STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 5894

May 1, 1981

BANKS AND BANKING:

Federal preemption of maximum rate of interest charged borrowers

Maximum rate of interest to be charged by state chartered banks to borrowers as authorized by federal law

Restrictions on loan terms imposed by state statute

CREDIT UNIONS:

Federal preemption of maximum rate of interest charged borrowers

Maximum rate of interest to be charged by state chartered credit unions to borrowers as authorized by federal law

Restrictions on loan terms imposed by state statute

SAVINGS AND LOAN ASSOCIATIONS:

Federal preemption of maximum rate of interest charged borrowers

Maximum rate of interest to be charged by state chartered savings and loan associations to borrowers as authorized by federal law

Restrictions on loan terms imposed by state statute

State chartered, federally insured banks, credit unions and savings and loan associations may charge borrowers an interest rate the greater of one percent in excess of the discount rate on 90-day commercial paper or the rate allowed by the laws of the state, whichever may be greater. Such lenders must comply with all restrictions as to loan terms imposed by state statutes under which such laws are made other than the maximum rate of interest to be charged.

Martha R. Seger

Commissioner

Financial Institutions Bureau

Department of Commerce

Law Building

Lansing, Michigan

You have requested by opinion on the following questions:

The Depository Institutions Deregulation and Monetary Control Act of 1980, 94 Stat 132 et seq (March 31, 1980), 12 USC 226 note, was enacted, in part, to eliminate interest rate ceilings which may be paid on savings accounts and to broaden the powers of financial institutions. In addition, the act supercedes state usury rate ceilings in three fields:

94 Stat 164-165 (1980), 12 USC 1831d, amends the federal deposit insurance act, 12 USC Sec. 1811 et seq, to provide lending parity to state chartered federally insured banks by providing, in pertinent part, that:

Similarly, 94 Stat 165-166, supra, which deals with savings and loan associations and credit unions, provides that 'notwithstanding any State constitution or statute which is hereby preempted for the purposes of this section,' such lenders may charge the greater of one percent in excess of the discount rate or the rate permitted by state law. On the basis of such language, it is clear beyond peradventure that Congress has exercised its constitutional power of preemption.

It must, however, be further noted that, pursuant to federal law, the State Legislature has been given the power to override the federal preemption and reinstate the legal interest rates which existed prior to the enactment of the Depository Institutions Deregulation and Monetary Control Act of 1980, 94 Stat 167 (March 31, 1980), 12 USC 1730g note. The power of the Legislature to override federal preemption in the case of mortgages must be exercised prior to April 1, 1983. Such action by the Legislature would divest all institutions, except national banks, of the 'most favored lender' doctrine and return control of interest rates to the state.

It is my opinion, therefore, that, notwithstanding any contrary state law, all state chartered, federally insured banks, credit unions, and savings and loan associations may charge an interest rate the greater of one percent in excess of the discount rate on 90-day commercial paper, or the 'rate allowed by the laws of the State . . . where such [bank, savings and loan association or credit union] is located, whichever may be greater.'

In your second question you ask whether state chartered institutions have the power to lend under the 'most favored lender' doctrine. Clearly, Congress had permitted state institutions to charge the alternate 'rate allowed by the laws of the state' if higher than one percent over the discount rate for 90-day commercial paper. However, the 'rate allowed by the law of the state' could either refer to the rate permitted a particular class of lenders, such as the 15 percent rate permitted credit unions in 1952 PA 285, as amended, Sec. 14; MCLA 490.14; MSA 23.494, or the highest rate permitted on a class of loans, such as loans of the type set forth in the Regulatory Loan Act of 1963, 1963 PA 103, as amended; MCLA 493.1 et seq; MSA 23.667(1) et seq, which allows interest at the rate of 31 percent. A pertinent inquiry therefore is whether Congress intended to permit a state chartered, federally insured institution such as a credit union to charge more than the 15 percent rate allowed under its enabling statute to charge a higher rate of interest for a similar loan. In other words, did Congress intend to authorize state institutions to lend under the 'most favored lender' doctrine.

The 'most favored lender' doctrine originated in Tiffany v National Bank of Missouri, 85 US 409; 21 L Ed 862 (1873), wherein the court concluded that the intent of the national bank act, 12 USC Sec. 85; 48 Stat 191, was to permit national banks to charge not only the rate permitted competing state chartered banks, but the highest rate allowed in the laws of the state to any lending competitor of the bank. The rule that a national bank may charge the highest rate permitted by a state to any lender was more recently examined in Northway Lanes v Hackley Union National Bank & Trust Co, 464 F2d 855 (CA 6, 1972). In Northway Lanes, supra, a national bank doing business in Michigan made a real estate loan at an interest rate in excess of the rate permitted state banks by adopting the state law applicable to Michigan savings and loan associations. The court applied the 'most favored lender' doctrine and concluded that the interest rate provision applicable to national banks:

464 F2d at 862.

The court in Northway Lanes, supra, further concluded that in addition to the rate of interest permitted by state law, a national bank could also receive reasonable and necessary costs in the same manner as could competing savings and loan associations. The federal courts have further recognized that a bank may use the rate permitted under state law on loans of the type made by small loan companies, Fisher v First National Bank of Omaha, 548 F2d 255 (CA 8, 1977), as well as the state retail installment sales act rate with respect to bank credit card transactions. Acker v Provident National Bank, 512 F2d 729 (CA 3, 1975).

Although the legislative history concerning 94 Stat 164-166, supra, is sparse, a perusal of the Congressional Record evidences an intent by Congress to not only preempt state usury laws but also to grant all state institutions the right to lend under the 'most favored lender' doctrine.

Senator Proxmire, then Chairman of the Senate's Banking, Housing and Urban Affairs Committee, explained the effect of the statute as follows:

Representative Reuss recognized a similar Congressional intent to preempt and provide parity among competing financial institutions, by explaining at 126 Cong Rec, H2274 (March 27, 1980), that 'the bill permits all federally insured institutions to do what national banks are already permitted; namely, on any loan (consumer loans, second mortgages, etc.) they may charge 1 percentage point over the Federal Reserve's basic discount rate regardless of State usury limitations.' Senator Bumpers' concern with existing interest disparities between banks, savings and loan associations, and credit unions was expressed at 126 Cong Rec, S3177 (March 27, 1980) as follows:

In enacting the Depository Institutions Deregulation and Monetary Control Act of 1980, supra, Congress clearly intended to place all insured banks, savings and loan associations and credit unions on the same competitive plane as national banks. Use of statutory language virtually identical to that contained in the national bank act, supra, as well as the statements of various members of Congress, require the conclusion that all federally insured financial institutions may take advantage of the 'most favored lender' doctrine.

It is, therefore, my opinion that all state chartered, federally insured savings and loan associations, credit unions, and banks may charge an interest rate the higher of one percent over the discount rate in effect for 90-day commercial paper at the Federal Reserve Bank or the highest rate permitted by law to any lender on the type of loan in question.

In your third question you ask whether the federal exemption would apply if state laws provide inconsistent restrictions on loan terms. A review of 94 Stat 164-166, supra, reveals that the stated federal preemption was only intended to apply to interest rates taken, received and charged on loans made by insured banks, savings and loan associations and credit unions. There is no indication that Congress intended to preempt other provisions of state law which regulate the terms of the loan, restrictions placed on the authority of the lenders, and other laws which are designed to protect the rights of consumers.

In applying the 'most favored lender' doctrine to national banks, the courts have consistently stated that in addition to 'borrowing' the rate, a national bank also becomes subject to the limitations and conditions the state imposes on a competing lender which might affect that rate. Partain v First National Bank of Montgomery, 467 F2d 167 (CA 5, 1972). A similar interpretation has been given by the Comptroller of the Currency at 12 CFR 7.7310 (1980).

It is my opinion, therefore, that a lender exercising the 'most favored lender' doctrine must comply with all restrictions as to the loan terms imposed by the state statutes under which such loans are made. Examples of such restrictions are the maximum loan amount of $3,000.00 contained in the Regulatory Loan Act of 1963, 1963 PA 103, Sec. 1, as amended; MCLA 49.31; MSA 23.667(1), the limitation that transactions under the Retail Installment Sales Act, 1966 PA 224, as amended; MCLA 445.851 et seq; MSA 19.416(101), et seq, do not include cash loans, loans secured by motor vehicles, or intangible goods, and the limitation found in the Michigan Banking Code, 1969 PA 319, Sec. 191; MCLA 487.491; MSA 23.710(191), that installment loans made by state banks be limited to a term of 84 months and 32 days.

Frank J. Kelley