The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us) STATE OF MICHIGAN FRANK J. KELLEY, ATTORNEY GENERAL Opinion No. 5428 January 24, 1979 BANKS AND BANKING: Home Improvement Loans SAVINGS AND LOAN ASSOCIATIONS: Home Improvement Loans CREDIT UNIONS: Home Improvement Loans USURY: Maximum Interest Rate on FHA Guaranteed Home Improvement Loans Banks, savings and loans associations, and credit unions may make 15-year FHA Title I home improvement loans at an interest rate established by an agency of the United States Government. Hon. William A. Ryan State Representative State Capitol Lansing, Michigan Hon. David Hollister State Representative State Capitol Lansing, Michigan You have requested my opinion on whether state chartered financial institutions may participate in a program being promoted by the Michigan State Housing Development Authority to assist persons of low and moderate income in securing home improvement loans. The program, known as the 'HIP/NIP' (Home Improvement/Neighborhood Improvement) Program, provides interest subsidies for FHA Title I home improvement loans issued by financial institutions. You state that: 'Under present state law, state chartered financial institutions are restricted to 7-year, 32-day home improvement loans except that FHA Title I lenders are permitted to grant 15-year FHA Title I home improvement loans. Because of this dual regulation, many lending institutions which are authorized to make 15-year loans are operating under the assumption that they are still restricted to 7-year, 32-day loans.' You have requested an opinion relating to the statutory authority of state chartered financial institutions to participate in the 'HIP/NIP' Program. There are three basic types of state chartered financial institutions operating in Michigan: credit unions, savings and loan associations, and banks. Each operates under separate enabling legislation. The operation of state chartered credit unions is governed by 1925 PA 285, as amended, MLCA 490.1 et seq; MSA 23.481 et seq. Although the credit union act authorizes credit unions 'to make loans to members for provident and productive purposes', 1925 PA 285, supra, Sec. 4(b), there is no statutory or regulatory limitation of the term of such loans. Thus, unless a credit union restricts the maximum term of any one loan in its bylaws to a shorter period, it may offer 15-year FHA Title I home improvement loans. (1) State chartered savings and loan associations are governed by the Michigan Savings and Loan Association Act of 1964, 1964 PA 156, as amended, MCLA 489.501 et seq; MSA 23.540(101) et seq. 1964 PA 156, supra, Sec. 370(e), expressly authorizes state chartered savings and loan associations to make home improvement loans at a maximum interest rate of 8%, added in advance. Furthermore, with respect to the length of time for repayment of home improvement loans, the act provides that such loans may not exceed a period 'that may be established by the supervisory authority from time to time'. The Michigan Financial Institutions Bureau has not promulgated rules with respect to the terms of such loans. The Michigan Banking Code of 1969, 1969 PA 319, MCLA 487.301 et seq; MSA 23.710(1) et seq, provides no limitation on the length of home improvement loans. 1969 PA 319, supra, Sec. 191, limits the maximum amount of interest which a bank may impose on a loan and, with respect to installment loans, 'the term of which loan does not exceed a period of 84 months and 32 days' provides that the bank may charge interest at a rate not to exceed 7% added in advance. On the basis of this language in section 191, many banks have adopted the view that they cannot make installment loans, including home improvement loans, in excess of 7 years, 32 days, without becoming bound by the maximum usury interest rate of 7% simple interest. 1966 PA 326, as amended, MCLA 438.31; MSA 19.15(1) Accordingly, many bank lenders have instituted an internal policy of not making home improvement or any installment loan in excess of 7 years, 32 days. However, the assumptions that banks are either prohibited from issuing home improvement loans for a term in excess of 7 years, 32 days or that they are restricted to an interest rate of 7% simple, are unfounded. As I previously noted, the Michigan Banking Code, supra, Sec. 191, does not limit the term of an intallment loan. Instead, it provides that if the length of time for repayment is less than 84 months and 32 days the interest rate may not exceed the rate added in advance of 7% per annum. Thus, if the term exceeds 84 months and 32 days, the interest governed by the usury statute applies. In reviewing the usury statute, it will be noted that the usury interest rate is not applicable to FHA Title I home improvement loans. 1966 PA 326, supra, Sec. 1, in establishing the usury rate of interest, expressly provides that the 'act shall not apply to the rate of interest on any note, bond, or other evidence of indebtedness . . . the issue and rate of interest of which . . . is regulated by any other law of this state, or of the United States. . . .' With respect to the FHA Title I home improvement loans, the Federal government has provided that the maximum rate of interest on such loans may not exceed an annual rate of 12% simple interest. See 24 CFR 201.4(a) (1977). In addition, 1935 PA 2, Sec. 1, MCLA 487.751; MSA 23.181, provides that banks, savings and loan associations, and other lending agencies may: '(a) . . . make such loans and advances of credit and purchases of obligations representing loans and advances of credit as are eligible for insurance by the federal housing administrator, and to obtain such insurance.' (footnote omitted) The interest rate on such loans is governed by 1935 PA 2, Sec. 2, MCLA 487.752; MSA 23.182, which provides that: 'No law of this state . . . prescribing or limiting interest rates upon loans or advances of credit, or prescribing or limiting the period for which loans or advances of credit may be made, . . . shall be deemed to apply to security given, furnished or accepted, or to loans, advances of credit, or purchases made, pursuant to section 1 of this act: . . .' (footnote omitted) Unequivocally, banks, savings and loan associations, and credit unions have authority to make federally insured loans and, because the interest rate is governed by Federal law, the usury rate limitation does not apply to FHA Title I home improvement loans. Therefore, it is my opinion that state banks, savings and loan associations, and credit unions may fully participate in the 'HIP/NIP' program and may make 15-year FHA Title I home improvement loans at the rate of interest authorized by the Federal government, unless otherwise restricted by their bylaws. Frank J. Kelley Attorney General (1)