STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 5765

August 28, 1980

USURY:

Maximum interest rates

MORTGAGES:

Interest charges

A federally related residential first mortgage loan may be made at any rate of interest in the absence of state legislative action before April 1, 1983.

A federally insured financial institution may charge up to 1% in excess of the discount rate on a mortgage loan not secured by a first lien.

A loan which does not qualify under federal law may be made at a rate of interest up to 25% if the lender is qualified under state law and the loan is secured by a first lien on residential real property, a land contract, or a land lease if the tenant owns a majority interest in the improvements.

A bank or credit union may make a residential real estate loan not secured by a first lien up to a maximum rate of interest of 15%.

A lender who does not qualify under either federal or state law may make a residential real estate loan secured by a first lien up to a maximum rate of 11% or, if not secured by a first lien, up to a maximum rate of 7%, if agreed to in writing, or 5% if agreed to orally.

Hon. Ernest W. Nash

State Representative

The Capitol

Lansing, Michigan

You have requested my opinion on whether interest rates which may be charged on mortgages or land contracts on the sale of real estate consisting of single family residential dwellings may exceed 11%

In Michigan, the interest rate which may be charged on loans and land contracts to finance real property is established in 1966 PA 326, Sec. 1c, as last amended by 1978 PA 440; MCLA 438.31c(1c); MSA 19.15(1c), which provides in pertinent part that:

The unlimited interest rate permitted in 1966 PA 326, Sec. 1c(2), supra, is limited to the restrictions contained in 1966 PA 326, Sec. 1c(4), as added by 1970 PA 75, supra, which bars any rate of interest in excess of the 25% criminal usury rate. In addition, 1966 PA 326, Sec. 1c(5), as added by 1971 PA 94, supra, limits the higher interest rate to qualified lenders who are 'lenders approved as a mortgagee under the national housing act or regulated by the state, or by a federal agency, who are authorized by state or federal law to make such loans.' 1966 PA 326, Sec. 1c(6), as added by 1973 PA 6, supra, further provides that:

Thus, under state law, a lender or a land contract vendor qualified under 1966 PA 326, Sec. 1c(5), supra, may charge up to 25% on a loan secured by a first lien on real property, a land contract, or a land lease if the tenant owns a majority interest in the improvements. See OAG, 1979-1980, No 5740, p [July 17, 1980]. A lender or a land contract vendor who is not qualified under 1966 PA 326, Sec. 1c(5), supra, may charge up to 11% on a loan secured by a first lien on real property or a land contract. If the loan is not secured by a first lien, 1966 PA 326, Sec. 1, MCLA 438.31; MSA 19.15(1), limits the maximum annual interest rate to 7%, if agreed to in writing, and 5%, if agreed to orally.

The issue of maximum interest rates on real property loans has also recently been addressed by Congress. The Depository Institutions Deregulation and Monetary Control Act of 1980, Sec. 501, 94 Stat 132 (1980), et seq; ---- USC ---- (March 31, 1980), provides for the preemption of certain state interest ceilings and thus permits an unlimited interest rate with respect to federally related residential first mortgage loans made after March 31, 1980. Federally related loans are defined in the National Housing Act, Sec. 527b, 88 Stat 728 (1974); 12 USC 1735f-5(b), with certain modifications set forth in the Depository Institutions Deregulation and Monetary Control Act of 1980, Sec. 501, supra. They include loans made by any federally insured national or state chartered bank, savings and loan association, or credit union, as well as lenders approved by the Department of Housing and Urban Development for participation in any mortgage insurance program. In addition, the federal act applies to any loan eligible for purchase by the Federal National Mortgage Association ^(MA), the Government National Mortgage Association (GNMA), or the Federal Home Loan Mortgage Corporation. Other creditors, as defined in the Truth in Lending Act, 88 Stat 1511 (1974); 15 USC Sec. 1602(f), who make real estate loans totalling over one million dollars annually, are similarly exempt.

The Depository Institutions Deregulation and Monetary Control Act of 1980, Secs. 521-524, supra, provide additional exemptions from state usury laws with respect to any loan made by a federally insured bank, savings and loan association, credit union, and shall business investment company. This exemption would allow such lenders to charge a rate of interest equal to 1% in excess of the discount rate on ninety (90) day commercial paper in effect at the Federal Reserve Bank in the federal reserve district where the institution is located. Thus, under this exemption, a qualified lender may make a loan at the designated rate without regard to whether the loan is secured by a first lien on residential real property. It should be noted that the federal preemption of state usury laws becomes permanent unless the state legislature expressly provides by law, before April 1, 1983, that the preemption will not apply.

It is, therefore, my opinion that the rate of interest which may be charged on a loan secured by a mortgage on residential real property or a land contract is as follows:

1. A mortgage which is secured by a first lien on residential real property and which meets the requirements of the Depository Institutions Deregulation and Monetary Control Act of 1980, Sec. 501, supra, may bear any rate of interest notwithstanding the existence of a state law which would otherwise impose a ceiling on the interest rate, in the absence of state legislative action before April 1, 1983.

2. A mortgage which is not secured by a first lien on residential real property and which meets the requirements of the Depository Institutions Deregulation and Monetary Control Act of 1980, Secs. 521-524, supra, may be made at a rate of interest equal to 1% in excess of the discount rate on ninety (90) day commercial paper in effect at the Federal Reserve Bank in the federal reserve district where the lender is located.

3. If the loan does not qualify under federal law for an exemption to the state law limitations, a different rule applies. A loan made pursuant to 1966 PA 326, supra, which is secured by a first lien on real property or a land contract may bear any rate of interest up to 25% per annum if it is made by a lender approved as a mortgagee under the National Housing Act, supra, or which is regulated by the state or by a federal agency and which is authorized by state or federal law to make such loans.

4. Other rules also apply to real estate loans, such as second mortgage loans, which are not secured by a first lien. A real estate loan, the primary security for which is not a first lien, may bear interest at a rate up to 15% per annum if it is made by a bank pursuant to 1969 PA 319, Sec. 194(4), as amended; MCLA 487.494(4); MSA 23.710(194)(4), or by a federal or state credit union pursuant to 48 Stat 1218 (1980); 12 USC Sec. 1757(5)(A)(vi), and 1925 PA 285, Sec. 14, as amended; MCLA 490.14; MSA 23.494, respectively.

5. An unqualified lender under federal and state law is limited to the maximum rate of 11% simple interest on loans secured by a first lien on residential real property, a land contract, or a land lease if the tenant owns a majority interest in the improvements. If not secured by a first lien, such a loan is subject to the usury limitation of 7%, if stipulated to in writing, or 5%, if agreed to orally. 1966 PA 326, Sec. 1, as amended, supra.

Frank J. Kelley