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Banking Interpretations

Gen. Reg. of the BB Part 82 and General Obligations Law 5-501

September 26, 2005

[ ]

Re: Part 82, Title 3 of the General Regulations of the Banking Board

Dear [ ]:

Your letter dated June 7, 2005 to Kenneth Bielemeier – Deputy Superintendent, New York State Banking Department (the "Department"), has been referred to me for response. In your letter you asked whether prepayment penalty restrictions imposed on alternative mortgage instruments under Part 82 are applicable to mortgage loans in a principal amount equal to or greater than $250,000.

According to Part 82.1:

Notwithstanding any provisions of State Law, regulation or interpretation to the contrary, this Part constitutes the exclusive authority for banks... to make, sell, purchase or participate in mortgage loans in a principal amount of less than $250,000 other than fixed-rate, equal payment, self-amortizing loans.

Financial institutions involved in mortgage transactions outlined above, referred to as "Alternative Mortgage Transactions," are sometimes restricted on the amount of penalties and fees that they may charge on such transactions. One such restriction is stated in Part 82.7 that relates to prepayment penalties. Therefore, [ ] as a financial institution, would be limited in the amount of prepayment penalties it may charge on mortgage loans that are less than $250,000, and conversely not limited by the Part 82.7 restrictions on mortgage loans that are $250,000 and more. However, you should note that there are certain conditions, stated in the New York State General Obligations Law, Title 5, §5-501(3) (b), that have to be met prior to imposing prepayment penalties on mortgage loans, including those that are $250,000 and more. These conditions, as stated in the New York State General Obligations Law, Title 5, §5- 501(3) (b), are as follows:

If prepayment is made on or after one year from the date the loan or forbearance is made, no penalty may be imposed. If the prepayment is made prior to such time, no penalty may be imposed unless provision therefore is expressly made in the loan contract.

I trust the foregoing is responsive to your inquiry.

Very truly yours,

Harry C. Goberdhan
Assistant Counsel

cc: Barbara Kent
Kenneth W. Bielemeier

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