In Mortgage Bulletin 1998-1 dated November 16, 1998, the Financial Institutions Bureau of the Michigan Department of Consumer & Industry Services (the "FIB") stated its position with respect to whether federal law preempted MCLA §438.31c(2)(c). That statute, which by its terms does not apply to loans guaranteed or insured by federal agencies or to loans secured by properties with dwelling units intended for occupancy by two or more families, allows a lender to charge a prepayment penalty of up to one (1) percent of the amount of any prepayment made within three years of the date of the loan. No penalty may be charged thereafter.
The Bulletin discusses two possible bases of federal preemption: Section 501(a)(1) of DIDMCA and the Alternative Mortgage Transactions Parity Act of 1982. It concludes that DIDMCA does not preempt the Michigan prepayment statute, but the Parity Act does so preempt. Consequently, a lender could deviate from the Michigan statute in charging a prepayment penalty as long as both the lender and the mortgage loan otherwise fall within the ambit of and comply with the Parity Act. Stated broadly the Parity Act provided authority for "housing creditors" other than banks or thrifts to make variable rate and balloon mortgage loans. In order for alternative mortgage loans to be eligible for the benefits of the Parity Act, mortgage bankers must comply with the OTS regulations on late charges; prepayments; adjustments to the interest rate, payment, balance, or term to maturity; and disclosures.
In Mortgage Bulletin 1998-2, the FIB addressed the issue of the legality of "rights of first refusal" that certain lenders have been using in Michigan. They generally take the form of an addendum recorded with the mortgage pursuant to which the borrower "agrees" that if the borrower seeks to refinance its loan, the lender will be given the right to provide the refinancing of the loan. In some cases no additional consideration is given by the lender and in other cases, money is paid by the lender to the borrower in consideration for the granting of the right of first refusal. Borrowers later seeking to refinance with a different lender would find out when a payoff was ordered that the original lender had such a right of first refusal. Some title companies have insured the new lender notwithstanding the existence of the right of first refusal on the grounds that such right is unenforceable.
Our Firm has previously advised clients who had sought our advice on this matter that in our view, there was great risk in using such a provision. The FIB has recently confirmed our advice and stated that such a provision violates Section 22(l) of the Michigan Mortgage Brokers, Lenders and Servicers Licensing Act in that such provision requires the consumer to deal exclusively with the lender. The FIB also stated that this arrangement violates the Michigan Consumer Protection Act. If you encounter a refinancing customer who has such a 'right of first refusal' problem with its prior lender, you should be able to close your loan. If you encounter a problem in this regard, please let us know and we can assist you. The FIB indicated in the Bulletin that agreements which require that consumers inform the lender of the consumer's decision to seek additional financing would be permissible, provided that the agreement does not require the borrower to deal exclusively with the lender and no other laws would be violated. If you would like to discuss this aspect further, please give us a call.
While the FIB Bulletins are given weight by the courts, they are not binding on them. Mortgage lenders should consult with legal counsel before either imposing prepayment penalties on Michigan borrowers or dealing with issues on the right of first refusal.