IN RE: Request by Banc One Financial Services, Inc., for a declaratory ruling on whether a licensee under Act No. 21 of the Public Acts of 1939 is permitted to make a loan that is consummated through the United States Mail.

DECISION

Statement of Facts

Banc One Financial Services, Inc. (hereinafter, BOFS) is a licensee under Act No. 21 of the Public Acts of 1939, also known as the Regulatory Loan Act of 1963 (hereinafter, Act), and has one licensed office located in Dowagiac, Michigan. BOFS contemplates making loans by mail whereby it would solicit loans by mail or by other means and the loan transactions would be consummated by mail, without the borrowers physically traveling to the licensee's licensed location. The solicitation may include some or all of the following: a description of the terms and conditions under which the loan is offered, the loan application, applications for other services such as insurance permitted under the Act, and the note evidencing the loan. The borrower would complete the application, execute the note, and return them to the licensee. The loan would be subject to the licensee's customary review of the application and would be accepted or rejected based on the licensee's customary lending practices. The transaction would be completed by the licensee accepting the note and the application and returning to the borrower the appropriate disclosures required by the Act and the Truth in Lending Act, and the check for the amount of the loan. If the application is rejected, the note would be returned to the applicant, along with disclosures regarding the denial required by state or federal law.

The question posed is as follows: is BOFS permitted to make a loan that is consummated by mail.

On Friday, July 10, 1987, a letter from Mr. David K. Otis of the law firm Plunkett, Cooney, Rutt, Watters, Stanczyk, & Pedersen representing BOFS was received by Commissioner Eugene W. Kuthy. The letter requested a declaratory ruling on the above-captioned question.

Subsequently in response to a request by the Commissioner for additional information on September 9, 1987, a letter from Mr. Otis was received by the Bureau.

Statutes

The sections of law to which the above question applies are in pertinent part as follows:

1. Section 4 of the Act as amended MCL 493.4:

Sec. 4. Upon the filing of such application and the payment of such fees and the approval of such bond the commissioner shall investigate the facts and if he shall find (a) that the financial responsibility, experience, character and general fitness of the applicant and of the members thereof if the applicant is a copartnership or association and of the officers and directors thereof if the applicant is a corporation, are such as to command the confidence of the community and to warrant belief that the business will be operated lawfully, honestly, fairly and efficiently within the purposes of this act and (b) that allowing such applicant to engage in business will promote the convenience and advantage of the community in which the business of the applicant is to be conducted and (c) that the applicant has available for the operation of such business at the specified location liquid assets in the amounts specified in section 2 (the foregoing facts being conditions precedent to the issuance of a license under this act) he shall thereupon issue and deliver a license to the applicant to make loans in accordance with, the provisions of this act at the location specified in the application which license shall remain in full force and effect until it is surrendered by the licensee or revoked or suspended if the commissioner shall not so find he shall not issue such license . . . . .

2. Section 12(5) of the Act as amended. MCL 493. 12(5):

Sec. 12(5). A licensee shall not transact business or make a loan provided for by this act under any other name or at any other place to business within this state than that named in the license unless it is also an office of the licensee duly licensed under this act.

3. Section 18(3) of the Act as amended MCL 493.18(3):

Sec. 18(3).

(3) A loan of the amount or value included within the regulatory loan ceiling for which a greater rate of interest, consideration, or charges than is permitted by this act has been charged, contracted for, or received, wherever made, shall not be enforced in this state. A person who participates in such a loan in this state shall be subject to this act. However, this restriction shall not apply to loans legally made in a state or country by a licensee under an existing regulatory loan law similar in principle to this act, except that loans made by mail to Michigan residents shall be subject to this act.

Discussion of Law

A question similar to the one posed in the instant case was the subject of litigation involving the State of Michigan (People, ex rel Attorney General v. Fairfax Family Fund, Inc., 55 Mich App 305). In that case, the Attorney General brought an action in quo warranto against Fairfax Family Fund, Inc., (hereinafter, Fairfax), and Spiegel, Inc. (parent corporation of Fairfax), to enjoin the defendants, both foreign corporations, from transacting a loan by mail business with residents of Michigan without first complying with key provisions of the Act. Fairfax had been engaged exclusively in interstate commerce. The Michigan Court of Appeals held that the State of Michigan could not require Fairfax to obtain a license and to domesticate its operations by establishing one or more offices in Michigan. The State of Michigan had argued that without domestication, Fairfax would fail to meet the convenience and advantage (hereinafter, C & A) clause contained in the Act. The Court of Appeals found that the State's ability to regulate defendant's lending business did not extend to the regulation of interstate commerce, "to say nothing of limiting the use of the United States mail."

In 1969, the Financial Institutions Bureau disapproved of the loan-by-mail program of American Investment Company (AIC), a licensee under the Act. Under its program, AIC mailed unsolicited drafts to prospective borrowers who, by endorsing the draft, could cash it at a licensed office of the company. The Bureau argued that it was bad public policy to permit licensees to solicit loans by mail and that solicitation of loans by mail defeated the C & A standard set forth in Section 4 of the Act. Particularly troublesome to the Bureau was that the decision to lend the money was made by AIC before the initial solicitation (including the draft) was mailed to the prospective borrower.

In the instant case, in contrast, BOFS would mail unsolicited to a prospective borrower a loan application, the note evidencing the loan, and description of the terms and conditions under which the loan would be offered. The borrower would complete the loan application, sign the note, and return them to the licensee. The loan application would be subject to the licensee's customary review procedures and lending practices. Thus, the applicant could not gain access to the loan unless and until BOFS approved the application. As part of the approval process, BOFS would accept the note and application and return to the borrower disclosures required by law and a check for the amount of the loan. It is especially significant that, as proposed by BOFS, the decision to lend money would be made after receipt of a completed loan application and the loan proceeds would be mailed only upon approval of the application. As described, the loan-by-mail program of BOFS does not raise the same concerns that were raised by the AIC loan-by-mail program. The Bureau's concern about the public policy implications of that program was attributable to the fact that the initial mail solicitation contained an unsolicited draft and that the decision to lend was made before a review of the borrower's creditworthiness.

The instant case is also distinguishable from the Fairfax case since BOFS is a licensee under the Act domiciled in Michigan which contemplates making loans by mail to Michigan residents from its office in Michigan. BOFS argues that the Act permits the type of loan transaction contemplated because first, there is no provision in the Act that directly prohibits loans by mail; second, Section 18 of the Act permits certain loans by mail; and third, Sections 4 and 12(5) which heretofore have been informally construed to prohibit loans by mail should not be so construed.

In support of the first point, BOFS argues that the absence of an explicit ban on a loan made by mail, in the context of a pervasive regulatory scheme, evinces an intent not to prohibit such transactions. If the Legislature intended to prohibit loans by mail, BOFS believes that it would have explicitly prohibited such transactions.

Concerning the second point, BOFS states that under Section 18, loans legally made in a state or country by a licensee under a regulatory loan law similar to the Act is exempted from certain enforceability provisions of the Act, except that loans made by mail to Michigan residents are subject to the Act. BOFS argues that if a foreign lender, not subject to Michigan law or regulation, may make loans by mail to Michigan residents, it would be unreasonable to bar lenders licensed under the Act from making such loans.

Concerning the C & A standard imposed as a condition of licensure by Section 4, BOFS argues that the large decline in the number of licensees has made the community to be served by the licensee less meaningful and difficult or impossible to ascertain. It contends further that a loan by mail having its predominant contact with the licensee's place of business does not violate Section 12(5), that prohibits a licensee from making loans at any other place of business within the state than the one named in the license. Even if it were determined that a loan by mail is made at the borrower's residence, the loan is not made at "any other place of business" since the borrower's residence is not a place of business.

Conclusion

To respond to the question asked by BOFS requires a determination of whether a small loan licensee which contemplates making loans by mail to Michigan residents would meet the C & A standard of the Act. Alternatively, is making loans by mail necessarily incompatible with, or does it preclude satisfaction of, the C & A standard?

Historically, the C & A clause has had two opposing purposes. On the one hand, it has been applied to prevent destructive or ruinous competition among licensed small loan lenders. To this end, it has been argued that adherence to the C & A licensing philosophy would " . . . . . encourage the growth of the size of loan offices to attain economies of scale . . . . ." [Source: Consumer Credit in the United States, Report of the National Commission on Consumer Finance, December 1972, p.114]. Preventing destructive competition, it has been argued, would help to avoid overly aggressive lending by licensees brought on by the desire to build higher loan volumes. A lender which was aggressively marketing its loans, it was feared, could promote over-indebtedness by consumers. The Bureau traditionally has argued that the C 8 A clause would serve to prevent unrestricted licensing of small loan companies in order to avoid destructive competition. On the other hand, it also was recognized that promoting the C & A clause would improve service to the community.

Because of its past interpretation of the C & A clause, the Bureau has taken the position that a lender (whether a licensee or foreign company licensed to do business in another state) could not make small loans by mail to Michigan residents. The basis for this position was that Section 4 of the Act required that the applicant's business promote the convenience and advantage of the community in which the business was to be conducted. The Bureau argued that allowing loans by mail would break the community service concept. Loans by mail, it was argued, if practiced by all licensees could cause certain areas to become flooded by unsolicited loans by mail which, when added to the business of local companies, might cause many companies to lose their financial responsibility.

Under ordinary circumstances, to resolve the competing goals of the C & A clause would appear to require a careful balancing of the two objectives. Under the circumstances present in 1987, to meaningfully apply the C & A clause requires the Bureau to balance these objectives in the context of the existing conditions in the market for consumer credit, in general, and in the small loan segment of the consumer credit market, in particular. Certainly, there is scant evidence to indicate that competition among licensed loan companies has been or threatens to become destructive. While the number of licensees fell from 691 in 1968 to 66, as of July 22, 1987, the large decline was not due to destructive intra-industry competition. During this period, retailers, automobile dealers, community credit unions, and other depository financial institutions likely made competitive inroads into the small loan segment of the consumer credit market. It should also be pointed out that over the same period, finance companies in other states did not experience declines as drastic as those in Michigan which suggests that in Michigan, other factors may have played a role.

The Bureau believes that a licensee which contemplates making loans by mail only to persons residing in its community, however defined, would not necessarily fail to meet the C & A standard of the Act, merely because it made loans by mail. As noted above, BOFS asserts that the large decline in the number of licensees in Michigan has made the "community . . . . . less meaningful and difficult or impossible to ascertain." The Bureau agrees that the community is more difficult to determine and believes that today it makes less sense to define community as a local, geographically confined area than it did 15 years ago. At a time when the overwhelming majority of cities, villages, and townships no longer have licensed offices, it has become increasingly difficult to accept a definition of community that is locally confined. Consumers are far more mobile today and often live, work, and shop in different cities. With this increased mobility, the area which a typical licensed office can serve has grown dramatically.

In analyzing the question posed by BOFS in meeting the two objectives of the C & A clause, the Bureau believes that allowing a licensee to make loans by mail to serve a community that is larger than the traditional local area is justified. The Bureau feels that permitting BOFS to make loans by mail will not result in destructive competition. After all, the vast majority of cities, villages, and townships formerly served by one or more competing licensees no longer have any licensed lenders. As alluded to above, subsumed in the avoidance of destructive competition goal is the expansion of the number of accounts served by each licensed office. The Bureau believes that permitting BOFS to make loans by mail to consumers in an expanded community could enable it to serve areas of the state not now served by any licensed lender without resulting in destructive competition; i.e., both objectives of the C & A standard would be met.

It is important to note that, in general, lenders increasingly have come to rely heavily on the use of the mails. For example, it is common today for banks, other depository institutions, and credit card companies to mail to consumers unsolicited applications for credit cards. In some cases, lenders are offering, through the mail, home equity lines of credit. Some lenders mail unsolicited preapproved offers for credit cards with a specific line of credit and which contains an acceptance form that the consumer need only sign and return to the lender. In other cases, banks and credit card companies mail similar unsolicited preapproved offers subject to requirement that the lender verify that the consumer meets its credit underwriting standards such as minimum annual income and length of time on the job.

That the Bureau is reversing its longstanding position deserves comment. Reexamination and reconsideration are among the normal process of intelligent thinking and decision-making. Every tribunal, judicial or administrative, has power to appropriately modify its judgments, decrees, or orders. 2 Davis, Administrative Law Treatise 18.09, p. 606. Agencies, no less than courts, are entitled to reconsider and reverse their policies and views in light of further experience when rationally and fairly based. Distrigas of Massachusetts v. Federal Power Commission, 517 F 2d.761 1 , 765 (CA 1 1975 ) . In Permian Basin Area Rate Cases, 390 US 747, 784; 20 L Ed 312, 346; 88 S Ct 1344, 1369 (1968), the Court, in addressing the Federal Power Commission's orders pertaining to maximum rates for sales in interstate commerce of natural gas, asserted that ". . . administrative authorities must be permitted, consistently with the obligations of due process, to adapt rules and policies to demands of changing circumstances . . ."

The Bureau must give weight to BOFS's argument that if a foreign lender may make loans by mail to Michigan residents, then a licensee under the Act also should be permitted to make such loans. Nowhere does the Act expressly prohibit a licensee from making loans by mail. Nor does the Act expressly authorize a licensee to make loans by mail. The Bureau believes that something so fundamental as the use of the mail should be available to a licensee in the conduct of its business absent an express prohibition. It would appear that the mail is merely a medium through which a licensee can conduct its business. In this respect, use of the mail is incidental to the underlying business of making loans.

In response to the question posed by BOFS, it is concluded that a licensee may make loans by mail to residents of its community provided that the licensee complies with all applicable provisions of the Act.

Eugene W. Kuthy, Commissioner
Financial Institutions Bureau
Department of Commerce
DATE: October 23, 1987