cir.1967).

Accordingly, we affirm the order of the Superior Court.

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