[ Previous Page]  [ Home Page ]

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. 6137

March 28, 1983


Secondary mortgage loans act--application to materials supplier who on occasion takes a secondary mortgage as security for debt due on materials sold

A building materials supplier who sells materials on credit and advances no cash to the buyer and on some occasions at a later time obtains a secondary mortgage from the purchasers to secure the debt in default does not engage in the business of making secondary mortgage loans and, therefore, need not be licensed under 1981 PA 125.

Honorable Margaret O'Connor

State Representative

The Capitol

Lansing, Michigan

You have requested an opinion on the following question:

Whether a supplier of building materials on open account, which sometimes obtains a mortgage note and mortgage from customers to secure payment of their outstanding overdue accounts, is making a loan and therefore within the dictates of the secondary mortgage loans act?

You advise that the seller is charging interest only after the failure of the buyer to pay charges on an open account when they become due. Occasionally, when a purchaser has defaulted on an account, the seller may request that the buyer provide security in the form of a second mortgage on real property. In exchange for the security, the seller agrees to forebear legal proceedings to collect the debt. Neither the note nor second mortgage were contemplated at the time of the sale of the building materials.

1981 PA 125; MCLA 493.51 et seq; MSA 26.568(1) et seq, was enacted to define and regulate secondary mortgage loans. Among its principal provisions is a licensing requirement with supervisory responsibility being established in the Michigan Financial Institutions Bureau and authorization to make secondary mortgage loans at a maximum annual rate of 15%. A 'secondary mortgage loan' is defined at 1981 PA 125, Sec. 1(d); MCLA 493.51(d); MSA 26.568(1)(d), as follows:

"Secondary mortgage loan' means a loan of $3,000.00 or more made to an individual, corporation or partnership for personal, family or household purposes not to be repaid in 90 days or less, which is secured by a mortgage upon an interest in real property used as a dwelling if the property is subject to the lien of 1 or more prior mortgages, or the purchase of an interest in an existing mortgage is made to secure the loan. Notwithstanding the place of execution, nominal or real, of a secondary mortgage loan, if the real property is located in this state, the secondary mortgage loan is subject to this act and all other applicable laws of this state.'

The question of whether a retail seller is required to be licensed as a secondary mortgage lender depends on whether the seller is making a 'loan of $3,000.00 or more' when the seller obtains a second mortgage to secure an overdue account.

A loan of money may be defined as the advancement of funds at the time of the agreement accompanied with a stipulation by the borrower to repay the funds at some future date. See, M.L.P. Usury, Vol 23, Sec. 3. The distinction between a loan of money and a credit sale was further explained in Boerner, et al v Colwell Co, 21 Cal 3d 37, 47; 577 P2d 200, 206; 145 Cal Rptr 380 (S.Ct. Cal, 1978), as follows:

"A sale is the transfer of the property in a thing for a price in money. The transfer of the property in the thing sold for a price is the essence of the transaction. . . . A loan, on the other hand, is the delivery of a sum of money to another under a contract to return at some future time an equivalent amount with or without an additional sum agreed upon for its use; . . ." [citing from Milana v Credit Discount Co, 27 Cal 2d, 335, 339; 163 P2d 869, 871 (S.Ct. Cal, 1975)

In considering whether the seller's taking of a security interest in the buyer's real property might change the character of the transaction, the California Supreme Court in Boerner, supra, further stated:

'It is clear, however, that the taking of a security interest in real property owned by the buyer is not inconsistent with a bona fide credit sale--at least in a case where the property which is the subject of the sale is to be affixed and made a part of the real property given as security for payment.' 21 Cal 3d at 49.

Thus, it has been recognized that in order to be a loan of money, or, as is stated in 1981 PA 125, supra, Sec. 1(d), a 'loan of $3,000.00 or more', there must be an exchange of funds from a lender to a borrower. This conclusion is supported by other provisions of 1981 PA 125, supra, such as section 6, which prohibits a secondary mortgage lender from engaging 'in the business of selling and leasing tangible goods at the location that secondary mortgage loans are being made.' In addition, section 24 of the Act prohibits a licensee from making a secondary mortgage loan 'merely to improve the strength of security on any existing indebtedness', which would be the case in the factual situation you relate, reading these provisions together, there is no legislative intent to subject such a transaction to 1981 PA 125, supra.

It is my opinion, therefore, that a building material supplier who sells materials on credit and advances no cash to the buyer and on some occasions obtains a secondary mortgage from the purchaser to secure a debt in default does not engage in the business of making secondary mortgage loans and therefore need not be licensed under the secondary mortgage loans act.

Frank J. Kelley

Attorney General

[ Previous Page]  [ Home Page ]