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Banking Interpretations

NYSBL 340 and Gen. Oblig.Law 5-501 and
Supts. Regs.Part 4 & Part 407

January 14, 2005

[ ]

Re: Applicability of Section 340 of the Banking Law

Dear [ ]:

Your letter to Sara Kelsey, Deputy Superintendent and Counsel, New York State Banking Department ("Department"), requesting confirmation that the Department has no objection to your client, a national lender, making commercial loans of less than fifty thousand dollars ($50,000.00) with interest rates in excess of 16% per annum to individuals in New York using loan documents that choose Illinois law, without first obtaining a license under Article IX of the Banking Law ("Article IX"), has been referred to me for response. Based upon the law and the facts as outlined in your letter, we are unable to confirm a non-objection to your client's projected course of action,

According to your letter, your client is a Michigan limited liability company ("Company") that processes and funds commercial loans ("Loans") from its offices in Illinois. We assume, for the purposes of responding to your inquiry, that by "commercial loans" you refer to loans made to any person (natural or otherwise) where the loan is for business and commercial purposes, rather than for personal, family, household or investment purposes. The Loans are made to individuals, corporations and other business entities in New York in amounts ranging from $7,500.00 to $50,000,000.00. Some of the Loans carry an interest rate in excess of 16% per annum. The Loans are secured by commercial vehicles normally titled and registered in New York and the loan documents are executed in New York. Although the Company has offices and personnel in New York, according to your letter, neither are involved in making or servicing the Loans. Notably, the Loan documents choose Illinois law to govern its provisions. In addition, you state that the Company does not hold a licensed lender license pursuant to Article IX but does hold all licenses required by Illinois law to make Loans to individuals of less than $50,000.00 having an interest rate in excess of 16% per annum.

Based on your legal analysis of several New York cases and the Restatement (Second) of Conflicts of Laws, you conclude that the choice of Illinois law in your client's commercial loan documents is valid and enforceable, your client is making the Loans under the authority of the Illinois statute and, therefore, does not need to obtain a license pursuant to Article IX to make business and commercial loans in New York of less than $50,000.00 having an interest rate greater than 16% per annum. We are unable to agree with your conclusion.

Your letter sets forth your view that Article IX does not apply to your client's commercial lending activity in New York since you maintain that the Loans are made under the authority of another statute, namely the Illinois lending statute. In support, you refer to a September 19, 2002 letter you received from the Department concurring with your view that making personal loans having an interest rate in excess of 16% to New York consumers for the purchase of manufactured homes need not hold a license pursuant to Article IX.

Banking Law §340, read together with Section 501 of the General Obligations Law and 3 NYCRR §4.1 , provides that a license is required to engage in the making of loans to individuals in New York State having a principal amount of twenty five thousand dollars ($25,000) or less for personal, family, household or investment purposes or a principal amount of
fifty thousand dollars ($50,000) or less for business or commercial purposes, having an annual rate of interest over 16%. Accordingly, the requirements of Article IX, including the need to obtain a license, apply to your client if it engages in the making of loans for an annual rate of more than 16% meeting the above criteria.

Such a licensing requirement is not overcome by the choice of law and alternate authority argument set forth in your letter. In support of your position, you rely on the Department's September 19, 2002 letter that stated it is not necessary to obtain a license pursuant to Article IX to make loans to New York consumers if the setting of the interest rate is based on alternate authority. However, in that case, we were advised that the loans to finance residential manufactured homes were being made pursuant to a provision of the federal Depository Institution Deregulation and Monetary Control Act of 1980 ("DIDMCA"), 12 U.S.C. § 1735f-7a, that clearly preempts state law interest rate limitations and related charges applicable to mortgages or loans secured by a first lien on (1) residential real property; by a first lien on all stock allocated to a dwelling unit within a residential cooperative housing corporation; or (3) a residential manufactured home, providing that the lender falls within the provisions of that section. In addition, 1 2 U.S.C. § 1735f-7a(c) requires that such a lender for residential manufactured homes comply with certain specified consumer protections,
which was represented to be the case.

In this instance, since the Loans are not being made pursuant to DIDMCA or any other federal statute, the choice of Illinois law as the authority to make said loans does not preempt the requirements of Article IX. Additionally, as indicated in Part 407 of the Superintendent's Regulations, an out-of-state small loan company licensed by another state is not excluded from the licensing requirements of Article IX merely because it is licensed by the other state.

Thank you for your attention to the above.

Very truly yours,

Alvin A. Narin
First Assistant Counsel

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