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June 26, 1986
IN-RE: REQUEST BY FIRST UNION MORTGAGE CORPORATION FOR A DECLARATORY RULING ON WHETHER SECTIONS 802-804 OF THE GARN-ST. GERMAIN DEPOSITORY INSTITUTIONS ACT OF 1982 (HEREINAFTER, GSDIA OF 1982) PREEMPTS STATE LAW RESTRICTIONS ON ALTERNATIVE MORTGAGE TRANSACTIONS MADE BY NON-FEDERALLY CHARTERED HOUSING CREDITORS CONTAINED IN SECTION 23 (1)(C) OF THE SECONDARY MORTGAGE ACT.
Statement of Facts
First Union Mortgage Corporation (FUMC) is a North Carolina Corporation and a wholly owned subsidiary of First Union National Bank, located in Charlotte, North Carolina (FUNB). FUMC is considering applying for a license under the Secondary Mortgage Act. As a licensee, FUMC would be engaged primarily in the business of making non-purchase money adjustable rate second mortgage loans that neither finance the purchase of a home nor refinance a portion of a prior purchase money obligation.
The question which FUMC asks can be stated as follows:
Is the application of Section 23 (1)(c) of the Secondary Mortgage Act to non-purchase money adjustable rate second mortgage loans which FUMC plans to make preempted by GSDIA of 1982 and the relevant regulations issued thereunder?
On March 12, 1986, a letter from Mr. Lloyd C. Fell of the law firm Simpson & Moran representing FUMC was received by Commissioner Eugene W. Kuthy. The letter requested a declaratory ruling on the above-captioned question.
The sections of law to which the above question applies are as follows:
1. Section 23(1) of the Secondary Mortgage Act, as amended, MCLA 493.73(1):
Sec. 23 (1) An instrument evidencing or securing a secondary mortgage loan shall not contain any of the following:(a) A power of attorney to confess judgment.
(b) A provision by which the debtor waives rights accruing under this act, any federal law, or law of this state.
(c) Except for instruments permitted by subsection (2), a requirement that an installment be substantially greater than a preceding installment.
(d) An assignment of or order for the payment of salary, wages, commissions, or other compensation for services, or any part thereof, earned or to be earned.
(e) Shall not compel, encourage or induce a borrower to incorporate to evade the provisions of this act.
(f) A provision by which a debtor agrees to pay damages absent a judgment by a court.
2. Section 804 (a) of the GSDIA of 1982, Pub. L. 97-320:
Sec. 804 (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:(1) 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 by rulemaking authority granted to the Comptroller of the Currency 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 limitation, 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.
(b) For the purpose of determining the applicability of this section, an alternative mortgage transaction shall be deemed to be made in accordance with the applicable regulation notwithstanding the housing creditor's failure to comply with the regulation, if:(1) the transaction is in substantial compliance with the regulation; and
(2) within sixty days of discovering any error, the housing creditor corrects such error, including making appropriate adjustments, if any, to the account.
(c) An alternative mortgage transaction may be made by a housing creditor in accordance with this section, notwithstanding any State constitution, law, or regulation.
Discussion of Law
The question asked by FUMC is whether federal law governing alternative mortgage transactions (in GSDIA of 1982 and applicable regulations issued thereunder) preempts provisions of state law, e.g., Section 23 (1)(c), which might be interpreted to prohibit the use of a variable rate on a secondary mortgage loan. FUMC argues that Sections 802-804 of the GSDIA of 1982 and applicable regulations preempt provisions of Michigan law which might be interpreted to prohibit or otherwise restrict the use of variable rates on second mortgage loans.
It should be noted that the position of the Bureau has been that Section 23 (1)(c) would prohibit a change in rate that contractually could give rise to a substantial increase in payment. In effect, under the Secondary Mortgage Act, a lender could not legally make a variable rate second mortgage loan if it resulted in an installment being "substantially greater than a preceding installment." The Bureau believes that the legislative intent clearly was to prevent a substantial increase in payments. The attempt of the Legislature to prohibit substantial increases in payments could easily be thwarted were variable rate second mortgage loans to be permitted.
The Bureau believes that the GSDIA of 1982 and relevant regulations issued thereunder preempt restrictions against rate variability which are contained in the Secondary Mortgage Act. Section 802 (b) Title VIII of the GSDIA of 1982, entitled the "Alternative Mortgage Transaction Parity Act of 1982" clearly stated the intent of Congress to preempt state laws.
(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.
It appears that the intent of Congress was to give "all other housing creditors" including state- chartered banks, savings and loan associations, mutual savings banks, credit unions, and other lenders licensed under applicable state laws, parity with federally chartered institutions. Section 804 (a)(3) of the GSDIA of 1982 (quoted above) is clear that an "other housing creditor" making an alternative mortgage transaction must comply with "...regulations governing alternative mortgage transactions as issued by the Federal Home Loan Bank Board for federally chartered savings and loan associations..."
The Federal Home Loan Bank Board has issued regulations governing alternative mortgage transactions made by the above-named "other housing creditors." The Appendix to 12 C.F.R. 545.32 (b)(3) and (4), and 12 C.F.R. 545.33 (c), (e), and (f)(4)-(11), of regulations issued by the Federal Home Loan Bank Board states as follows:
"Pursuant to Title VIII, Pub. L. 97-320, housing creditors that are not commercial banks, credit unions, or Federal associations may make alternative mortgage transactions (as defined by Section 803 of Pub. L. 97-320 and as further defined and described by applicable regulations identified herein) notwithstanding any state constitution, law or regulation."
FUMC states that one preemption of state restrictions on adjustable rate mortgages under Section 804 (a)(1) of the GSDIA of 1982 and the Comptroller's regulations is not applicable to non-purchase money adjustable rate second mortgage loans. FUMC argues, however, that it is an "other housing creditor" authorized by Section 804 (a)(3) of the GSDIA of 1982 to make alternative mortgage transactions in accordance with regulations issued by the Federal Home Loan Bank Board. These regulations have general applicability, i.e., they apply to any mortgage loan made by a housing creditor. Thus, for example, 12 C.F.R. 545.32 (b)(3), authorizes adjustments in the interest rate, payment, balance, or term to maturity on any real estate loan. The regulations preempting state law are not confined to purchase money mortgages.
Based on the foregoing, it is concluded that FUMC may make non-purchase money adjustable rate second mortgage loans in reliance on the federal preemption contained in the GSDIA of 1982 and the regulations applicable to housing creditors other than banks and credit unions. To the extent that FUMC intends to make such mortgages, it must comply with 12 C.F.R. 545.32 (b)(3) and (4) and 545.33 (c), (e), and (f)(4)-(11) of the regulations issued by the Federal Home Loan Bank Board.
It must be added that in order for FUMC to make adjustable rate second mortgage loans in reliance on the above-described federal preemption, it first must obtain a license under the Secondary Mortgage Act. This conclusion is based on the definition of "housing creditor" contained in Section 803 (2) of the GSDIA of 1982 which states as follows:
(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.
Finally, in response to FUMC's contention that "FUMC may be entitled to preemption under Garn and Section 34.2 (a)(2) of the Comptroller's regulation," the Bureau is convinced that a mortgage company may not avail itself of the preemptive authority contained in regulations issued by the Comptroller of the Currency. Only national banks and state-chartered banks may rely on the authority contained in the regulations issued by the Comptroller to make alternative mortgage transactions. Thus, even though FUMC is a subsidiary of FUNB, a national bank, its authority to make alternative mortgage transactions, as a nonbank institution, comes from the applicable regulations issued by the Federal Home Loan Bank Board.
It should be added that even though FUMC is a wholly owned subsidiary of FUNB, for purposes of Michigan law, FUMC is not a branch office of FUNB. If FUMC were operating as a branch office of FUNB, it would be in violation of the prohibition on interstate branching contained in the McFadden Act. Further, if subsequent to licensure, FUMC were deemed to be a bank, it would be ineligible to continue as a licensee under the Secondary Mortgage Act since Section 2 provides that a "person" shall not make or negotiate a secondary mortgage loan in the regular course of business unless the person is licensed under the act. "Person" is defined in Section 1(c) to exclude a state or national bank.
Eugene W. Kuthy, Commissioner
Financial Institutions Bureau
Department of Commerce
June 26, 1986