General Regulations Part 4
May 5, 2010
Your letter dated December 18, 2009, to the New York State Banking Department ("Banking Department") has been forwarded to me for a response. You requested information concerning the applicability of certain provisions of New York's Licensed Lender Act to your prospective business activities.
You inquired whether the assets of your entity should be in the company's name or that of the individual if the individual is the sole proprietor. You also asked how many loans constitute "isolated, incidental or occasional" transactions and the maximum interest rate chargeable on these loans. You further inquired if an application fee may be charged by an unlicensed lender and, if allowed, whether the fee must be included in the 16 percent interest rate.
Section 340 of the New York State Banking Law provides, in part, that "No person or other entity shall engage in the business of making loans in the principal amount of twenty-five thousand dollars or less for any loan to an individual for personal, family, household, or investment purposes... and charge, contract for, or receive a greater rate of interest than the lender would be permitted by law to charge if he were not a licensee hereunder except as authorized by this article and without first obtaining a license from the superintendent."
Section 14-a of the New York State Banking Law provides that the maximum rate of interest shall be sixteen per centum per annum. Therefore, if the loans that you are providing are given to individuals at an interest rate of sixteen per centum per annum or less, you would not need to apply for a license to be a lender in New York as long as that maximum rate is not exceeded.
I note, however, that the Department has proposed new legislation that would eliminate the sixteen percent threshold. You should check back in the near future on the status of this proposal.
In direct response to your first question, all financial requirements imposed by law and regulations apply to the licensee and must be satisfied by the licensee and not by the individual(s) owning the licensee. Therefore, the assets must be in the company's name if that is the licensee.
With regard to your next inquiry, there is no number stated in the statute for isolated and incidental loans, and we are not aware of any interpretation concerning such a number. It would depend on the facts and circumstances of the loans and whether they are truly isolated or part of a regular business.
As previously stated, you do not need a license if you are charging not more than16 percent, which is the maximum legal rate of interest. You need a license if you are going over 16 percent. The "Truth and Lending Act," which is federal law, governs what is to be disclosed as interest and finance charges.
You have asked whether an application fee is included in the determination of the interest rate for purposes of Section 340. Section 340 determines whether licensing is required based on the rate of interest that the lender would be permitted to charge if it were not a licensed lender under Article IX of the Banking Law. Section 14-a (2) and (3) provide as follows:
2. The rate of interest as so prescribed under this section shall include as interest any and all amounts paid or payable directly or indirectly, by any person, to or for the account of the lender in consideration for the making of a loan or forbearance as defined by the Banking Board pursuant to subdivision three of this section.
3. The Banking Board shall have the power, by a three-fifths vote of all its members, to adopt such regulations as it shall deem necessary or proper to implement the provisions of this section.
The relevant regulation is Part 4 of the General Regulations of the Banking Board. Part 4.2(b) states that, when applied to any loan or forbearance other than one secured primarily by an interest in real property improved by a 1or 2-family owner occupied residence, interest includes all amounts that would have been includible as interest under New York law as it existed prior to the enactment of Chapter 349 of the Laws of 1968.
Case law indicates that a processing or commitment fee is not included as interest as long as it is reasonable, and is not solely a ruse to collect additional interest above what would be allowed by the usury law. See, e.g. Freitas v. Geddes Savings and Loan Ass'n, 63 N.Y.2d 254, 481 N.Y.S.2d 437 (1984), London Realty Co. v. Riordan, 207 N.Y. 264,100 N.E. 800 (1913).
If you wish to apply for a license, you should consult with your personal attorney. If you have any further questions about the application process, please contact our Financial Services Division at (212) 709-1594.I trust this letter has been responsive to your inquiry.
Very truly yours,Orinthia E. Perkins