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January 13, 1983
|STATE OF MICHIGAN
DEPARTMENT OF COMMERCE
FINANCIAL INSTITUTIONS BUREAU
IN RE: REQUEST BY HOUSEHOLD FINANCE CORPORATION FOR A DECLARATORY RULING ON THE INTERPRETATION OF SEC. 21 OF ACT NO. 125 OF THE PUBLIC ACTS OF 1981 AS AMENDED BY 1982 PA 361.
Statement of Facts
Senate Bill 839 received legislative action in November and December of 1982. The bill, as initially drafted, amended section 21 of Act No. 125 of the Public Acts of 1981 (the Secondary Mortgage Act) MCLA 493.71 to increase the interest ceiling on loans from 15% per annum to 21% per annum. At a hearing of the Senate Corporations and Economic Development Committee on November 23, 1982, the bill was amended to provide for an 18% per annum ceiling until December 31, 1983 after which the ceiling would revert to 15% per annum. The bill, as amended, passed the Senate and House of Representatives with immediate effect and was subsequently signed by the Governor on December 23, 1982.
Since enactment of the legislation there has been keen interest on the part of lenders to make secondary mortgage loans and obtain secondary mortgage licenses. Since the passage of the Secondary Mortgage Act on July 23, 1981 very few licenses had been issued and virtually no loans had been made under the new act because lenders could not profitably make loans at the maximum allowable rate of 15% per annum. Along with the increased interest in new licenses, questions have been raised about the language of 1982 PA 361 as to the intent of the Legislature. MCLA 493.71, as amended by Public Act 361, reads in pertinent part as follows:
"A licensee may contract for and receive a finance charge including interest, not exceeding a rate of 18% per year until December 31, 1983, and 15% thereafter computed by the actuarial method, and shall make disclosures as required by the consumer credit protection act, Public Law 90-321, 82 Stat. 146, and the regulations promulgated under that act."Specifically, the questions raised by lenders was the intent of the Legislature as to the effect of the December 31, 1983 expiration date. Did the Legislature intend that contracts negotiated after the effective date of 1982 PA 361 and on or before December 31, 1983 could be at the maximum rate of 18% per annum for the duration of the contract; or alternatively, did the Legislature intend that contracts negotiated after the effective date of 1982 PA 361 could only provide for a maximum rate of 18% per annum until December 31, 1983 with a 15% maximum thereafter? The language of 1982 PA 361 is equivocal on this question.
On Tuesday, January 4, 1983, a letter from Mr. Christian T. Jones of Household Finance Corporation (HFC) was received by Mr. Russell S. Kropschot, Chief Deputy Commissioner requesting a declaratory ruling on the Bureau's interpretation of 1982 PA 361. The request was made pursuant to section 63 of 1969 PA 306 as amended (the Administrative Procedures Act) MCLA 24.263. The letter requested a Financial Institutions Bureau ruling on whether 1982 PA 361, MCLA 493.71 would permit a lender to enter into a contract for a secondary mortgage loan on or before December 31, 1983 which provides for a rate of 18% per annum on the unpaid balance, and charge such a rate during the entire term of the loan.
HFC argues that:
At issue in this request for a declaratory ruling is section 21 of Act 125 of the Public Acts of 1981 as amended by Act 361 of the Public Acts of 1982, MCLA 493.71. Section 21 reads as follows:
"A licensee may contract for and receive a finance charge, including interest, not exceeding a rate of 18% per year until December 31, 1983, and 15% thereafter computed by the actuarial method, and shall make disclosures as required by the consumer credit protection act, Public Law 90-321, 82 Stat. 146 and the regulations promulgated under that act. Interest on a secondary mortgage loan under this act shall not be added or deducted in advance but shall be computed on the basis of actual or scheduled unpaid balances of the amount financed on a daily or monthly basis for the time actually outstanding until the contract is paid in full."Discussion of Law
The Bureau does not dispute the fact that the language of MCLA 493. 71, as amended, is equivocal as it relates to the application of the expiration date. When statutory language is equivocal, the appropriate approach is to look to Legislative intent in an effort to interpret the language. Since 1969, the Michigan Legislature has adopted a procedure for periodic review of mortgage and land contract interest rate ceilings. This procedure entailed the passage of legislation setting interest ceilings with an expiration date in order to bring the matter before the Legislature for periodic review based on the then existing economic conditions. Legislation of this type is commonly known as "sunset" legislation. Since April 1980, the Legislature has adopted a similar procedure for periodic review of interest ceilings on auto loans. New ceilings were established with a one year expiration date in April 1980 with the enactment of Acts No. 79, 80, 81, and 82 of the Public Acts of 1980. The rates provided in these acts were subsequently reinstated after Legislative review with the enactment of Public Acts 54, 55 and 56 in 1981 and again in 1982 with the enactment of Public Acts 319, 320, and 321.
The "sunset" legislation for mortgages, land contracts, and auto loans discussed above all stipulated that contracts entered into after the effective date of the legislation, but on or before the expiration date; could provide for the higher rate of interest for the duration of the contract. Even though the language of 1982 PA 361 is equivocal, the Bureau believes that the Legislature intended to provide for periodic review of the 18% secondary mortgage ceiling in the same manner as it has provided for periodic review of ceilings on mortgages, land contracts, and auto loans. A review of the official analyses of the Senate supports this view. The analysis of Senate Bill 839 dated December 6, 1982 prepared by the Senate Analysis Section (SAS) states:
"The bill would amend Public Act 125 of 1981 to increase to 18% the maximum interest rate which lenders licensed under the act are allowed to charge on secondary mortgage loans. The new rate ceiling would be effective until December 31, 1983 at which time it would revert to the current maximum rate of 15%." (emphasis added)The use of the term "revert" connotes a provision returning to a former condition after the passage of time. It does not suggest a contractual requirement that an interest rate initially effective be reduced to a lower level after a certain date. A review of the analysis for Senate Bills 989, 990, and 991 by the SAS completed November 23, 1982 reveals language similar to the language cited above. Those bills extended the interest ceiling on auto loans until December 1, 1983. This analysis also states that the new ceilings would "revert" to their original levels after the sunset date. The language of Senate Bills 989, 990, and 991 which later became Acts No. 320, 321, and 319 is unequivocal as to its intent. The fact that the SAS used language in the analysis of these bills substantially similar to language used in the analysis of Senate Bill 839 strongly suggests that the Legislature intended to adopt the same "sunset" procedure for second mortgages as it had adopted for auto loans two weeks earlier.
Deputy Commissioner Murray Brown of this office, who was in attendance at the hearing at which the amendment to Senate Bill 839 was adopted, specifically recalls discussions on the intent of the amendment. He recalls that at the November 23, 1982 hearing, there was some discussion about whether the provision should expire after six months or after one year. It was felt by the Committee that six months might not give the Legislature enough time to review the impact of the new ceiling and to extend or modify it. It was felt by Committee members that a one year period would provide more time for appropriate legislative review. Additionally, Mr. Brown listened to a tape recording provided by the Clerk of the House on the proceedings of the House of Representatives on December 14, 1982, the date Senate Bill 839 passed the House. Representative William Keith, Chairman of the Corporations and Finance Committee, in explaining the bill to his colleagues stated:
"It's for one year incidentally, it expires in one year, and if we feel there are extensive abuses or anything brought to our attention that we feel we should not continue it, it sunsets at the end of one year."The discussions on the bill in both the Senate and the House reveal a clear Legislative intent to establish a "sunset" review procedure rather than to require contracts with downward variability.
If one argues that the Legislative intent was to require that contracts with interest up to 18% per annum be reduced to 15% after December 31, 1983, it would defeat the benefits of increases in the interest ceiling and periodic review thereof. In enacting 1982 PA 361 the Legislature hoped to encourage the making of second mortgage loans by allowing lenders to charge a rate higher than 15% per annum. Only a few loans had been made under the 15% ceiling, because the high cost of funds and high market interest rates made such loans unprofitable for lenders. To require lenders to write contracts with an 18% initial rate and a 15% rate after December 31, 1983, would defeat the purpose of the legislation as there would be no inducement for lenders to make additional second mortgage loans. If the Legislature extended beyond December 31, 1983 the applicability of the 18% ceiling, it is doubtful that such legislative action would permit lenders, on contracts providing for downward variability, to continue charging 18% after December 31, 1983. Such retroactive application of legislation would raise serious constitutional questions.
For the reasons set forth above, it is the position of this Bureau that 1982 PA 361 permits a licensee under the Secondary Mortgage Act (1981 PA 125 as amended) to impose a finance charge up to 18% per annum for the full term to maturity on contracts entered into on or before December 31, 1983. On contracts entered into after that date the maximum allowable charge would be 15% per annum for the duration of the contract.
Russell S. Kropschot, Chief Deputy Commissioner