B. F. Saul Co. v. West End Park North, Inc.

Citation250 Md. 707,246 A.2d 591
Decision Date02 October 1968
Docket NumberNo. 189,189
PartiesB. F. SAUL COMPANY et al. v. WEST END PARK NORTH, INC., et al.
CourtCourt of Appeals of Maryland

Hal C. B. Clagett, Upper Marlboro (Thomas A. Farrington and Sasscer, Clagett, Powers & Channing, Upper Marlboro, on the brief) for appellants.

Maryland Bankers Assn., Norwood B. Orrick, Baltimore, on the brief amicus curiae.

William L. Kahler, DeBlasis & Kahler, Hillcrest Heights, for corporate appellees.

Thomas A. Garland, Asst. Atty. Gen. Francis B. Burch, Atty. Gen., Baltimore, for State of Maryland, appellee.


FINAN, Judge.

This is an appeal from a declaratory decree entered in equity by the Circuit Court for Prince George's County pursuant to the Uniform Declaratory Judgment Act (Code (1967 Repl.Vol.), Art. 31A §§ 1-16 construing Chapter 453, 1968 Laws of Maryland (House Bill No. 11) which repeals §§ 1-6 of Art. 49 of the Maryland Code entitled 'Interest and Usury' and replaces it with §§ 1-11). The new law, hereinafter referred to as the Act, had an effective date of July 1, 1968.

The three plaintiffs are corporations whose principal business is residential construction and development and the three defendants are corporate lenders. In each instance the defendant had entered into a contract with the plaintiff to supply it with money for the permanent financing of mortgage loans to be made to prospective home purchasers, either insured by the Federal Housing Administration (FHA), or guaranteed by the Veterans Administration (VA). In each instance the commitment was well in excess of a half million dollars ($500,000).

Subsequent to the passage of the Act, each mortgage loan broker notified the developers that they could not honor their original financing commitment because of the ambiguity created by the Act with regard to the legal rate of interest, the computation of points and uncertainty regarding the judicial interpretation which might be given to certain fees and charges set forth in the Act and and normally paid by the borrower or seller and at times retained by the lender. The purpose of the plaintiffs in the action below was to seek clarification of provisions of the Act, so that the loan commitments made on the part of the mortgage brokers might be specifically enforced by the developers. After answers were filed by the defendants the cases were consolidated in the court below and the Attorney General was permitted to intervene on behalf of the State of Maryland.

This Court is somewhat hard pressed to discern in these proceedings a justiciable matter because all parties are corporate entities whose common gravamen is the possibility of unwitting exposure to penalties attached to usurious interest as provided by § 3 of the Act. It was thought that Art. 23 § 125 of the Code (1967 Repl. Vol.) which provides 'No corporation shall interpose the defense of usury in any action,' provided an escape hatch which would exculpate the corporate plaintiffs from any usurious conduct and thus render the question of usury moot. However, we do acknowledge a valid question regarding the applicability of the disclosure provisions of the Act, commonly referred to as the 'Truth in Lending' provision, found in Section 10, as the same may relate to the parties to this action and their transactions. We are also aware that the home mortgage financing ultimately contemplated by the parties and the purpose for which they have entered into a commitment agreement, would involve, in practically every instance, individual residential property owners to which transactions the provisions in the Act pertaining to usury, as well as disclosure, would be applicable. We therefore are of the opinion that we have a justiciable matter before us.

At the beginning of the 1968 Session of the General Assembly of Maryland, the Legislature addressed itself to the crisis precipitated by the demand for higher interest rates for home financing, induced by a tight money market, juxtaposed against Maryland's Usury Law (Code Art. 49, § 1) which established the maximum legal rate of interest at six per cent (6%).

To alleviate the situation, House Bill No. 11 was introduced which permitted the lender and borrower to agree to an interest rate not to exceed a legal maximum of eight per cent (8%). However, the Act coupled the raise in interest rates with certain restrictive provisions designed to regulate unscrupulous lenders, and by § 2(A) specifically prohibited the practice of charging 'points,' except for business or commercial borrowers of more than $5,000 and in the case of '* * * any loan guaranteed or insured by FHA, VA or any other instrumentality of the Federal Government where the maximum interest rate is not more than 7%; * * *.' The Act also contained a 'truth in lending' provision which required that certain disclosures be made by the lender to the borrower.

Long before the Governor's imprimatur was on the Act, home mortgage brokers were posing, not the metaphysical question of 'how many angels may be balanced on the point of a needle,' but the very mundane question of how many 'points' may be charged at the inception of the loan while keeping the transaction within the framework of the legal maximum interest rate of eight per cent (8%). If for example, in the case of $10,000 mortgage loan, bearing interest at six per cent (6%) per annum, payable over a 20 year term, a fee of five 'points' were to be charged at the inception of the loan and the 'points' were to be construed as interest payable during the initial year of the loan, the interest rate for the first year would be eleven per cent (11%) and obviously usurious. On the other hand, if the five 'points' were to be computed or spread over the twenty year life of the loan it would come within the permissive rate of the Act, as we shall later illustrate.

The legal acceptance of the spreading of 'points' was the main issue presented to the court below and argued on appeal, however, the 'truth in lending' or disclosure provisions of the Act, as well as the treatment to be given other items of expense attendant to the consummation of a mortgage financed real estate transaction, were challenged for ambiguity.

The consternation within the home mortgage market created by the possible legal construction which might be placed on various provisions of the Act, wrought little short of havoc. 1

For the sake of clarity our discussion of the Act will be divided into four categories: (1) the proper method for computing interest in determining if a given loan is usurious; (2) the treatment to be given interest when the loan is prepaid; (3) the nonapplicability of the disclosure provisions of the Act to commercial loans in excess of $5,000 and the manner in which disclosure regarding the interest in construction loans may be met; (4) which of the many items involved in the settlement of a loan are required to be considered as interest and which are not.

The lower court in an able opinion by Powers, J., specifically delineated answers to the problems encountered under the above categories with the exception of that of prepayment of the loan, under category 2. The primary question before the court below was the manner in which interest should be computed and we agree with its concept of the spreading of 'points' over the life of the loan in computing the effective interest rate. We further agree with the court's treatment of expenses collected by the lender at the time of the consummation of the transaction and its designation as to which items should or should not be construed as interest. However, we disagree with the court's conclusion that the disclosure provisions of the Act were intended to be applicable to commercial loans in excess of $5,000. We shall discuss all categories seriatim.


All parties agree that the most troublesome problem raised by the Act is the manner in which 'points' should be treated in context with the term 'interest,' 'stated interest' and 'effective rate of simple interest,' all terms used rather inartistically, in various sections of the Act. To fully understand this problem a brief discussion of the anamolous term 'points' should be helpful.

Our search reveals that there is no mysterious connotation to the word 'point.' It simply denotes a fee or charge equal to one per cent (1%) of the principal amount of the loan which is collected by the lender at the time the loan is made. It may be used interchangeably with the term 'bonus,' 'premium,' 'loan origination fee' or 'service charge.' The basic tenent to remember is that it is a fee or charge which is collected only once, at the inception of the loan, and is in addition to the constant long term stated interest rate on the face of the loan.

This Court discussed the question of a 'bonus' in Birmingham v. Maryland Land and Homestead Association, 45 Md. 541 (1876) and again we find the use of the term 'premium' in Washington National Building and Loan Association v. Andrews, 95 Md. 696, 53 A. 573 (1902). Mr. James D. Laudeman, Jr., Chairman of the Legislative Coordinating Committee of the Savings and Loan Industry in Maryland, a member of the American Bar Association Committee on Real Estate, Probate and Trust Law and a member of the Governor's Study Commission on Interest and Usury Laws, testified as an expert witness on the custom and usage of 'points' in the home mortgage finance industry in Maryland. He emphasized the acceleration given to the practice of exacting points since the advent of the FHA and VA programs to the extent that today it is a term given universal acceptance in the lending industry throughout the country. 2

One theory advanced in justification for changing 'points' is the recoupment of the administrative or operating costs attendant to negotiating the loan. See 91 A.L.R.2d 1392 Anno: Usury-Procuring Money Loaned-Expense § 3.

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