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Banking Interpretations

Gen. Regs. of BB Part 38 and 80 and General Obligations Law 5-501

April 7, 2005

[ ]

Re: Prepayment Penalties on Mortgages related to properties located in New York State

Dear [ ]:

Your May 18, 2004 letter to the Legal Division, New York State Banking Department (the "Department"), has been referred to me for response. In your letter you asked: (i) for an interpretation of the meaning of the "six percent rate of interest charged" found in the New York State General Obligations Law, Title 5, §5-501(3); and (ii) can prepayment penalties be assessed on junior mortgage loans to the same extent they are imposed on first lien mortgage loans.

General Obligations Law, Title 5, §5-501(3) (the "Statute") reads, in part:

"If the rate of interest charged, taken or received on any loan or forbearance secured primarily by either (i) an interest in real property improved by a one to six family residence occupied by the owner or (ii) certificates of stock or other evidence of an ownership interest in a corporation or partnership formed for the purpose of the cooperative ownership of real estate taken as security for a loan under subdivision five of section one hundred three of the banking law, subdivision eight-a of section two hundred thirty-five of such law or subdivision two-a of section three hundred eighty of such law, exceeds six per centum per annum."

The Statute is clear, its provisions are only applicable to covered mortgage loans if the interest rate charged is above six percent. Further, because the Statute does not provide for different treatment of fixed and/or variable rate transactions, the six percent threshold applies to both. In cases where the interest rate charged is less than six percent, the terms of the contract dictates.

In connection with your second question, the General Regulations of the Banking Board, Part 80.9 provides that:

"A contract, note or instrument evidencing or securing a junior mortgage loan shall not contain:...

(e) any provision prohibiting prepayment of the junior mortgage loan in whole or in part or imposing a penalty, except as otherwise permitted by section 5-501(3)(b) of the General Obligations Law, and then only if according to the provisions of the note and mortgage, the interest rate for the loan shall remain fixed for a period of at least five years, the mortgage broker, mortgage banker and/or exempt organization complies with the provisions of section 38.2, 38.3 and 38.4 of this Title which pertain to prepayment penalties and the loan contract provides for a prepayment penalty."

From the plain reading of the above-cited regulation, it is clear that mortgage lenders can impose prepayment penalties on "junior mortgage loans" to the same extent that they can be imposed on first lien "mortgage loans," as such terms are defined by General Regulations of the Banking Board, Part 80.1(c), and General Regulations of the Banking Board, Part 38.1(m), respectively.

I trust the foregoing is responsive to your inquiry.

Very truly yours,

Harry C. Goberdhan