September 29, 1986STATE OF MICHIGAN
DEPARTMENT OF COMMERCE
FINANCIAL INSTITUTIONS BUREAU
IN RE: REQUEST BY HOUSEHOLD FINANCE CORPORATION FOR A DECLARATORY RULING ON THE AUTHORITY OF LICENSEES UNDER THE SECONDARY MORTGAGE LOAN ACT, (M.S.A. .26.568(1)et seq.) TO MAKE FIXED RATE AND VARIABLE RATE REAL ESTATE SECURED REVOLVING (OPEN-END) LOANS PURSUANT TO TITLE VIII OF THE GARN-ST. GERMAIN DEPOSITORY INSTITUTIONS ACT OF 1982, ENTITLED "ALTERNATIVE MORTGAGE TRANSACTION PARITY ACT OF 1982" (12 U.S.C. Section 3801 et seq.)
Statement of Facts
Household Finance Corporation (H.F.C.) is a Delaware corporation and a wholly owned subsidiary of Household International whose principal offices are located in Prospect Heights, Illinois. H.F.C. owns and operates 33 separately licensed secondary mortgage loan offices, 27 of which are located in the State of Michigan, through Household Realty Corporation, a wholly owned subsidiary of H.F.C.
H.F.C. has requested a declaratory ruling confirming that fixed rate and variable rate real estate secured revolving (open-end) loans may be made by Household Realty Corporation, through their secondary mortgage licensees in Michigan, pursuant to the preemptive provisions of Title VIII of the Garn-St. Germain Depository Institutions Act of 1982 (hereinafter GSDIA of 1982).
On Tuesday, April 29, 1986, a letter from Mr. William J. Sparer, Counsel for Household Finance Corporation was received by Commissioner Eugene W. Kuthy of the Financial Institutions Bureau. The letter requested a declaratory ruling on the above-referenced question, and provided written documentation of federal statutes and regulations supporting their position on the matter.
The sections of law applicable to this request for declaratory ruling are as follows:
l. Section 3804 (a) of Title VIII of the GSDIA of 1982, Public Law 97-320:Sec. 3804 (a) The provisions of section 3803 of this title shall not apply to any alternative mortgage transaction in any State made on or after the effective date (if such effective date occurs on or after the effective date of this title and prior to a date three years after the effective date of this title) of a State law or a certification that the voters of such State have voted in favor of any provision, constitutional or otherwise, which states explicitly and by its terms that such State does not want the preemption provided in section 3803 of this title to apply with respect to alternative mortgage transactions (or to any class or type of alternative mortgage transaction) subject to the laws of such State, except that section 3803 of this title shall continue to apply to:
(l) any alternative mortgage transaction undertaken on or after such date pursuant to an agreement to undertake such alternative mortgage transaction which was entered into on or after the effective date of this title and prior to such later date (the "preemption period"); and
(2) any renewal, extension, refinancing, or other modification of alternative mortgage transaction that was entered into during the preemption period.
2. Section 3803 (a) of Title VIII of the GSDIA of 1982, Public Law 97-320:Sec. 3803 (a) In order to prevent discrimination against State-chartered depository institutions, and other non-federally chartered housing creditors, with respect to making, purchasing, and enforcing alternative mortgage transactions, housing creditors may make, purchase, and enforce alternative mortgage transactions, except that this section shall apply:
(l) with respect to banks, only to transactions made in accordance with regulations governing alternative mortgage transactions as issued by the Comptroller of the Currency for national banks, to the extent that such regulations are authorized with regard to national banks under laws other than this section;
(2) with respect to credit unions, only to transactions made in accordance with regulations governing alternative mortgage transactions as issued by the National Credit Union Administration Board for Federal credit unions, to the extent that such regulations are authorized by rulemaking authority granted to the National Credit Union Administration with regard to Federal credit unions under laws other than this section; and
(3) with respect to all other housing creditors, including without limitations, savings and loan associations, mutual savings banks, and savings banks, only to transactions made in accordance with regulations governing alternative mortgage transactions as issued by the Federal Home Loan Bank Board for federally chartered savings and loan associations, to the extent that such regulations are authorized by rulemaking authority granted to the Federal Home Loan Bank Board with regard to federally chartered savings and loan associations under laws other than this section.
3. Section 3802 of Title VIII of the GSDIA of 1982, Public Law 97-320:Sec. 3802 As used in this title:
(1) the term "alternative mortgage transaction" means a loan or credit sale secured by an interest in residential real property, a dwelling, all stock allocated to a dwelling unit in a residential cooperative housing corporation, or a residential manufactured home (as that term is defined in section 5402(6) of Title 42):(A) in which the interest rate or finance charge may be adjusted or renegotiated;
(B) involving a fixed-rate, but which implicitly permits rate adjustments by having the debt mature at the end of an interval shorter than the term of the amortization schedule; or
(C) involving any similar type of rate, method of determining return, term, repayment, or other variation not common to traditional fixed-rate, fixed-term transactions, including without limitation, transactions that involve the sharing of equity or appreciation; described and defined by applicable regulation; and
(2) the term "housing creditor" means:(A) a depository institution, as defined in section 501 (a)(2) of the Depository Institutions Deregulation and Monetary Control Act of 1980;
(B) a lender approved by the Secretary of Housing and Urban Development for participation in any mortgage insurance program under the National Housing Act;
(C) any person who regularly makes loans, credit sales, or advances secured by interests in properties referred to in paragraph (1); or
(D) any transferee of any of them.
A person is not a "housing creditor" with respect to a specific alternative mortgage transaction if, except for this title, in order to enter into that transaction, the person would be required to comply with licensing requirements imposed under State law, unless such person is licensed under applicable State law and such person remains, or becomes, subject to the applicable regulatory requirements and enforcement mechanisms provided by State law.
Discussion of Law
The question asked by H.F.C. is whether federal law governing alternative mortgage transactions (Title VIII of GSDIA of 1982, entitled Alternative Mortgage Transaction Parity Act of 1982) allows licensees under the Michigan Secondary Mortgage Act (M.S.A. 26.568(1) et seq.) to make fixed rate and variable rate real estate secured revolving (open-end) loans. Title VIII of GSDIA of 1982, and applicable federal regulations issued thereunder, does preempt certain provisions of the Michigan Secondary Mortgage Act. This preemption applies only to "alternative mortgage transactions" made by a "housing creditor" as defined by the Alternative Mortgage Transactions Parity Act of 1982.
Section 3801 (b) of Title VIII of GSDIA of 1982 clearly establishes the intent of Congress to specifically preempt state laws.
Sec. 3801 (b) It is the purpose of this title to eliminate the discriminatory impact that those regulations have upon non-federally chartered housing creditors and provide them with parity with federally chartered institutions by authorizing all housing creditors to make, purchase, and enforce alternative mortgage transactions so long as the transactions are in conformity with the regulations issued by the Federal agencies.
The intent of Congress was to grant "all housing creditors", including state chartered and licensed institutions, the authority to make alternative mortgage transactions in parity with federally chartered institutions.
Section 3804 (a) of GSDIA of 1982 establishes the applicability of the federal preemption. This section provides for a three-year period in which a state, by State law or vote, may decide not to allow the provisions of Title VIII of GSDIA of 1982 to take permanent effect. Since no action was taken by the Michigan Legislature or by the voters of the state prior to the expiration of this "opt-out" period on October 15, 1985, the provisions of the federal preemption now apply to mortgage transactions made by qualifying lenders in Michigan.
Given the intent and applicability of the federal preemption to state law, one must now look to the qualifications of H.F.C. as a "housing creditor," as defined by Title VIII of GSDIA of 1982.
Section 3802 of Title VIII includes within the definition of housing creditor, "any person who regularly makes loans, credit sales, or advances secured by interests in [...residential real property, a dwelling, all stock allocated to a dwelling unit in a residential cooperative housing corporation, or a residential manufactured home...]"
Further, any housing creditor under this definition would not qualify with respect to a specific alternative mortgage transaction if, except for the federal preemption, in order to enter into that transaction, the person would be required to comply with licensing requirements Imposed under State law, unless such person is licensed under applicable State law and such person remains, or becomes, subject to applicable regulatory requirements and enforcement mechanisms provided by State law.
H.F.C. has maintained a number of offices licensed under the authority of the Secondary Mortgage Act. As licensed lenders, these offices qualify under section 3802 (2)(c) of Title VIII of the GSDIA of 1982 as "housing creditors".
The final question is whether fixed rate and variable rate real estate secured revolving (open-end) loans, as proposed by H.F.C., qualify as "alternative mortgage transactions" under Title VIII of the GSDIA of 1982. Section 3802 of the GSDIA of 1982 defines alternative mortgage transaction and clearly authorizes both fixed-rate and variable-rate real estate secured loans involving alternative repayment schemes as authorized by the applicable federal regulation. For housing creditors other than a bank or credit union, the applicable federal regulations are those issued by the Federal Home Loan Bank Board for federally chartered savings and loan associations.
Section 545.32 (b)(4) of those regulations, which defines the types of real estate loans in which a federal association or housing creditor may participate, allows real estate loans which "may be fully amortized, partially amortized, nonamortized, or a line-of-credit loan, and the loan contract may provide for the deferral and capitalization of a portion of the interest." (emphasis added)
Based upon the foregoing discussion, it is concluded that Household Finance Corporation may, through its licensed secondary mortgage loan subsidiary Household Realty Corporation, offer and provide fixed rate and variable rate real estate secured revolving second mortgage loans, pursuant to the authority and regulations of Title VIII of the Garn-St. Germain Depository Institutions Act of 1982, entitled "Alternative Mortgage Transaction Parity Act of 1982" (12 U.S.C. Section 3801 et seq.) To the extent that Household Realty Corporation intends to make such loans in Michigan, it must comply with federal savings and loan association regulations (12 C.F.R. 545.32 (b)(3) and (4) and 545.33(c), (3) and (e) (4)-(11)) issued by the Federal Home Loan Bank Board.
It should be noted in regards to the instant case that the provisions of the Michigan Secondary Mortgage Loan Act (M.S.A. 26.568(1) et seq.) not specifically preempted by the federal law will remain in effect.
These provisions will include, though not be limited to, the following:
(1) Section 1(d) which by definition of a "secondary mortgage loan" requires that the loan amount must be at least $3,000.00 or more.
(2) Section 21 which limits the interest charge to 18% per year, computed on the basis of the actual unpaid balance of the principal of the loan on a daily or monthly basis for the time actually outstanding until the loan is paid in full.
(3) Section 22 which limits the types of charges and fees which may be assessed in conjunction with the making of a secondary mortgage loan. These limitations include a restriction on the amount charged as a loan processing fee of not more than 2% of the gross amount of the loan, but not more than $200.00.
It should also be noted that this ruling should not be interpreted as approving the specific provisions of the proposed General Revolving Lending policies and procedures as submitted in conjunction with the request for declaratory ruling dated April 29, 1986.
Eugene Kuthy, Commissioner
Financial Institutions Bureau
Department of Commerce
September 29, 1986