NYSBL 340 and 350 and 351 and Superintendent Regs Part 401 and Part 407
October 14, 2005
To: Deputy Regina Stone
From: Gene C. Brooks
Subject: Response to [ ]
Do we agree with [ ] proposed interpretations of Article IX of the New York Banking Law as set forth in her June 10, 2005 letter ?
[ ] argues in effect that the limitations set forth in Article IX do not apply to loans made outside the statutory definitions therein as long as such loans are made at interest rates within the current statutory interest rate ceilings available to unregulated lenders.
For the reasons set forth below, I am of the opinion that licensed lender offices in New York State may make loans outside of the statutory limitations set forth in Article IX (hereinafter, loans within the limitations of Article IX are "Conforming Loans" and loans outside of such limitations are "Non-Conforming Loans") only if they have dual authorization to engage in such activities.
At the bottom of page 5 and the top of page 6 of [ ] letter, she sets out her opinions regarding the application of Article IX to Non-Conforming Loans, loans made outside of the statutory definition in Article IX ($25,000 for consumer purpose loans, $50,000 for business purpose loans). Specifically, [ ] argues that
We submit that the making of loans [by a Licensed Lender] not within the criteria requiring licensure under Article IX would not result in 'evasions' of Article IX or the Superintendent's Regulations.
Therefore, a Licensed Lender should be able to make loans in principal amounts which exceed the limitations of § 340 at the same physical location where it is approved to function as a licensed lender.
We further contend that this is clearly the case for out-of-state Licensed Lenders operating in compliance with Part 407 as there are no limitations in
Part 407 on the business which may be conducted at an out-of-state Licensed Lender approved location.
[ ] goes on to raise a number of questions regarding her interpretation of Article IX. I will respond to these questions below.
In support of her interpretations, [ ] references various opinions issued by the Legal Division (copies also attached). (These opinions deal with the issue that entities engaging in lending outside the parameters of Article IX do not need to be licensed. They do not deal per se with the issue of what non-conforming loan activities licensed entities can engage in at licensed locations.)
I am of the opinion that Article IX is intended to protect consumers from unreasonable lending practices in a segment of the lending market serving generally lower income individuals. Hence, while Article IX permits lenders to charge relatively high interest rates on loans, it otherwise limits the charges such lenders may impose and otherwise subjects such lending to a variety of restrictions.
It appears that the benefits permitted to lenders by Article IX May not be as attractive as they once were given the relatively low general interest rate environment. Hence, licensees appear to be interested in their ability to make loans in excess of the statutory limits set forth in Article IX. While interest rates permitted for that type of lending would be subject to the general interest rate ceilings established in New York, the activity would otherwise be unrestricted under Article IX.
As noted above, [ ] asks a series of related questions regarding her interpretations of Article IX. She first asks on page six of her letter whether "a New York Licensed Lender ... [can] offer loans in principal amounts in excess of the limitations set by NY Banking Law § 340 ($25,000 for consumer loans, $50,000 for business purpose) out of the same location where it is authorized to conduct its Licensed Lender activities?" I am of the opinion that the answer to this question should be yes, if requested and approved pursuant to Section 350(3).
Section 351(1) provides in relevant part that:
Every licensee hereunder may loan any sum of money not exceeding the maximum principal amounts prescribed in section three hundred forty of this article, and may charge, contract for, and receive thereon interest at the rate or rates agreed to by the licensee and the borrower.
The accepted view of this provision is that it grants the licensee authority to make conforming loans, but it is otherwise silent on other activities engaged in by the entity.
Section 350(3) provides further statutory support for this view. Specifically, this provision limits Article IX activities "within any office, room, or place or business in which any other business is solicited or engaged in ....." Any such other business activities can only be engaged in if the Superintendent finds in writing that "that such other business would not result in evasions of this article or the rules and regulations lawfully made hereunder." Hence, a process is contemplated by the statute for such activities. They are permissible at licensed offices if conducted under so-called "dual authorization" authority granted by the Superintendent in accordance with Section 350(3).
[ ] next asks whether the answer to the first question would be dependent on the licensee having a presence in New York. In this regard, she notes that licensees subject to Part 407 of the Superintendent's Regulations are not subject to the provisions of Section 401.11 of Part 401 of the Superintendent's Regulations regarding the conduct of other business activities at licensed offices.
This is a correct analysis in my opinion. Licensed lender offices outside of New York are not subject to the limitations on non-conforming activities set out in the statute and Section 401.11.
[ ] second question is whether licensed lenders can make Non- Conforming Loans without complying with the processing and record keeping requirements of Article IX. For the reasons set forth above, I believe the answer to this question is yes. Such non-conforming lending activities would only be subject to the limitations of Section 401.11.
In [ ] third question, she notes that, if the answer to the first question is no, then licensed lenders "will need to form a separate business entity" to make non-conforming loans. Since I believe the answer to the first question is yes, I need not respond to this question.
I would ask that you advise us if you agree from a supervisory perspective with this analysis. If you do, I will advise [ ] in writing of our conclusions. A copy of a suggested letter to [ ] is attached as well for your review.
cc: Robert Sheffield