NYSBL Sec. 555
May 18, 2005
From: First Assistant Counsel Barras
Re: Certain Issues Concerning Premium Finance Companies Licensed
under Article XII-B of the Banking Law
Several issues have recently been raised concerning Article XII-B of the Banking Law and these issues are discussed herein.
- The first issue that has arisen in this area concerns the maximum rate of "interest" that may be imposed upon borrowers by licensed premium finance agencies. That rate is set forth in Section 568(4)(a) of the Banking Law and is not expressed as an "interest" rate but rather as a "service charge". The maximum service charge authorized by that section is $14 per $100 per annum plus an additional charge of $10 for each premium finance agreement. Apparently, there has been some confusion about the actual rate that may be charged by licensed premium finance agencies, with some persons believing that this rate is equivalent to a 14% per annum interest rate (this view does not make any sense considering that Section 577(3)(a) indicates that a premium finance license is not required if a lender does not charge more than 16% per annum in a premium finance agreement, which is discussed hereinbelow). The maximum service charge set forth in Section 568(4) is considered an "add-on" rate, i.e. added on to the principal balance of the loan, and is the equivalent of an interest rate with approximately a 24% APR. This rate will vary slightly depending on the term of the loan.
- The question of whether a person or entity, not otherwise exempt from the provisions of Article XII-B, may engage in the premium finance business without first obtaining a license under that article if loans are made solely to corporations at an interest rate not exceeding 25% per annum has also arisen. Section 577(3)(a) states that a person or entity is exempt from the provisions of Article XII-B if the premium finance agreement imposes a rate of interest "not greater than the rate prescribed by the banking board pursuant to section fourteen-a of [the Banking Law]...." Section 14-a(1) states that "the maximum rate of interest provided in section 5-501 of the general obligations law shall be sixteen per centum per annum." Section 14-a(5) provides that "whenever reference is made in this chapter or in any other law, contract or document to the rate of interest prescribed or to be prescribed by the banking board or the superintendent pursuant to this section or any former section 14-a of this chapter, such reference shall be deemed a reference to the rate of interest prescribed in subdivision one of this section." The reference to Section 14-a in Section 577(3)(a) is obviously a reference to a former Section 14-a as current legal rate of interest set forth in Section 14-a(1) is fixed as a matter of law, with no Banking Board involvement in the setting of the rate.
Considering the foregoing, a person or entity may not engage in the premium finance business as described above without first obtaining a license under Article XII-B as the maximum rate that may be imposed by a person or entity under Section 577(3)(a) is 16% per annum. This is the case despite the fact that virtually all loans to corporations by any lender may be made at a rate not exceeding 25% per annum by virtue of the provisions of Section 5-521 of the General Obligations Law. The situation here contrasts with that of licensed lenders as Section 340 of the Banking Law states that a small loan lender (as
defined in that section) need not obtain a license under Article IX of the Banking Law if it does not charge a "greater rate of interest than the lender would be permitted by law to charge if he were not a licensee hereunder...." Therefore, a small loan lender which made small loans solely to corporations for business or commercial purposes could charge an interest rate up to 25% per annum on such loans without being licensed under Article IX.
- Another question that has arisen concerns the benefits of being licensed under Article XII-B. I can see three such benefits. The first relates to the ability to impose a higher rate of interest ("service charge") than would be available to nonlicensees, as discussed above. The second concerns the ability of a licensee under Article XII-B to cancel the insurance policy that is being financed under the premium finance agreement. Pursuant to Section 3428(c) of the Insurance Law, an insurance company may only honor a power of attorney to cancel an insurance policy that is given by an insured person to a licensee
under Article XII-B. The right to cancel a policy upon default of a scheduled payment under a premium finance agreement is of great benefit to a company engaged in premium financing. The last benefit that accrues to a licensee is that its reputation may well be enhanced by being regulated and supervised by the Banking Department.
- The question of how to modernize the provisions of Article XII-B has also arisen. At a minimum, I would suggest the following:
Amend Section 568(4) to provide for a maximum rate "as agreed between the insured and the licensee". This would make the maximum rate consistent with other licensees and would "cap" the interest rate (I would delete the reference to a service charge) at 25% per annum. It would also eliminate any confusion about what is meant by "$14 per $ 100 per annum".
- Amend Section 577(3)a) to make the exemption based on interest rate consistent with that in Section 340.
- Section 5-501(7) of the General Obligations Law states that "except as
otherwise expressly provided by law, in the event of a prepayment in full of a loan, any refund of unearned interest to which the borrower may be entitled..." must be computed in accordance with a generally accepted actuarial method. That method gives a return more favorable to the borrower. Section 574(2) of the Banking Law permits premium finance companies to compute such refunds via a "sum of the balances" method, which is not actuarial and favors the lender. As far as I am aware, premium finance companies are the only lender in the Banking Law that is authorized to utilize a method that contravenes the requirement of Section 5-501(7). This appears to the last vestige of the "Rule of 78s" and I have no idea why the provision still remains in Article XII-B. It probably escaped detection in the past and should be amended accordingly.