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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)



Opinion No. 5764

August 29, 1980


Const 1963, art 4, Sec. 43


Enactment of laws pertaining to

Legislation which would give savings and loan associations trust powers requires a two-thirds affirmative vote of the members elected to and serving in each house of the legislature for its enactment.

Hon. H. Lynn Jondahl

State Representative

The Capitol

Lansing, Michigan

You have requested my opinion on the following questions relative to legislation which has been introduced to recodify the laws of Michigan pertaining to state chartered savings and loan associations:

1. Does the recodification found in House Bill 4426 and HB 4426(H-1) constitute a general law under the provisions of Const 1963, Art IV, Section 43 which requires a two-thirds vote of the members elected to and serving in each house of the Legislature for passage?

2. If the trust powers generally found in Article 5 of these bills were deleted from this proposal [sic] recodification, would the remaining provisions constitute a general law for the incorporation of corporations for banking purposes, and thus require a two-thirds vote of the members of each house of the Legislature for passage?

Const 1963, art 4, Sec. 43 provides that:

'No general law providing for the incorporation of trust companies or corporations for banking purposes, or regulating the business thereof, shall be enacted, amended or repealed except by a vote of two-thirds of the members elected to and serving in each house.'

The predecessor of Const 1963, art 4, Sec. 43 was Const 1850, art 15, Sec. 2, which required that any general banking law be approved by a majority vote of the electors of the state at a general election. Const 1908, art 12, Sec. 9 substituted the present two-thirds vote of the legislature for the previous referendum provision. In the Address to the People relative to the 1963 Constitution, the framers of the Constitution advised the electors that Const 1963, art 4, Sec. 43 constituted '[n]o change from Sec. 9, Article XII of the present [1908] Constitution except for the elimination of the concluding sentence: 'Such laws shall not authorize the issuance of bank notes or paper credit to circulate as money.' This restriction is no longer necessary.' 2 Official Record, Constitutional Convention, 1961, p 3376.

During the debates of the 1985 Constitution, the delegates expressed their concern with Michigan banks. (1) Unlike contemporary banking institutions, those of that time provided neither security nor interest to depositors. In addition, banks were permitted to issue notes which circulated as money. The value of those notes was determined by the ability of the bank to either exchange the notes for notes of other banks or units of government, or to redeem the notes for gold or other precious commodities.

Although the delegates is 1850 debated between permitting unrestrained banking operations and barring any bank from existing in the state, (2) they arrived at a compromise resolution which required public approval of any banking law and further required the officers and shareholders of any bank to be individually liable for the debts of the bank. (Const 1850, art 15, Sec. 3)

The first comprehensive building and loan association statute enacted was 1887 PA 50, as amended by 1901 PA 17; 1915 PA 273; 1931 PA 135; 1933 PA 14 (ex. sess.); 1933 PA 120; 1935 PA 116; 1945 PA 105; and 1954 PA 159. The present savings and loan act, 1964 PA 156; MCLA 489.501 et seq; MSA 23.540(101) et seq, was the first major recodification of the savings and loan law since 1887. It is significant that despite the constitutional requirement that banking legislation be first approved by a vote of the electorate, none of the building and loan acts preceding the elimination of the referendum provision in the 1908 Constitution was ever submitted for such a vote.

A consideration in determining whether Const 1963, art 4, Sec. 43 applies to the proposed recodification of the savings and loan association act is whether the bill would regulate the business of a corporation created for 'banking purposes'. Since the term first appeared in Const 1850, there have not been any judicial interpretations of 'banking purposes' as used in the prevailing Michigan Constitution. The nature of the business of banking has, however, been described by the courts in other contexts. In North Arlington National Bank v Kearney Federal Savings & Loan Association, 187 F2d 564, 567 (CA 3, 1951), the court considered the distinctions between banks and savings and loan associations in the following terms:

'These savings and loan associations do some of the same things which banks do, obviously. But they do not do a general banking business. They are set up under the declared congressional purpose to provide thrift institutions in which people may invest their funds and to provide for the financing of homes. . . .' (Emphasis added.)

More recently, in Lyons Savings & Loan Association, et al v Federal Home Loan Bank Board, et al, 377 F Supp 11, 20-21 (DC Ill, 1974), the court re-examined the relationship between banks and savings and loan associations in light of legislative amendments which had given greater powers to such associations. However, the court refused to group savings and loan associations in the same category as banks based on the stated objective of such associations to principally engage in the business of financing homes. The court stated:

'Admittedly, savings and loan associations have developed to a point in many ways comparable to, and therefore competitive with, commercial banks. But there remains substantial differences. First, they are under the jurisdiction of different regulatory and examining authorities and are subject to different statutory and regulatory provisions governing their operations in business functions. Second, they perform many different services. Commercial banks may offer checking accounts, trust services, commercial and consumer loans and unsecured personal loans, all of which are generally prohibited to savings and loan associations.

'More significant here, however, savings and loan associations remain the most important source of home mortgage financing in the United States. This was one of the primary purposes for which Congress enacted the HOLA--In order to provide local mutual thrift institutions in which people may invest their funds and in order to provide for the financing of homes . . . 12 USC Sec. 1464(a) If Congress felt the board should be free to decide whether or not providing service through branch offices was a more effective way of fulfilling that purpose, we are unable to conclude that the resulting difference in treatment is a 'classification utterly lacking in rational justification." (Citations omitted.)

In determining whether banks and savings and loan associations should be considered similarly, the Michigan Supreme Court, in Phelps v American Savings & Loan Association, 121 Mich 343, 354; 80 NW 120 (1899), held:

'. . . Building and loan associations are peculiar institutions, and, from some real or imaginary benefit that they are supposed to afford the poorer classes of society, are frequently given exceptional advantages over other corporations and private persons, such as immunity from taxation and usury laws. . . .'

In Stoddard v Saginaw Building & Loan Association, 138 Mich 73, 79; 101 NW 50 (1904), the Court recognized that savings and loan associations are dissimilar to banks, stating that '. . . [t]he law gives special favors to such associations as these. It permits them to charge high rates of interest and to escape the payment of taxes--privileges denied to banks and other similar institutions.' It should also be noted that in Moran v State Banking Commissioner, 322 Mich 230; 33 NW2d 772 (1978), the court considered the propriety of the banking commissioner comparing services offered by banks with those of building and loan associations and credit unions for the purpose of determining whether there was a need for additional bank charters. In holding that such comparisons were improper, the Supreme Court stated:

'While the institutions just above noted, [small loan companies and credit unions] as is also true of building and loan associations, render a certain and limited financial service, it cannot be said that they function in the same field or render a service comparable to that of commercial banks.' (Emphasis added.) 322 Mich 230, 239-240 See also: Bank of Dearborn v Banking Commissioner, 365 Mich 567; 114 NW2d 210 (1962)

Finally, the United States Supreme Court has consistently recognized that thrift institutions, such as savings and loan associations, operate in a different line of commerce and, as such, may not be compared to banks for purposes of anti-trust litigation. See: United States v Connecticut National Bank, 418 US 656; 94 S Ct 2788; 41 L Ed 2d 1016 (1974); United States v Phillipsburg National Bank, 399 US 350; 90 S Ct 2035; 26 L Ed 2d 658 (1970); and United States v The Philadelphia National Bank, 374 US 321; 83 S Ct 1715; 10 L Ed 2d 915 (1963), wherein the Court recognized that 'Commercial banks are unique among financial institutions.' (3)

Although distinctions between banks and thrift institutions have narrowed in recent years, with most credit unions offering draft accounts which operate similar to bank checking accounts, and savings and loan associations in many states offering accounts which permit transfers to third parties by means of a negotiable order of withdrawal, it may not be concluded that the framers of the 1963 Constitution intended that art 4, Sec. 43 should be applied to savings and loan associations. In addition to their presumed knowledge of the cited court cases which recognize the distinctions between banks and savings and loan associations, Bacon v Kent-Ottawa Metropolitan Water Authority, 354 Mich 159; 92 NW2d 492 (1958), examination of other constitutional provisions further evidences a consciousness on the part of the framers of the differences between banks and savings and loan associations. For example, Const 1963, art 9, Sec. 20, and its predecessor, Const 1908, art 10, Sec. 15, initially provided that state money could only be deposited in banks. Consistent interpretations by this office concluded that savings and loan associations are not banks, and that consequently state money may not de deposited in state or federally chartered savings and loan associations. 1 OAG, 1955, No 2167, p 384 (July 21, 1955); OAG, 1969-1970, No 4674, p 84 (September 9, 1969). Subsequently, at the general election of November 7, 1978, Const 1963, art 9, Sec. 20 was amended specifically to permit the deposit of state money in savings and loan associations and credit unions, as well as banks.

Moreover, the fact that savings and loan associations have undergone recent changes to the end that in some ways they resemble banks in their structure and operation does not alter the fact that the constitutional use of the term 'banking' does not include savings and loan associations. In Michigan Savings & Loan League v Municipal Finance Commission, 347 Mich 311, 322; 79 NW2d 590 (1956), the Supreme Court addressed the question of whether the character of savings and loan associations had changed to the extent that the constitutional prohibition on the state maintaining a proprietary interest in a corporation (Const 1963, art 9, Sec. 19) should not apply to savings and loan associations. The Supreme Court rejected the argument, concluding that '[p]resent economic conditions, stressed by counsel for the plaintiffs in his brief, may not be given the effect of modifying the fundamental law of the state.'

Under the proposed recodification of the state savings and loan association laws, an association will continue to engage primarily in the business of financing real estate. Other types of business which are authorized include the making of general purpose personal loans, such as for education, home modernization, and automobile financing, but only up to a maximum amount of $15,000, thereby effectively precluding savings and loan associations from engaging in such traditional banking activities as commercial and industrial financing. Furthermore, no authority exists for the issuance of letters of credit, bills of exchange, and acceptances, thereby precluding associations from effectively engaging in international financing in the same manner as authorized for banks. Even to the extent savings and loan associations may be empowered under the proposed legislation to offer check-like negotiable orders of withdrawal, the commercial value of such instruments is limited by the provision in the bill (Section 608) which permits an association to establish a rotation plan whenever the association is in financial distress, pursuant to which the association may limit withdrawals to one a month in the sequence in which the withdrawal requests are received.

It is, therefore, my opinion that savings and loan associations operating pursuant to the provisions of House Bill 4426, assuming its lawful enactment, would not be engaging in the business of banking.

However, it must be observed that Const 1963, art 4, Sec. 43 requires a two-thirds vote, not only for legislation regulating corporations engaged in banking purposes, but also for corporations engaged in the business of a trust company. Section 506 of House Bill 4426 expressly authorizes savings and loan associations to utilize all incidental powers as are necessary to carry on trust powers and 'to exercise a trust business' in essentially the same manner as banks. No such authority currently exists in the savings and loan association act, 1964 PA 156, supra.

To the extent that House Bill 4426 would authorize savings and loan associations to operate as trust companies, it is my opinion that an affirmative vote of two-thirds of the members elected to and serving in each house of legislature is required in order to enact House Bill 4426. (4)

Frank J. Kelley

Attorney General

(1) Report of the Proceedings and Debates in the Convention to Revise the Constitution of Michigan, 1850. See, in particular, the statement of delegate Bagg, at p 691.

(2) Id, at pp 558-583.

(3) See also: In Re United Bank Corporation of New York, 65 Fed Res Bulletin 61 (1980, wherein the Federal Reserve Board refused to group commercial banks with thrift institutions for the purpose of competitive analysis.

(4) See: OAG 1933, p 248 (April 22, 1933).


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