| 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
NONFEDERALLY 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
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
The sections of law to which the above question applies are as follows:
1. Section 23(1) of the Secondary Mortgage Act, as amended,
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.
2. Section 804 (a) of the GSDIA of 1982, Pub. L. 97-320:
(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
(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.
Sec. 804 (a) In order to prevent discrimination against state-chartered
depository institutions, and other nonfederally 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
(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:
(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:
(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.
(1) the transaction is in substantial compliance with
the regulation; and
(c) An alternative mortgage transaction may be made by a housing creditor
in accordance with this section, notwithstanding any State constitution,
law, or regulation.
(2) within sixty days of discovering any error, the housing
creditor corrects such error, including making appropriate adjustments,
if any, to the account.
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
(b) It is the purpose of this title to eliminate the discriminatory
impact that those regulations have upon nonfederally 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
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 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.
(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);
(D) any transferee of any of them.
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