September 11, 2006
Your letter, dated July 24, 2006, to the New York State Banking Department (the "Department"), has been referred to me for response, In your letter you asked whether it is necessary for a lender to make the disclosures required by Part 80.4(c) of the General Regulations of Banking Board (the "Regulation"), if a borrower simultaneously utilizes a first and a junior lien mortgage in a purchase money mortgage transaction, even if the first mortgage "accommodates the junior lien mortgage."
According to the Regulation, the following is a necessary disclosure to be provided whenever a borrower enters into a junior lien mortgage transaction:
"The lender shall include in the disclosures a statement, in bold face type at least ten point in size, as follows:
YOU SHOULD CHECK WITH YOUR LEGAL ADVISOR AND WITH OTHER MORTGAGE LIEN HOLDERS AS TO WHETHER ANY PRIOR LIENS CONTAIN ACCLERATION CLAUSES WHICH WOULD BE ACTIVITATED BY A JUNIOR ENCUMBRANCE."
The intent of this disclosure, it seems, is to sensitize the junior lien mortgagor of the fact that he might be required to repay his first mortgage, in full, if such first mortgage includes an acceleration clause, which can be triggered by the entering into of a junior lien transaction.
According to your letter, [---] the ("Licensee") is involved in transactions wherein both first and junior lien mortgages are used simultaneously in certain purchase money transactions. In those instances, you indicated that the Licensee would typically enter into first lien mortgages that "accommodate [the] junior subordinated liens." In a subsequent letter, dated August 16, 2006, you stated that accommodations for the junior lien mortgages are typically made by not including any acceleration clauses in the first lien transactions.
In light of the intent of the Regulation, the Department is of the opinion that the disclosures should be made in every transaction involving a junior lien mortgage. In reaching this conclusion the Department notes the disclosures would be considered redundant in those instances where accommodations were made for the junior mortgages. However, the Department also notes that in such cases, the disclosures would neither be illegal nor would they in any way impede the transaction; instead, they would enable the Department to maintain consistency, as to this disclosure, in the industry as well as enhance the safety and soundness of the operations of lenders by providing a safety net in cases that they might be remiss in not permitting the necessary accommodation for the junior lien mortgages.
I trust the foregoing is responsive to your inquiry.
Very truly yours,
Harry C. Goberdhan