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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)



STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL


Opinion No. 6089

August 3, 1982

RETAIL INSTALLMENT SALES ACT:

Sale of mobile home bearing a variable rate of interest

A retail installment sales contract for a mobile home employing the 'add on' method of interest computation may not bear a variable rate of interest.

A retail installment sales contract on a mobile home may bear a variable rate of interest only if the time price differential is calculated on the simple interest method based upon the unpaid monthly principal balance and the contract is executed in accordance with applicable federal requirements.

Norton L. Berman

Director

Department of Commerce

Law Building

Lansing, Michigan

My opinion has been requested on the question whether a retail installment sale of a mobile home may bear a variable rate of interest pursuant to the Retail Installment Sales Act, the Depository Institutions Deregulation and Monetary Control Act of 1980, the Federal Home Loan Bank Board regulations promulgated pursuant thereto, and the federal Truth in Lending Act.

The Retail Installment Sales Act, 1966 PA 224; MCLA 445.851 et seq; MSA 19.416(101) et seq, governs retail installment sales transactions, agreements, charges and disclosures in connection with the purchase of goods or services, including mobile homes. Michigan Mobile Homeowners Association v Bank of the Commonwealth, 56 Mich App 206; 223 NW2d 725, lv den 393 Mich 809 (1974). The amount of interest (1) that may be charged on a retail installment sales contract is limited by 1966 PA 224, supra, Sec. 7(1):

'A retail installment contract may provide for, and the seller or holder may then charge, collect, and receive a time price differential which shall not exceed an amount determined in accord with the following schedule:

'(a) On so much of the principal balance as does not exceed $500.00, at the rate of $12.00 per $100.00 per year.

'(b) On so much of the principal balance as exceeds $500.00, at the rate of $10.00 per $100.00 per year.'

As explicated in OAG 1981-1982, No 6000, p 422 (October 21, 1981), a variable rate mortgage permits a lender in a real estate transaction to adjust the interest rate from time to time in accordance with a predetermined index verifiable by the borrower and beyond the lender's control. (2) The opinion concluded that the existing structure of the state's usury laws governing real estate loans permits lenders subject to the federal Depository Institutions Deregulation and Monetary Control Act of 1980, 94 Stat 161-168 (1980); 12 USC 226 note, hereafter 'DIDMCA', to issue variable rate mortgages.

Pertinent to your inquiry, Section 501(a)(1) of 'DIDMCA', supra, preempts state interest ceilings on loans or credit sales made after March 31, 1980 where secured by a first lien on a residential manufactured home and where made under the circumstances and by a lender as described in the National Housing Act, 48 Stat 1246 (1934) et seq; 12 USC 1701 et seq, Sec. 527(b): (3)

'The provisions of the constitution or the laws of any State expressly limiting the rate or amount of interest, discount points, finance charges, or other charges which may be charged, taken, received, or reserved shall not apply to any loan, mortgage, credit sale, or advance which is--

'(A) secured by a first lien . . . on a residential manufactured home;

'(B) made after March 31, 1980); and

'(C) described in section 527(b) of the National Housing Act (12 U.S.C. 1735f-5(b)), . . .'

To qualify for the preemption, the terms and conditions of the loan or credit sale must also comply with the consumer protection provisions specified in regulations promulgated by the Federal Home Loan Bank Board: (4)

'The provisions of subsection (a)(1) shall not apply to a loan, mortgage, credit sale, or advance which is secured by a first lien on a residential manufactured home unless the terms and conditions relating to such loan, mortgage, credit sale, or advance comply with consumer protection provisions specified in regulations prescribed by the Federal Home Loan Bank Board . . .' 94 Stat 132 (1980) et seq; 12 USC 3501 et seq, Sec. 501(c).

Accordingly, a lender or seller qualified under the federal statute may finance the purchase of a mobile home at any rate of interest, notwithstanding any limitation specified in 1966 PA 224, supra,. OAG 1979-1980, No 5765, p 942 (August 28, 1980), concluded that a qualified lender includes any federally insured bank, savings and loan association, or credit union, or a lender approved by the Department of Housing and Urban Development for participation in a mortgage insurance program. The federal act also applies to any loan eligible for purchase by the Federal National Mortgage Association, the Government National Mortgage Association, or the Federal Home Loan Mortgage Corporation. Other creditors, as defined in the Truth in Lending Act, 88 Stat 1511 (1974); 15 USC Sec. 1602f, making loans totalling over one million dollars annually, are similarly exempt.

Despite the fact that 'DIDMCA', supra, overrides interest rates and components of the finance charge, such as discount points or miscellaneous charges, it is equally clear that it does not preempt provisions of state laws which are designed to protect the rights of consumers. This conclusion is supported by the House Conference Report, 96-842, 1980 US Code Cong and Ad News, at 309:

'The conferees wish to emphasize that consumer protection provisions regarding manufactured home financing adopted in regulations of the Bank Board shall not preempt any state law which provides stronger protection to the consumer.'

The Senate Committee Report, 96-368, 1980 US Code Cong and Ad News, at 255, also states:

'In exempting mortgage loans from state usury limitations, the Committee intends to exempt only those limitations that are included in the annual percentage rate. The Committee does not intend to exempt limitations on prepayment charges, attorney fees, late charges or similar limitations designed to protect borrowers.'

Since the existence of a variable rate provision is not included in the computation of the annual percentage rate, any state law limiting or prohibiting the use of a variable rate transaction would not be preempted.

1966 PA 224, supra, authorizes two methods for computing the finance charge. The first method permits the rate to be computed on the basis of the initial principal balance. This is the 'add on' method of interest computation. In order to employ the 'add on' method, the lender must determine at the time the credit transaction is negotiated, the amount of the time price differential involved during the life of the contract. With respect to contracts employing the 'add on' method of interest computation, 1966 PA 224, supra, Sec. 7(2) provides:

'The time price differential under this section shall be computed on the principal balance of each transaction, as determined under section 3 on contracts payable in successive monthly payments substantially equal in amount from the date of the contract to the maturity of the final payment, notwithstanding that the total time balance thereof is required to be paid in 1 or more deferred payments. When a retail installment contract provides for payment other than in substantially equal, successive monthly payments, the time price differential shall not exceed the amount which will provide the same return as is permitted on substantially equal, successive monthly payment contracts, having due regard for the schedule of payments. The time price differential may be computed on the basis of a full month for a fractional portion of a month in excess of 10 days.' (Emphasis added.)

Since a variable rate loan increases the monthly interest payment, a lender may not thereby comply with the requirement that the interest be 'payable in successive monthly payments substantially equal in amount from the date of the contract to the maturity of the final payment.' Moreover, because it is impossible at the time the loan is made to calculate what the total interest will be during the course of the transaction, there is no assurance that a variable rate loan will provide the same return as will a loan with substantially equal monthly payments.

It is my opinion, therefore, that, as enacted, 1966 PA 224, supra, does not authorize variable rate loans with respect to contracts involving the 'add on' method of interest computation.

1966 PA 224, supra, Sec. 23, also provides for a second method of computation of the time price differential. This is the simple interest method of time price differential computation, to be calculated on the basis of the unpaid principal balance each month during the life of the contract. In pertinent part, 1966 PA 224, Sec. 23, supra, provides:

'Instead of a time price differential computed on the original principal balance as defined in section 2(m), the seller may charge from time to time a time price differential consisting of interest on the amount of the unpaid principal balance of the contract. In this event, the transaction shall be subject to this act as modified by the following provisions.'

1966 PA 224, Sec. 23, supra, neither prohibits a variable time price differential, nor does it require any conditions inconsistent with the variable rate concept. 1966 PA 224, Sec. 23(a), supra, defines a time price differential as 'the estimated amount of consideration in excess of the cash sale price which the buyer will pay in the form of interest assuming that each scheduled payment is made on the date it is due and in the scheduled amount.' In contracts where the time price differential varies, with fluctuations in economic indices, it would be difficult, or in same cases impossible, to determine in advance the amount of the time price differential. Thus, under the second method of computation, a lender who employs a variable time price differential rate would not be able to comply with the disclosure requirements of 1966 PA 224, supra, Sec. 3(d). However, 1966 PA 224, supra, Sec. 1(a), provides as an alternative means of satisfying the disclosure requirement compliance by the lender with the federal Truth in Lending Act, 82 Stat 146 (1968) et seq; 15 USC 1606 et seq:

'Compliance with the requirement of the consumer credit protection act, Public Law 90-321; 82 statute 146, et seq., commonly referred to as the federal Truth in Lending Act is compliance with the disclosure provisions of subsection (d) of section 3 and subsection (b) of section 12.'

Current federal truth in lending regulations, 12 CFR 226.8(b)(8), 45, FR 35802, May 28, 1980, provide that in case where the annual percentage rate is subject to prospective increases, the lender must disclose to the borrower the initial interest, the fact that the annual percentage interest rate is subject to prospective increase, the specific conditions which would cause the increase to occur and the manner in which the increase in the annual percentage rate may be effected. (5)

Adoption of federal legislation in state law often gives rise to the issue of illegal delegation of legislative power. The Michigan rule is that state laws may incorporate existing, but not future, federal statutes, rules and regulations. People v Urban, 45 Mich App 255, 262; 206 NW2d 511, 516 (1973). 1966 PA 224, supra, Sec. 1(a), was added to the act by 1969 PA 31, effective July 10, 1969. Federal rules regulating the disclosure of variable interest rates became effective June 30, 1969. 12 CFR 226.810, 34 F.R. 11083, July 1, 1969; rescinded April 19, 1977, 42 FR 20456, April 20, 1977. Although compliance with state law requires compliance with the federal law in effect on July 10, 1969 only, a lender subject to the federal Truth in Lending Act, supra, would, of course, be required to comply with current federal requirements.

It is my opinion, therefore, that a retail installment sales contract on a mobile home may bear a variable rate of interest only if the time price differential is calculated on the simple interest method based upon the unpaid principal balance. In addition, if the sale meets the requirements of 'DIDMCA', supra, and the Federal Home Loan Bank Board regulations, supra, the contract may call for a variable rate of interest. The contract must also disclose the interest charges in accordance with the Retail Installment Sales Act, supra, the Truth in Lending Act, supra, and Regulation Z, supra.

Frank J. Kelley

Attorney General

(1) The term 'interest' will be used throughout this opinion instead of and as synonymous with the term 'time price differential,' which is used in the Retail Installment Sales Act, supra, and 'finance charge,' which is used in the federal Truth in Lending Act.

(2) OAG 1981-1982, No 6000, supra, provided such examples of acceptable indices as the national average of mortgage rates, the average cost of funds to insured lenders, and the average treasury bill rate.

(3) See OAG, 1979-1980, No 5765, p 942 (August 28, 1980), for a discussion of 'DIDMCA', supra, and the application of the National Housing Act, Sec. 527(b), supra, in the context of a loan secured by a first lien on residential real property. The Legislature may override the federal usury preemption by enacting appropriate legislation before April 1, 1983. 'DIDMCA', supra, Sec. 501(b)(2).

(4) Consumer protection rules for federally related loans secured by first liens on residential manufactured homes may be found in 12 CFR 590.4. These rules were enacted to afford mobile home purchasers certain protections in the borrowing of monies exempt from state usury laws by 'DIDMCA', supra. The rules cover balloon payments, prepayment penalties, late charges, deferral fees, thirty-day notice prior to any action leading to foreclosure or repossession, and calculation of refunds of unearned interest on precomputed finance charges.

(5) The Truth in Lending Regulations are generically referred to as Regulation Z, beginning at 12 CFR 226 et seq, 34 Fed Reg 2002, Feb. 11, 1969, as amended. It should be noted that pursuant to the requirement of Title VI of 'DIDMCA', supra, the Federal Reserve Board has promulgated a simplified Regulation Z. A lender may now elect to follow the revised regulation although compliance with the new law will be mandatory on October 1, 1982. 47 Fed Reg 755, Jan. 7, 1982. The revised section of Regulation Z applicable to variable rate disclosures is 12 CFR 226.18(f). The revised Regulation Z provides two substantive changes from existing law. First, the new regulation permits national banks, federal savings and loan associations, and federal credit unions to comply with variable rate regulations promulgated by their respective regulatory agency in lieu of Regulation Z. Second, Rev. Reg. Z, Sec. 226.18(f)(4) has been changed to require the lender to provide borrowers with a hypothetical increase of the variable rate feature for any type of loan.

 


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