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Bulletin No. 2005-16-INS


In the matter of net lease and
purchase agreements and eligible
person standards for home insurance
under MCL 500.2103

Issued and entered
this 14th day of July 2005
by Linda A. Watters


The principles of Islam and certain other faiths forbid the receipt and payment of interest in connection with loans. To accommodate this prohibition, and yet make the purchase of homes possible, some lenders have developed net lease home finance products, commonly referred to as Islamic mortgages.

In these arrangements, the homebuyer is referred to as a lessee. The lessee contracts to buy a family residence and tenders a down payment. The lender funds the remainder of the purchase price. The lender and the lessee enter into a net lease and purchase agreement.

The lender, or a trust formed by the lender, has "legal title" to the property. Monthly lease payments cover principle, interest, insurance, and property taxes. By the end of the lease term, the lessee will amortize the entire principal.

The lessee has occupancy rights in the property for a specified term. Upon fulfilling the terms of the agreements, including the delivery by the lender to the lessee of a properly executed deed, the lessee becomes the legal owner of the property. By prepaying the remainder, the lessee may acquire title and is entitled to profits from any immediate resale. In the event of lessee default, the lessee is given procedural rights like those under a conventional mortgage. Collectively, these and other rights under the agreements confer "equitable ownership" upon the lessee.

Islamic mortgages were the subject of Interpretive Letter #806, issued by the Comptroller of the Currency December 1997. In this letter, which is amply supported by court precedent, the OCC focuses upon substance rather than form. In concluding that national banks were authorized to enter into these mortgages, the OCC expressly rejected the significance of "legal title" as follows [at 11], "… But such a narrow view of the statute would elevate form over substance because, in this case, having legal title is largely cosmetic and the actual indicia of ownership are borne by the Lessee."
While there appears to be no direct, binding Michigan court precedent exactly on point, several authoritative sources and precedent on related issues, such as land contracts, support the recognition of equitable ownership with respect to Islamic mortgages. These sources include Restatement of Property/Mortgages 3d, Reporters Comment b(3), Reid v Dowd, 257 Mich 492 (1932), and London v Gregory, 2001 WL 726940 (Mich App Feb. 23, 2001).

Subject to underwriting rules authorized by MCL 500.2117, insurers are required to sell home insurance to eligible persons as defined in MCL 500.2103(2):

"Eligible person", for home insurance, means a person who is the owner-occupant or tenant of a dwelling of any of the following types: a house, a condominium unit, a cooperative unit, a room, or an apartment; or a person who is the owner-occupant of a multiple unit dwelling of not more than 4 residential units….

In light of the discussion above, the Commissioner interprets "owner-occupant" to include persons purchasing homes through net lease and purchase agreements. These persons are, therefore, eligible to purchase home insurance.

Insurers writing this coverage will need to review their forms and practices to ensure that the interests of the lenders and purchasers/equitable owners/lessees are protected in the Islamic mortgage context to the same extent that mortgagors and mortgagees are protected in the conventional mortgage context.

Any questions regarding this bulletin should be directed to:

Office of Financial and Insurance Services
Product Review Unit
611 West Ottawa
P.O. Box 30220
Lansing, MI 48909-7720
Phone: (517) 373-4948
Toll Free: (877) 999-6442


Linda A. Watters
Commissioner of Financial and Insurance Services