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Banking Interpretations

NYSBL 108(4)(b) & (c)

November 26, 2002

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Re: New York Banking Law Section 108(4)(c)

Dear [ ]:

Your letter of August 16, 2002, concerning Banking Law Section 108(4)(c), has been referred to me for reply. As we understand it [ ] employs two methods of calculating late charges in the consumer loan documentation it creates for banks located in New York.

Under the first method, after a loan payment is ten days late, [ ] calculates the late charge at five percent of the outstanding payment or five dollars, whichever is less, with a maximum of twenty-five dollars for the term of the loan. Under the second method, there is no grace period, and [ ] calculates the late charge on a per diem basis using a rate no greater than the interest rate stated in the note. When employing the second method, there is no per payment maximum and no aggregate maximum.

Aside from the rate of interest which may be charged for a personal loan under Banking Law Section 108(4)(b), all other charges pertaining to such loan have been strictly limited under Section 108(4)(c). These restrictions apply to perfection of a security interest, credit checks, and attorney fees (limited to actual expenditures). As to late charges, Section 108(4)(c) provides as follows:

".; (ii) in case of default, and in accordance with the provisions of the instrument evidencing the obligation, either a fine in an amount not to exceed five cents per dollar on any installment which has become due and remained unpaid for a period in excess of ten days, but no such fine shall exceed five dollars and only one fine shall be collected on any such installment regardless of the period further that should the aggregate of such fines collected in connection with any loan exceed two per centum of such loan, or in any event twenty-five dollars, the bank or trust company shall refund such excess to the borrower within sixty days after the loan is paid in full, or subject to an allowance of unearned interest attributable to the amount in default, interest on each amount past due at a rate not in excess of the rate provided for in the instrument evidencing the obligation;."

Therefore, the statute allows a late charge under two alternatives: either the charge of a flat fee or the charge of interest on the past due amount at the rate provided for in the contract.

Where the five cents per dollar alternative is used, the statute states that "only one such fine shall be collected on any such installment regardless of the period during which it shall remain in default." Since under this alternative the statute provides for a single charge for a defaulted installment payment as one which is more than ten days overdue, a bank may not use any procedure which would convert a single default into multiple defaults. Thus, based on the facts presented, we conclude that the first method employed by [ ] complies with the requirements set forth in Section 108(4)(c)(ii).

While the second alternative would allow for accumulation of charges, we note that the accumulated charges would still only pertain to a specific default of a specific installment payment. However, based on the facts presented, we note that with respect to the second method employed by [ ], that interest on each amount past due is limited to the rate provided for in the instrument evidencing the obligation, and that the bank or trust company must refund any unearned interest attributable to the amount in default.

I trust the foregoing is responsive to your inquiry.

Sincerely yours,

Jay Kane 
Assistant Counsel