October 12, 2004
Re: Legal Lending Limit
Dear [ ]:
Your September 15, 2004 letter to Edward B. Kramer, Deputy Superintendent of Banks, New York State Banking Department (the "Department"), has been referred to me for a response. In your letter you requested a determination as to whether parts of advances made by [ ] (the "Bank") under a line of credit, used by the borrower to make loans collateralized by the Small Business Administration ("SBA"), is exempt from the legal lending limitations.
According to Banking Law §103(1)(a), the legal lending limits of Banking Law §103(1) "shall not apply to (1) any loan to the extent that . the Small Business Administration . has agreed to pay the principal and interest thereof, or has guaranteed payment (by guaranty or commitment to purchase or otherwise) of such principal and interest, or is committed to supply, by loan, subsidy or otherwise, funds sufficient to pay such principal and interest, or has otherwise pledged its faith and credit for the payment of such principal and interest."
As stated in your letter, the Bank provides a line of credit to a non-bank Small Business Lending Company (the "Lending Company") that is licensed in accordance with the provisions of the SBA. The Lending Company uses the proceeds of the line of credit to finance, and temporarily warehouse loans made to borrowers under the SBA 7(A) guaranty loan program. From the information provided, it is clear that the Bank's loan is to the Lending Company. Even though the Lending Company uses the loan proceeds to fund loans made to borrowers under the SBA 7(A) guaranty loan program, the loan by the Bank to the Lending Company is not guaranteed by the SBA. Because the loan made by the Bank to the Lending Company is not guaranteed by the SBA, the carve-out allowed for under Banking Law §103(1)(a) is inapplicable and the loan should be subject to the legal lending limitations.
I trust the foregoing is responsive to your inquiry.
Very truly yours,
Harry C. Goberdhan