July 9, 2008
[---]Re: Necessity for licensing under section 590(2)(a) of the Banking Law
This is in response to you letter, dated February 1, 2008, in which you have asked the following question:
"A private lender wishes to offer mortgage loans secured by residential property within the State of New York. Said private lender would either be an LLC, Corporation or individual. At times the same entity or individual would be the beneficial owner of all of said LLC/Corporation. Would the threshold of four mortgage loans per calendar year apply to the individual and to the entity combined or is the limit of four mortgages each before becoming a Licensed Broker or Licensed Banker?"
The licensing provision for mortgage bankers is found in Section 590(2)(a) of the Banking Law, which provides:
"No person, partnership, association, corporation or other entity shall engage in the business of making five or more mortgage loans in any one calendar year without first obtaining a license from the superintendent….”
The requirement for licensing effectuates the policy set forth in Section 589 of the Banking Law:
"The legislature finds that it is essential for the protection of the citizens of this state and the stability of the state's economy that reasonable standards governing the business practices of mortgage lenders and their agents be imposed. … [T]he purpose of this article is to protect New York consumers seeking a residential mortgage loan and to ensure that the mortgage lending industry is operating fairly, honestly and efficiently, free from deceptive and anti-competitive practices."
We believe that, if a person who controls a corporation or limited liability company could avoid the licensing provisions of Section 590(2)(a) of the Banking Law by dividing the loans made by him or her between those that he or she makes in an individual capacity and those made by the corporation or LLC, the policy set forth by the legislature would be circumvented. Consequently, we would aggregate loans made by an individual (or a group of individuals acting in concert) and one or more other entities controlled by the individual or such group.
In other contexts, the legislature has specifically prohibited such "structuring" to avoid the application of the Banking Law. See Section 61(3) (“The provisions of this section shall apply to any person who in bad faith attempts to avoid the application of this section by any subterfuge, including but not limited to splitting or dividing any loan transaction into separate parts for the purpose of evading the provisions of this section.") See also Section 6-m, as adopted by both houses of the legislature and awaiting signature by the Governor ("The provisions of this section shall apply to any person who in bad faith attempts to avoid the application of this section by any subterfuge, including but not limited to splitting or dividing any loan transaction into separate parts for the purpose of evading the provisions of this section.") However, we do not believe that a specific statutory prohibition of structuring is necessary in order to make unlawful any structuring to avoid application of the law. Such structuring would expose consumers of this state to undue risks, which the licensing requirement is designed to minimize.
I trust the foregoing is responsive to your inquiry.
Very truly yours,
Harry C. Goberdhan