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Banking Interpretations

NYSBL 6-L
Gen. Reg. Part 41

June 5, 2009

[---]

Re:      Banking Law Section 6-L and Part 41 of the General Regulations of the Banking Board

Dear Mr. [---]:

This is in response to your inquiry dated April 1, 2009, to the New York State Banking Department (the "Department") in which you asked for guidance on whether a fee received for the sale of a loan by a mortgage banker, "acting as such," is includable in the "points and fees" calculation for purposes of determining whether such loan is a high-cost home loan under Section 6-L of the Banking Law and Part 41 of the General Regulations of the Banking Board. In subsequent correspondence, dated April 6, 2009, you clarified that the "fee" referred to in your April 1, 2009 inquiry was received as a servicing release fee or service release premium, as in any secondary market sale of a closed loan to an investor.

In your April 6 correspondence you also stated that the "fee" in question was paid to an entity that originated and table-funded the loan.

Relevant Banking Law and Regulations

The test for whether a mortgage loan made on a property located in this state is a high-cost home loan is prescribed in Section 6-L of the New York Banking Law (the "High-Cost Law") and its implementing regulation, 3 NYCRR, Part 41.  According to 6-L (1)(d), a mortgage loan would be considered a "high-cost" loan if the terms of the loan exceed one of the thresholds in Section 6-L (1)(g). Under clause (ii) of that paragraph, the "total points and fees" paid in connection with the loan may not exceed five percent of the total loan amount if the total loan amount is fifty thousand dollars or more.1             

"Points and fees" include: "(i) all items listed in 15 U.S.C § 1605(a)(1) through (4); (ii) all charges for items listed under § 226.4(c)(7) of title 12 of the code of federal regulations; (iii) all compensation paid directly or indirectly to a mortgage broker, including a broker that originates a loan in its name in a table-funded transaction ... ; and (iv) the cost of all premiums financed by the lender ....”2

Analysis and Conclusion

In order to reach a proper conclusion on the issue raised, it is important to identify some concepts commonly accepted by the mortgage industry. In a recent article, the Mortgage Bankers Association notes that a Servicing Release Fee or Service Release Premium has commonly been accepted as a fee received by a lender after the initial closing and funding of the mortgage loan.3  The article states that this accepted concept or practice may have provided a rationale for not requiring lenders to disclose any Service Release Premium.4 The Department of Housing and Urban Development ("HUD"), in a document entitled HUD RESPA FAQ's by Industry, points out that the sale of servicing after the initial funding is considered a Secondary Market Transaction.5 In contrast, a table-funded transaction is not a secondary market transaction, but rather a closing "at which a loan is funded by a contemporaneous advance of loan funds and an assignment of the loan to the person advancing the loan funds.6

It is the Department's position that a "fee" received as a Servicing Release Fee or Service Release Premium in a Secondary Market Transaction in the sale of a loan to an investor by a mortgage banker who self-funded the loan, is not included in the "points and fees" test for purposes of Section 6-L.

However, the opposite conclusion has to be reached in the case of a fee received by an entity that originates and table-funds a loan: The fee is included in the "points and fees" calculation for purposes of Section 6-L. This conclusion is based on the fact that, by the terms of a Table-Funded Transaction, a Servicing Release Fee or Service Release Premium would not be paid to the originator of the loan since the servicing rights in such a Table-Funded Transaction would have already been owned by the entity that table-funds the loan.

In the opinion of the Department, when a mortgage banker table-funds a transaction, it is acting in a mortgage brokerage capacity.7 In its revised regulation under RESPA, HUD reaches the same conclusion. In its explanation of its decision, it stated:

While HUD recognizes that mortgage lenders are functionally different from mortgage brokers, an exclusive agent of a lender who is not an employee of a lender, but who renders origination services and serves as an intermediary between the lender and the borrower, is essentially acting as a mortgage broker, and will be subject to the mortgage broker disclosure requirements, as set forth in the rule.... The revised definition clarifies that a mortgage broker also means a person or entity that renders origination services and serves as an intermediary between a borrower and a lender in a transaction involving a federally related mortgage loan, including such a person or entity that closes the loan in its own name in a table-funded transaction. (emphasis added)

Section 6-L(1)(f)(iii) includes, within the definition of "points and fees" any compensation paid to a mortgage broker, including a broker that originates a loan in its own name in a table-funded transaction. We believe this is only one example of the compensation that is included in "points and fees," but it is not exclusive. A fee received by a mortgage banker which originates a loan in a table-funded transaction would also be included in the definition of "points and fees."

A similar analysis applies to Part 41 of the General Regulations of the Banking Board. Section 41.1(h)(3) includes, in the definition of "points and fees," "all compensation paid directly or indirectly to a mortgage broker otherwise included as points and fees pursuant to paragraphs (1) and (2) of this subdivision." Because we believe that a mortgage banker making a table-funded loan is acting in a brokerage capacity, we believe that the compensation received from the assignee of the loan, irrespective of how it is denominated, must be included in the definition of "points and fees."

I trust the foregoing is responsive to your inquiry.

Sincerely,

Harry Goberdhan
Assistant Counsel

____________________________

  1. New York Banking Law § 6-L (1)(g)(ii)
  2. New York Banking Law § 6-L (1)(f)
  3. Mortgage Bankers Association -Preliminary Information on HUD's Forthcoming RESPA Rule (November 12, 2008)
  4. Id.
  5. http://www.hud.gov/offices/hsg/ramh/resindus.cmf
  6. Moreno v. Summit Mortgage Corporation, 364 F. 3d 574 (5th Cir. 2004).
  7. A New York mortgage broker cannot make a loan, including a table-funded loan, except in the case of brokers who are FHA loan correspondents making FHA loans. A New York mortgage banker may make any loan, including a table-funded loan, because it is a licensed mortgage banker. However, when doing so, it is treated as acting in a brokerage capacity.

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