NYSBL 568 and 577
May 20, 2005
Re: Premium Finance Agency License
Dear [ ]:
Your letter dated March 16, 2005 has been forwarded to me for a response. You have requested guidance in the area of premium finance agencies for one of your clients. You state that your client is interested in an investment opportunity involving premium finance agencies and requested guidance on certain issues relating to that investment.
Your first issue is whether a premium finance agency is required to obtain
a license in New York in order to make the type of loans you described in your
letter. The loans as you describe them have a maximum interest rate of 15%
(the rate changes at different times during the life of the loan). Banking Law
section 577(3)(a) creates an exception from the licensing requirements of
Article 12-B for a party making insurance premium finance loans and charging
interest rates that do not exceed the legal rate of interest prescribed by section
14-a of the Banking Law, which is 16% per annum. Accordingly, it is the Department's position that pursuant to section 577(3)(a) of the Banking Law, a party making insurance premium loans at interest rates not in excess of 16% is not required to obtain a premium finance license under Article 12-B.
Your second and third issues are whether a New York licensed premium finance agency can charge a rate of 15% on loans made to residents of New York under either the Banking Law or General Obligations Law. A New York licensed premium finance agency may impose a service charge on loans at a rate not exceeding $14 per $100 per annum plus an additional charge of $10 per premium finance agreement. This rate, as discussed further below, is much greater than an interest rate of 15% per annum.
Your fourth issue is whether a New York premium finance agency that charges a rate of 14% interest should consider the additional expenses and fees that it charges as interest and as such, would it then exceed the maximum rate of interest. Before addressing this issue, I should note that Banking Law section 568 only applies to licensed premium finance agencies and does not apply to premium finance agreements that fit within the exception of section 577(3)(a). Premium finance agreements with interest rates that do not exceed the legal interest rate of 16% fit within the exception of section 577(3)(a). Under section 568, a licensed premium finance agency can charge a rate that does not exceed fourteen dollars per one hundred dollars per annum plus an additional service charge of ten dollars per agreement. This is not an annual percentage rate of 14% per annum but rather is equivalent to an APR of approximately 24%, depending on the term of the loan. As to your issue on how you consider the additional expenses and fees, you will have to make that determination based on case law after looking at the facts of each different type of charge that you propose to decide if it is the equivalent of interest. As noted herein, your specific question would only have relevance if the premium finance company were unlicensed.
In your fifth issue, you inquire if you can charge the fees and expenses referenced in your fact pattern, under section 568(4)(a). In your fact pattern, the interest rate does not exceed 15% and as such, section 568(4)(a) would not apply. However, you will have to determine whether the additional fees and expenses that you propose to charge would be the equivalent of interest. In the case of a licensed premium finance agency, the additional fees and expenses could not exceed $10 per agreement.
I note that there are other benefits to becoming a licensed premium finance agency even if you are not charging an interest rate that exceeds the legal limit of 16%. As a licensee under Article 12-B, you have the ability 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 12-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.
I trust that this has been helpful.
Very truly yours,