Does the state of Michigan require landlords to put security deposits in interest bearing financial institutions?
NO. The legislation requires the landlord to deposit it in a bank. Check out pages 7-10 of the linked document. There is no mention of interest.
The second clause, I believe, is probably for large landlords who hold hundreds of thousands of dollars of security.
Once collected, what must the landlord do with the security deposit? The landlord must either:
a) Deposit the money with a regulated financial institution (e.g., bank), OR
b) Deposit a cash bond or surety bond, to secure the entire deposit, with the Secretary of State. ( Note: If the landlord does this, he or she may use the money at any time, for any purpose.) The bond ensures that there is money available to repay the tenant’s security deposit
No. The full text of the Landlord-Tenant Act (specifically, section 554.614 of Act 348 of the year 1972) makes no mention of this. Searching the law for "interest" doesn't yield anything of interest (pardon the pun).
Specifically, section 554.604 of the same law states that:
(1) The security deposit shall be deposited in a regulated financial institution. A landlord may use the moneys so deposited for any purposes he desires if he deposits with the secretary of state a cash bond or surety bond written by a surety company licensed to do business in this state and acceptable to the attorney general to secure the entire deposits up to $50,000.00 and 25% of any amount exceeding $50,000.00. The attorney general may find a bond unacceptable based only upon reasonable criteria relating to the sufficiency of the bond, and shall notify the landlord in writing of his reasons for the unacceptability of the bond.
(2) The bond shall be for the benefit of persons making security deposits with the landlord. A person for whose benefit the bond is written or his legal representative may bring an action in the district, common pleas or municipal court where the landlord resides or does business for collection on the bond.
While it does sound like the landlord is required to deposit the money in a bank or other secured form, e.g. the Secretary of State, he/she isn't required to place it in an account that will earn interest.