STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 5895

May 11, 1981

MORTGAGES:

Assessment of cost by mortgagee for formal assumption of mortgage

A lender may require the new borrower to pay a reasonable and necessary fee reflecting expenses incurred by the lender in processing a formal assumption of a mortgage on real property, but the lender may not exact any fees for an informal assumption where no note is executed between the buyer of the property and the mortgagee.

Honorable John Kelly

State Senator

The Capitol

Lansing, Michigan

You have requested my opinion on the following questions:

Since the first two questions are related they will be considered together.

Your questions involve the situation in which a borrower/mortgagor transfers the secured property pursuant to an assumption agreement. A mortgage assumption may generally take one of two forms. One type, termed 'informal assumption,' results from an agreement between the buyer and seller of the mortgaged property, whereby the buyer agrees to assume the outstanding debt of the seller. It is a private agreement between the buyer and seller and the seller nonetheless remains obligated on the note and mortgage to the lending institution. The lender may be requested to send statements, notices, and documents to the attention of the buyer, but is under no obligation to do so.

The other form of assumption is referred to as a 'formal assumption.' A formal assumption requires the approval of the lending institution, in that the lender agrees to release the seller from the note. Any obligation is assumed by the purchaser. The lender's records are amended to reflect the change in ownership, as well as the obligation of the parties. In this situation, the lender may treat the formal assumption in a manner similar to the making of a new loan.

Generally, state laws are silent with respect to the exaction of fees for services rendered by financial institutions. It is axiomatic, however, that financial institutions such as banks and savings and loan associations are entitled to be reasonably compensated for services rendered. OAG, 1979-1980, No 5605, p 490 (December 5, 1979), recognized the legality of a bank charging a reasonable fee in connection with the issuance of a bank credit card. However, a concern which arises is that the fees being exacted from the borrower are an attempt to circumvent existing usury limitations. Accordingly, OAG, 1979-1980, No 5605 supra, cautioned that although a lender may charge a fee for a credit card, 'such fees cannot be used as a subterfuge to exact additional interest from prospective borrowers.'

The charging of a fee in connection with the making of a mortgage loan is both permitted and limited in 1966 PA 326, Sec. 1(a), as amended by 1978 PA 27, Sec. 1(a); MCLA 438.31a; MSA 19.15(1a), which provides:

Accordingly, pursuant to 1966 PA 326, Sec. 1(a), supra, the fee which may be exacted from a mortgage borrower is limited to the '. . . making, closing, disbursing, extending, readjusting, or renewing of a loan. . . .' Furthermore, such fees are limited under 1966 PA 326, Sec. 1(a), supra, to the costs connected with title examination or insurance, preparation of deeds and recording fees, appraisals, credit reports, and a broad charge referred on in the statute as a 'loan processing fee.' The only limitation is that such fees be '. . . reasonable and necessary charges which are the actual expenses incurred by the lender . . .' in connection with the loan transaction.

As previously observed, the assignment by the mortgagor normally takes one of two forms. In cases where the mortgagor remains principally liable on the note and simply wishes to notify the lender of the sale of the mortgaged premises, no formal action is required of the lender other than amendment of its own records to reflect the change in ownership. Moreover, the position of the seller is unchanged other than the fact that possession and title of the mortgaged premises have changed. The sale of the property does not transfer liability for the debt owed the lender from the seller to the buyer.

More often, the seller desires to be discharged from any obligation to the lender. In such cases, the buyer of the mortgaged premises becomes the borrower, thereby triggering the provisions of 1966 PA 326, Sec. 1(a), supra, since the transaction will require an adjustment to the existing loan. As a result, the lender is permitted by law to charge fees, such as a loan processing fee, as well as a charge for the necessary credit reports and recording fees.

It should also be noted that the final sentence of 1966 PA 326, Sec. 1(a), supra, exempts savings and loan associations from its provisions. One reason for this exemption is that authority to charge fees exists for such institutions in their respective enabling legislation. 1980 PA 307, Sec. 730(1); MCLA 491.730; MSA 23.602(730), provides:

Although federally chartered savings and loan associations are similarly permitted to exact charges in connection with loans under 1980 PA 307, Sec. 730(1), supra, authority also exists under federal regulations which permits the assessment of a fee againat a borrower for costs which are incidental to the making of a loan. See 12 CFR Sec. 545.6-10; Fed Reg, Vol 23, p 9901 (December 23, 1958).

Therefore, in answer to your first two questions, it is my opinion that in the event of a formal assumption of a mortgage whereby a new note is executed and the original borrower is discharged from any obligation to the lending institution, the lender may require that the new borrower pay a reasonable and necessary fee reflective of the actual expenses incurred by the lender in processing the assumption. Such fees may include recording fees, credit reports, as well as a processing fee. If the original borrower does not request to be discharged, no note is executed between the buyer of the property and the mortgagee and the lender does not provide any service, there is no authority to exact a fee.

Your third question involves whether a state chartered or regulated financial institution may refuse to recognize the assignment of a mortgage and consequently refuse future mortgage payments from the assignee. Such action is normally taken pursuant to a mortgage provision which provides the lending institution with the option to demand payment in full in the event of alienation of the property. This mortgage provision, sometimes referred to as a 'due on sale clause,' has been the subject of considerable controversy and litigation in recent years.

In Nichols v Ann Arbor Federal Savings & Loan Association, 73 Mich App 163; 250 NW2d 804; lv app den 400 Mich 844 (1977), the Court of Appeals addressed the question of whether a lender in Michigan may legally enforce a due on sale clause. The court concluded that in most cases such clauses acted to unreasonably restrain the free alienation of real property and were unenforceable. However, the court held that such clauses may be enforced if the lender demonstrates that the sale threatens a 'legitimate interest' of the lender, which the court defined, citing from Tucker v Lassen Savings & Loan Association, 116 Cal. Rptr. 633; 526 P2d 1169 (1974), as follows:

The Court of Appeals concluded in Nichols, supra, that a mortgagee's interest in maintaining its loan portfolio at current interest rates did not constitute a 'legitimate interest' and therefore could not form the basis for enforcement of a due on sale clause.

In answer to your third question, it is my opinion that a lender may refuse payments from the assignee of the mortgagor in the absence of a formal assumption, and seek to enforce the due on sale clause only if a legitimate interest of the lender is involved. Using the test announced in Nichols, supra, the due on sale clause may be enforced only where it can be demonstrated that the assignment of the mortgage will result in harm to the lender because the property may be subjected to waste, depreciation, or impairment of security whereby the prospect of default is increased. In such situations, the lender may require that the note secured by the mortgage be renegotiated and may require the new borrower to pay a reasonable and necessary fee reflective of the actual expenses incurred in completing the transaction.

Frank J. Kelley