Question

When the Prestons took out a variable mortgage with the First Bank of Marietta, their interest rate was 9 percent. The agreement allowed First Bank to raise or lower the interest rate at any time, provided that the Prestons received 30 days’ notice. When the bank raised the interest rate to 11 percent, the Prestons refused to pay, arguing that the agreement was unenforceable, because it set no limit on what interest rate they might be forced to pay. Were the Prestons correct? Explain. [See: Preston v. First Bank of Marietta, 473 N.E.2d 1210 (OH).]

Answer 1

it is an appeal from the Washington County Court of Common Pleas. Plaintiffs-appellees, Gary D. Preston and Robert D. Smith, filed suit against defendant-appellant, First Bank of Marietta, challenging the bank's ability to escalate the interest rate on their home mortgages.

Plaintiffs claimed the bank did not make a sufficient disclosure of the variable interest rate in its mortgages to comply with Regulation Z of the Truth-In-Lending-Act, Section 1601 et seq., Title 15, U.S. Code (hereafter "TILA"). Plaintiffs further claimed the bank's failure to comply with the TILA prevents it from escalating the interest rates in their mortgages.

The record reveals the following facts. The Smiths' note, executed in 1973, was for $23,000 at eight percent interest. In 1977 the Prestons signed their note for $20,000 at nine percent interest. The last paragraph of each note is identical and states:

"It is further agreed that the holder hereof may hereafter decrease said interest rate and may also increase the rate upon giving not less than 30 days' written notice prior to the effective date of such increase by letter mailed to the last known address of the undersigned; and in the event said increase in interest is made, the undersigned hereby promise to pay the interest as computed under the rate so made. In the event of such increase of interest rate, this note may be paid in full within the said notice period, at the interest rate herein originally stipulated."

Each party was given a disclosure statement when the loans were made, but neither statement made mention of the raising of interest rates. It merely recited the original terms of each loan.

On March 19, 1980, the bank sent notices to the plaintiffs of its intent to raise each party's interest rate to eleven percent, effective April 25, 1980. Around May 1, 1980, the FDIC informed the bank it had failed to comply with Regulation Z in that it did not provide plaintiffs with an additional disclosure statement. The bank provided plaintiffs with the required statement and by letter informed them their rate would increase on June 10, 1980. Plaintiffs objected, did not pay the increase and filed suit.

Now the question is whether the suit will sustain?

Then Court ordered that "In view of the goal of standardized terminology to facilitate comparison shopping, many courts have held that the failure to use the required terminology results in a violation of TILA. It is not sufficient to attempt to comply with the spirit of TILA in order to avoid liability. Rather, strict compliance with the required disclosures and terminology is required.

and "Where an agreement founded on legal consideration contains several promises, or a promise to do several things, and a part only of the things to be done are illegal, the promises which can be separated, or the promise, so far as it can be separated, from the illegality, may be valid."

The court's determination to enforce the mortgages as originally agreed, and not to enforce the part which violated TILA, is entirely proper under both Section 1640, Title 15, U.S. Code, and Ohio law.

Thus From above court's reuling Preston is correct in not paying increased interest.