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Bulletin 1986-1



SUBJECT: Open-End Second Mortgage Loans

Title VIII of the Garn-St. Germain Act entitled the "Alternative Mortgage Transactions Parity Act of 1982" (12 USCA Sect. 3801 et seq.) permits certain creditors to make alternative mortgage loans, including real estate secured, open-end loans with fixed or variable rates notwithstanding the provisions of the Secondary Mortgage Act, Act No. 125, Public Acts of 1981. Title VIII does not, however, preempt the Secondary Mortgage Act in its entirety. Licensing requirements, provisions on minimum loan size, rate restrictions and loan processing fee limitations among other provisions, are not preempted.

Several issues and concerns have been raised as to the applicability of the federal preemption. The purpose of this correspondence is to clarify the Bureau's position in regard to the application of a number of the provisions of the Secondary Mortgage Act as they relate to real estate secured, open-end loans made under the authority of the federal preemption. These interpretations are meant to provide information to those secondary mortgage licensees who may be anticipating offering second mortgage line of credit loans in the future.

State Licensing Requirements

In order to qualify as a housing creditor as indicated by section 3802(2) of the Garn-St. Germain Act, a person must first be licensed by the state's Financial Institutions Bureau as a second mortgage licensee in order to offer a second mortgage revolving loan under the federal preemption, unless it is exempt from the Secondary Mortgage Act by its provisions. Currently the only entities that are specifically exempted from the Secondary Mortgage Act are state or national banks, state or federal savings and loan associations, insurance companies or other financial institutions subject to another law of this state or of the United States regulating the power of the financial institution to engage in secondary mortgage loan transactions.

Minimum Loan Amount

By definition in the Secondary Mortgage Act, a "secondary mortgage loan means a loan of $3,000 or more..." Because the minimum loan size is not specifically preempted by the Garn-St. Germain Act, this restriction still applies to alternative mortgage loans made pursuant to the authority of the Secondary Mortgage Act. In cases where a line of credit or open-end loan is being established, the $3,000 minimum loan amount applies to the initial draw on the line of credit loan. Subsequent draws upon a previously established line of credit will not be subject to the minimum loan amount requirement.

Interest Rate Restriction

Section 21 of the Secondary Mortgage Act limits the interest charged on a second mortgage loan 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. Alternative mortgage loans made pursuant to Title VIII of the Garn-St. Germain Act by secondary mortgage licensees will be subject to this rate restriction.

Loan Processing Fee

Section 22(1)(e) of the Secondary Mortgage Act authorizes a loan processing fee which is nonrefundable of not more than 2% of the gross amount of the loan but, not more than $200.00. Application of this limit to line of credit loans limits the assessment of the fee to the first $10,000.00 in draws on a line of credit, regardless of the number of draws involved, up to the $200.00 maximum fee. For example, a lender may charge a $60.00 loan processing fee on an initial draw of $3,000, an additional fee of $100.00 on a subsequent draw of $5,000.00 and additional fees at 2% of the draw until such time as the total loan processing fees equal $200.00.

Further questions regarding specific applications of the provisions of the Secondary Mortgage Act involving alternative mortgage transactions should be directed to the Consumer Finance Division of the Financial Institutions Bureau at (517) 373-3470.

Eugene W. Kuthy, Commissioner
John W. Drury, Consumer Finance Division