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Banking Interpretations

NYSBL 108(4) & 577

May 30, 2008

From: Steven Barras

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Subject: Maximum Interest Rate

Your inquiry relates to the maximum rate of interest and service charges that may be imposed by a bank in connection with premium finance loans.  Section 577 of the Banking Law states that nothing in Article XII-B of that law affects premium financing by lending institutions, which term is defined in Section 554(5) of the Banking Law and includes banks. Consequently, as indicated in Section 577(b), a bank may engage in insurance premium financing "in accordance with the applicable provisions of other laws authorizing and regulating the making of loans by the lending institution." Pursuant to Section 14-a of the Banking Law, the legal rate of interest in this state is 16% per annum. However, Article III of the Banking Law gives banks the authority to charge up to 25% per annum on certain types of loans (the 25% cap implicitly imposed by Section 190.40 of the Penal Law). To take advantage of the 25% limitation, banks would have to structure a premium finance loan as a personal loan, as set forth in Section 108(4) in Article III. If the loan is not so structured, then the maximum interest rate would be 16% per annum. "Service charges", as that term is used in Article XII-B, are not applicable to loans made under Article III and the maximum rate allowed for loans is inclusive of any items deemed to be "interest" under law. I note that the 16% per annum limitation is applicable to loans made to entities that are not corporations and if the borrower is a corporation, the premium finance loan may be made at a rate not exceeding 25% per annum in any event. There are other exceptions to the 16% per annum cap and these may be found in Title 5 of Article 5 of the General Obligations Law.

I trust that the foregoing is responsive to your inquiry.

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