STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 5972

September 2, 1981

USURY:

Commitment fees

Discount points

STATUTES:

Override of federal preemption

Re-enactment of statute

A qualified lender may charge discount points and may charge a commitment fee on loans secured by home mortgages since amendatory 1980 PA 238 did not override the federal preemption of the applicable state usury law.

Honorable William R. Keith

State Representative

The Capitol

Lansing, Michigan

You have requested my opinion on the following questions:

The payment of discount points by a borrower, directly or indirectly, is forbidden by 1969 PA 305, as amended; MCLA 438.31c(2); MSA 19.15(1c)(2). This section is part of the state's general usury law, which, as explicated in OAG, 1981-1982, No 5894, p 157 (May 1, 1981), was preempted in part by the Depository Institutions Deregulation and Monetary Control Act of 1980 ('DIDMCA'), 94 Stat 132 et seq (March 31, 1980); 12 USC 226 note. Your inquiry concerns the continuing effect of this federal preemption in light of the fact that the Legislature has recently re-enacted 1969 PA 305, as amended, supra, by 1980 PA 238, subsequent to the passage of 'DIDMCA,' supra. As indicated in OAG, 1981-1982, No 5894, supra, the State Legislature was given the power in 'DIDMCA' to override the federal preemption and reinstate state usury laws. 94 Stat 162 (March 31, 1980); 12 USC 1735f-7 note.

The analysis of the legal questions presented begins with an examination of the state's usury limit of five percent, which can be increased to seven percent if the parties so stipulate in writing. 1966 PA 326, as amended by 1970 PA 227; MCLA 438.31; MSA 19.15(1). This general interest rate ceiling, however, is subject to numerous exceptions, many of which were identified in OAG, 1979-1980, No 5765, p 942 (August 28, 1980), and OAG, 1979-1980, No 5740, p 877 (July 17, 1980). The exception most appropriate to real estate loans was enacted by 1969 PA 305, supra, upon recognition that escalating interest rates had caused existing limitations to become obsolete and were threatening the ability of prospective homeowners in Michigan to secure needed financing. As a result, the Legislature lifted the ceiling to permit parties to a 'conventional home loan mortgage or land contract' to agree in writing to pay any rate of interest. 1969 PA 305, as amended, supra, contained an annual sunset provision, and provided that lenders could not require borrowers to maintain a deposit account, other than an escrow account, could not 'directly or indirectly, impose or collect as a condition of the making of the loan, any payment from any seller or borrower pursuant to a discount, point or similar system,' and could not charge the borrower a prepayment penalty in excess of one percent if the loan is paid off within three years.

In 1970, the Legislature extended the sunset provision and further amended the statute to exempt only land contracts and real estate loans secured by a first lien on real property and limit the rate of interest to the state's 25 percent criminal usury rate. 1970 PA 75. In 1971, the Legislature extended the sunset provision to 1973 and limited the usury exception to '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 and mortgage loans and land contracts between natural persons.' Loans, including land contracts, between unqualified persons were limited by statute to a maximum annual rate of six percent. 1971 PA 94. Soon thereafter, however, the Legislature modified the exception to permit nonqualified lenders, including parties to a land contract, to charge a maximum of 11 percent per annum. The Legislature further prohibited charging interest on an add-on basis and allowed an aggrieved party to bring suit for injunctive relief. 1971 PA 228. In 1980, the Legislature further amended the section to allow a lender to require the borrower to maintain a deposit account which is pledged as additional security for the mortgage or land contract in a limited manner specified by law. 1980 PA 238.

The rationale behind the statutory prohibition of discount points is twofold. First, it prohibits the indirect exaction of interest in an amount undisclosed to the borrower. This rationale, however, is negated by the fact that 1969 PA 305, as amended, supra, permitted an unlimited rate subject only to the state's criminal usury maximum of 25 percent. Thus, there would be little purpose in indirectly exacting more interest unless the loan is being made at a rate close to 25 percent. In addition, with the enactment of federal disclosure laws, any discount points paid by the borrower would have to be disclosed as part of the interest rate. 82 Stat 148 (May 29, 1968); 15 USC Sec. 1605. A more important reason for the prohibition of discount points is to give effect to 1969 PA 305, as amended, supra, Sec. 1(c)(2)(c), which prohibits a lender from charging a prepayment penalty in excess of one percent on any prepayment made within three years from the date of the loan. The effect of a lender charging discount points is to collect interest on the front end of the loan. The shorter term the loan is outstanding, the greater the rate of return to the lender will be. Thus, discount points act to discourage prepayments by penalizing borrowers with a higher interest rate should a prepayment be attempted.

Presently, 1969 PA 305, Sec. 1c, supra, provides, in pertinent part:

The most significant change in the effect of 1969 PA 305, as amended, supra, has been Section 501(a)(1) of 'DIDMCA,' 94 Stat 161 (March 31, 1980); 12 USC 1735f-7 note, which states, in pertinent part:

Your immediate concern is with whether the Legislature has overriden the federal preemption and thus reinstated the effect of the state's usury laws by enacting 1980 PA 238. The ability of a state to override the federal preemption is provided in two subsections of Title V, Section 501 of 'DIDMCA,' supra. Section 501(b)(2) of 'DIDMCA,' supra, provides that the federal usury preemption 'shall not apply to any loan, mortgage, credit sale, or advance made in any State after the date (on or after April 1, 1980, and before April 1, 1983) on which such State adopts a law or certifies that the voters of such State have voted in favor of any provision, constitutional or otherwise, which states explicitly and by its terms the such State does not want the provisions of subsection (a)(1) to apply with respect to loans, mortgages, credit sales, and advances made in such State.' (Emphasis added.) With respect to the federal preemption on discount points, however, Section 501(b)(4) of 'DIDMCA,' supra, does not require explicit state legislation but instead provides:

The primary rule of statutory construction is to ascertain and give effect to legislation intent. Production Credit Association of Lansing v Department of Treasury, 404 Mich 301; 273 NW2d 10 (1978). As I previously mentioned, 1980 PA 238 had a limited purpose. In discussing the content of HB 4858, which later became 1980 PA 238, the House Legislative Analysis Section, in a report dated January 29, 1980, advised the Legislature as follows:

Following an amendment to HB 4858, the House Legislative Analysis Section issued a second bill analysis, dated February 14, 1980, which stated that the bill had been amended to limit its application to owner-occupied dwellings and to prohibit any lender from making more than 20 percent of its loans pursuant to this new law. Other analyses prepared by the Senate Analysis Section and the Michigan Financial Institutions Bureau, at whose request the bill was introduced, dated August 2, 1980 and November 14, 1979, respectively, also disclose that the legislative intent of HB 4858 was to permit lending institutions to offer graduated payment mortgages by authorizing lenders to require pledged deposit accounts. In none of these documents is there any indication that the Legislature intended to override the federal preemption. Moreover, it is doubtful that such an intent was possible since HB 4858 was introduced and passed by the House several months before the enactment of the federal usury preemption and, as enacted, contained a sunset provision pursuant to which the amendatory act would automatically expire on December 31, 1982.

Further, the re-enactment of 1969 PA 305, Sec. 1(c), supra, by amendatory 1980 PA 238, does not constitute the enactment of a new statute. 1959 PA 189, Sec. 3u; MCLA 8.3u; MSA 2.122(21) provides:

It is my opinion, therefore, that by re-enacting the state discount point prohibition in a manner identical to its existing form, the Legislature continued the law in its prior, preempted, state. It is also my opinion that in order to override the 'DIDMCA' discount point preemption, the Legislature must do more than merely re-enact existing law without indication of an intent to override.

In your second question you inquire:

Your second question concerns whether a commitment fee may be collected based on the federal usury preemption contained in 'DIDMCA,' supra. Your question assumes that a lender was prohibited from collecting such a fee until the enactment of the federal preemption. If such were the case, it would be my opinion that, for the reasons stated in response to your first question, the federal preemption has not been overriden by 1980 PA 238, and therefore commitment fees could be charged. However, the imposition of a commitment fee which is consideration received by a lender in return for its promise to make a loan at some future date at a specific rate is not prohibited by the state's usury law. As stated in a letter opinion to Robert P. Briggs, Commissioner of the Michigan Financial Institutions Bureau, dated November 24, 1970, a lender may receive a commitment fee if (1) it is not a subterfuge to charge an illegal rate of interest or illegal discount points, (2) the fee is paid in advance of the closing so that it does not appear to be illegal interest or discount points, and (3) the commitment only binds the lender to make the loan and does not bind the borrower to complete the transaction.

In answer to your second question, it is my opinion that until the Legislature acts to override existing federal laws, a qualified lender may continue to charge a commitment fee in connection with loans secured by home mortgages.

Frank J. Kelley