August 27, 2001
Re: Murabaha Financing Facility/Islamic Home Finance Product
Dear [ ]:
Your letter dated August 6, 2001 addressed to Deputy Superintendent and Counsel Kelsey has been referred to me for reply. In your letter you inquire as to whether [ ] ("Mortgage Corporation"), the wholly-owned mortgage lending subsidiary of [ ] ("Bank"), a New York State-chartered commercial bank, may engage in Murabaha home financing transactions. The New York State Banking Department ("NYSBD") has previously authorized Bank to offer a "net lease" home finance product which was designed to meet the needs of Islamic customers, who, for religious reasons, cannot borrow money if the lender charges interest. Murabaha financing is designed to meet the needs of these same customers.
You have not provided the NYSBD with the particulars of how Mortgage Corporation will structure Murabaha financings. Thus, for purposes of our analysis I am assuming that Mortgage Corporation will structure such financings in the same manner as the Murabaha real estate financing transaction described in Interpretive Letter No. 867 which was issued by the Comptroller of the Currency ("OCC") dated November 1999 ("Interpretive Letter").
Following the procedure described in the Interpretive Letter, the customer of Mortgage Corporation will identify the property, negotiate the purchase price with the seller, then apply to Mortgage Corporation for financing. Mortgage Corporation will then enter into a purchase agreement with the seller of the property and a Murabaha Agreement with the customer. The customer will make a downpayment of not less than twenty- five percent of the purchase price. Mortgage Corporation, after acquiring ownership of the residential property its customer wishes to purchase will immediately resell it to the customer at the original purchase price plus the bank's cost and a "profit amount" which reflects the cost of financing the sale. Pursuant to the terms of a deferred sales contract, the customer will confirm that Mortgage Corporation makes no warranties or representations to the customer and both parties agree that no other warranties are available.
Mortgage Corporation (and thus Bank) will be protected since the balance due under the Murabaha Agreement will be secured by a first mortgage (or deed of trust) in favor of Mortgage Corporation subject to the requirement that the property be fully insured jointly in the name of Mortgage Corporation and the customer until all sums due under the Murabaha contract are repaid in full. If the customer defaults on the payment schedule in the Murabaha Agreement, Mortgage Corporation will have the right to foreclose on the real estate under its mortgage as it would under any other conventional real estate transaction, sell the real estate for as much as it could obtain and then seek to recover the difference between the amount of the down payment plus the amount realized on the sale of the real estate and the amount the customer agreed to pay under a breach of contract action in the appropriate forum. Based on the foregoing, the Banking Department is of the opinion that the risks associated with Murabaha real estate financings are essentially the same as those associated with underwriting "traditional" mortgage loans.
The authority for Bank to engage in Murabaha real estate financings is arguably contained within the incidental powers clause contained in Section 96(1) of the New York Banking Law ("Banking Law"). Moreover, express authority for Bank to engage in such financings is contained Section 96(14) of the Banking Law which gives State-chartered banks and trust companies the express authority "to arrange... Moans secured by liens on interests in real estate...", and Section 98 of the Banking Law which gives State- chartered banks and trust companies the power to "purchase, hold, lease and convey real property" subject to certain restrictions. Thus, as a matter of policy Mortgage Corporation, as an operating subsidiary of Bank, can engage in the same activities as Bank can
Thus, based on the foregoing analysis, the Banking Department finds that authority exists under the Banking Law for Mortgage Corporation to engage in Murabaha real estate financing. Moreover, the Banking Department agrees with the OCC that such financings are "functionally equivalent to conventional financing transactions" and thus has no objection to Mortgage Corporation entering into Murabaha financing. However, we do suggest that the bank should carefully consider and address for itself any special liability that could arise under the Murabaha Agreements.
I trust that the foregoing is responsive to your inquiry.