Opinion #6679

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. 6679

April 29, 1991

BANKS AND BANKING:

Mortgage loan charges under federal and state law

FEDERAL PREEMPTION:

Extent to which federal law preempts state law concerning mortgage loan charges

The provision in section 23 of the Michigan Mortgage Brokers, Lenders and Services Licensing Act dealing with loan processing fees is preempted by the federal Depository Institutions Deregulation and Monetary Control Act of 1980.

Pursuant to section 501(b)(4) of the federal Depository Institutions Deregulation and Monetary Control Act of 1980, the Michigan Legislature has the authority to enact a statute overriding the federal preemption of that portion of section 23 of the Michigan Mortgage Brokers, Lenders and Servicers Licensing Act dealing with loan processing fees.

Russell S. Kropschot

Acting Commissioner

Financial Institutions Bureau

Department of Commerce

P.O. Box 30224

Lansing, Michigan 48909

You have requested my opinion on two questions relating to the Mortgage Brokers, Lenders and Servicers Licensing Act (Act), 1987 PA 173, as amended, MCL 445.1651 et seq; MSA 23.1125(51) et seq.

Your first question may be stated as follows:

Are the provisions of Section 23 of the Michigan Mortgage Brokers, Lenders and Servicers Licensing Act preempted, in whole or in part, by the federal Depository Institutions Deregulation and Monetary Control Act of 1980 (Public Law 96-221)?

Section 23 of the Mortgage Brokers, Lenders and Servicers Licensing Act, MCL 445.1673; MSA 23.1125(73), provides that:

A licensee or registrant may require a borrower to pay reasonable and necessary charges which are the actual expenses incurred by the licensee or registrant in connection with the making, closing, disbursing, extending, readjusting, or renewing of a mortgage loan. The charges shall be in addition to interest authorized by law, and are not a part of the interest collected or agreed to be paid on the mortgage loan within the meaning of the law of this state which limits the rate of interest which may be exacted in a transaction. Reasonable and necessary charges shall consist of recording fees, title examination, or title insurance, the preparation of a deed, appraisal, or credit report, and a loan processing fee. The charges shall be paid only once by the borrower to the licensee or registrant. This section is not intended to override the federal preemption of state usury laws contained in the depository institutions deregulation and monetary control act of 1980, Public Law 96-221. [Emphasis added.]

Thus, Sec. 23 purports to limit a licensee or registrant to "reasonable and necessary charges," which are the "actual expenses" incurred in connection with the mortgage loan. As defined in Sec. 1a(j) of the Act, MCL 445.1651a(j); MSA 23.1125(51a)(j), a mortgage loan is:

[A]ny loan secured by a first mortgage on real property used, or improved to be used, as a dwelling and designed for occupancy by 4 or fewer families or a land contract covering real property used, or improved to be used, as a dwelling and designed for occupancy by 4 or fewer families.

Pursuant to the statute, the charges are in addition to interest and unaffected by interest rate limitations. However, the Legislature expressly provided that the section was not intended to override the federal preemption of state usury laws contained in the Depository Institutions and Monetary Control Act of 1980.

Legislative history and case law throughout the country confirm the fact that the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA), Public Law 96-221, 94 Stat 132 et seq (March 31, 1980); 12 USC 226 note, was passed at a time when inflation and interest rates were soaring. The act addressed Congressional concerns that where state usury laws required mortgage rates below market levels of interest, mortgage funds in those states would not be readily available to potential borrowers. In re Lawson Square, Inc, 816 F2d 1236, 1238 (CA 8, 1987). The purpose of the act was to promote stability and viability of federally insured financial institutions by freeing them of state regulation and allowing them to impose realistic borrowing rates, thereby insuring an increased and evenly spread flow of available mortgage money. See Smith v Fidelity Consumer Discount Co, 898 F2d 907, 911 (CA 3, 1990). Shelton v Mutual Savings & Loan Ass'n, FA, 738 FSupp 1050, 1057 (ED Mich,1990). Bank of New York v Hoyt, 617 FSupp 1304, 1310 (D RI,1985).

In order to accomplish this objective, Congress preempted state law by passing Sec. 501(a) of DIDMCA, 94 Stat 161, 12 USC 1735f-7a(a)(1), which provides in pertinent part that:

(1) 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 residential real property, ...;

(B) made after March 31, 1980; and

Loans described in the National Housing Act, Sec. 527b, 88 Stat 728 (1974), 12 USC 1735f-5(b), are referred to as "federally related" loans and apply to lenders who are either federally regulated or otherwise federally approved. OAG, 1981-1982, No 6000, p 422, 423 (October 21, 1981); OAG, 1979-1980, No 5765, p 942, 943 (August 28, 1980). Thus, Congress preempted all state law expressly limiting interest, discount points, finance charges and other charges in connection with loans, mortgages, credit sales and advances secured by first liens on real estate.

Legislative history clarifies the scope of the federal preemption. The Senate report accompanying the bill provided in pertinent part that:

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. [Emphasis added.]

S.Rep. No. 96-368, 96th Cong., 2d Sess. 19, reprinted in 1980 U.S.Code Cong. & Admin.News, Vol 2, 236, 255.

Thus, Congress intended to preempt only those limitations that are a component of the annual percentage rate (APR). Regulation Z, 12 CFR 226 (1990), promulgated by the Board of Governors of the Federal Reserve System to implement the Federal Truth in Lending Act, 15 USC 1601 et seq, defines the APR as "a measure of the cost of credit, expressed as a yearly rate, that relates the amount and timing of value received by the consumer to the amount and timing of payments made." 12 CFR 226.22(a). The "finance charge" is an integral part of the APR and is defined in 12 CFR Sec. 226.4(a) as follows:

The finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction. [Emphasis added.]

12 CFR Sec. 226.4(a)

Charges expressly excluded from finance charges in a residential mortgage transaction are set forth in pertinent part in 12 CFR 226.4(c)(7)(i-iii), as follows:

(7) The following fees in a transaction secured by real property or in a residential mortgage transaction, if the fees are bonafide and reasonable in amount:

(i) Fees for title examination, abstract of title, title insurance, property survey, and similar purposes.

(ii) Fees for preparing deeds, mortgages, and reconveyance, settlement, and similar documents.

(iii) Notary, appraisal, and credit report fees.

Also excluded are:

(e) Certain security interest charges. If itemized and disclosed, the following charges may be excluded from the finance charge:

(1) Taxes and fees prescribed by law that actually are or will be paid to public officials for determining the existence of or for perfecting, releasing, or satisfying a security interest. [Emphasis added.]

The fees and charges in a residential mortgage loan transaction delineated above which are excluded from the definition of a finance charge, and hence not a component of the APR, are not preempted by Sec. 501(a)(1) of DIDMCA.

Thus, the state law limitations expressed in Sec. 23 of the Mortgage Brokers, Lenders and Servicers Licensing Act as to fees for recording, title examination, title insurance, deed preparation, appraisal and credit report are not preempted. As the statute provides, those fees must be reasonable, necessary, and reflect the actual expenses incurred by the licensee or registrant. It should be noted that a finding by the Commissioner of a violation of this section may subject the licensee or registrant to all applicable penalties, including a civil fine or the suspension or revocation of a license or registration as provided in Sec. 29(2)(a) and (b) of the Act, MCL 445.1679(2)(a) and (2)(b); MSA 23.1125(79)(2)(a) and (2)(b).

However, "loan fees" are expressly encompassed within the definition of a finance charge in 12 CFR 226.4(b)(3), and hence are a component of the APR. Guidance for determining whether a particular type of charge is part of the "finance charge" is set forth in pertinent part in 12 CFR 226.4(b) as follows:

(b) Examples of finance charges. The finance charge includes the following types of charges, except for charges specifically excluded by paragraphs (c) through (e) of this section:

(1) Interest, time price differential, and any amount payable under an add-on or discount system of additional charges.

(2) Service, transaction, activity, and carrying charges, including any charge imposed on a checking or other transaction account to the extent that the charge exceeds the charge for a similar account without a credit feature.

(3) Points, loan fees, assumption fees, finder's fees, and similar charges. [Emphasis added.]

There is nothing in 12 CFR 226.4(c) indicating "loan fees" are excludable charges. Consequently, the provision in Sec. 23 of the Act relating to loan processing fees is preempted by Sec. 501(a)(1) of DIDMCA. See Currie v. Diamond Mortgage Corp of Illinois, 859 F2d 1538, 1542 (CA 7, 1988).

In answer to your first question, it is my opinion that the provision in Sec. 23 of the Michigan Mortgage Brokers, Lenders and Servicers Licensing Act dealing with loan processing fees is preempted by the federal Depository Institutions Deregulation and Monetary Control Act of 1980.

Your second question asks:

If all or part of Section 23 is presently preempted by Public Law 96-221, does the Michigan Legislature still have the authority to override this preemption?

Section 23 of the Mortgage Brokers, Lenders and Servicers Licensing Act expressly states that it is not the Legislature's intent to override the federal preemption. The question remains whether the Michigan Legislature has the authority to enact a subsequent statute overriding the federal preemption.

The Attorney General has had occasion to address the authority of a state to override this federal preemption in OAG, 1981-1982, No 5972, p 350, 353 (September 2, 1981). See also OAG, 1981-1982, No 5894, p 157, 158 (May 1, 1981). There, the Attorney General noted the continuing ability of a state to override the federal preemption as to discount points and other loan charges as provided by Sec. 501(b)(4) which states:

At any time after ... [March 31, 1980], any State may adopt a provision of law placing limitations on discount points or such other charges on any loan, mortgage, credit sale, or advance described in subsection (a)(1).

Pursuant to this section, the State may enact legislation limiting discount points or such other fees as described in 12 CFR 226.4(3), including "loan fees," "assumption fees," "finder's fees," and "similar charges."

In answer to your second question, it is my opinion that, pursuant to Sec. 501(b)(4) of the federal Depository Institutions Deregulation and Monetary Control Act of 1980, the Michigan Legislature has the authority to enact a statute to override the federal preemption of that portion of Sec. 23 of the Michigan Mortgage Brokers, Lenders and Servicers Licensing Act dealing with loan processing fees.

Frank J. Kelley

Attorney General