General Obligation Law 5-501
Dear Mr. [---]:
I was assigned to respond to your letter of January 28, 2011, in which you ask the New York State Banking Department (the "Department") to assist you in "resolv[ing] an apparent inconsistency" between the Legal Staff Opinions issued by the Department on Sections 340, et seq. of the New York Banking Law (the "Banking Law") and the "holding" of Beneficial New York, Inc. v. Stewart, 25 Misc.3d 797 (Sup Ct, Kings County, 2009, Kramer, J.).
You assert, "Stewart holds that a licensed lender under Section 340 et seq. of the Banking Law could charge interest in excess of 25% without violating the New York usury laws." We do not agree, and therefore decline your request that we "confirm that [our prior Legal Staff Opinions] do not survive Stewart."
Stewart holds that Beneficial New York, a licensed lender under Banking Law Section 340, was due accrued interest, and the principal, for a "small loan" it extended at an annual interest rate of 25%1. Stewart, supra, at 800-801. The holding is entirely consistent with our Legal Staff Opinions which opine, like this one:
[T]he legal rate of interest in New York, as set forth in Section 14-a of the Banking Law, is 16% per annum. Consequently, the general rule is that, unlicensed nonbank lenders may not charge more than that rate on the small loans within the purview of Article IX. If such lenders obtain an Article IX license, they may charge interest up to 25% per annum on the small loans. Any greater charge would be deemed to be criminal usury under the New York Penal Law.
Banking Department, Legal Opinion (11/6/07).
New York's criminal usury laws apply to an annual interest rate "exceeding" 25% per annum. P.L. § 190.402. Since Beneficial extended a small loan that did not exceed a 25% per annum rate of interest, the Department agrees with Stewart's holding that the licensee did not run afoul of any law. Inasmuch as the court administered judgment where the licensee violated no usury law, we cannot agree that Stewart holds precedential value for licensees that may.
Nor is the holding of Watkins v. Guardian Loan Company of Massapegua, Inc. (240 B.R. 668 [Bankr. E.D.N.Y., 1999]), also cited by you, discordant with the Department's view. As it pertains to the issue of licensed lenders and usury laws, the court merely held that it "lacked jurisdiction over the issue of criminal usury and found that civil usury was inapplicable with respect to the rate of interest charged by [licensee] Guardian pursuant to the statute under which it operated." Watkins, supra n. 1, at 671 (viz.. "[s]ince each of the [consumer] loans made by Guardian to the Watkins were [sic] in the principal amount of less than $ 25,000, Guardian was permitted by statute to charge an interest rate of 25%." Id. at 672).
In a case where it disclaimed jurisdiction over the issue of criminal usury, and where the licensee did not exceed a 25 % rate of interest, it is unfortunate that the Watkins Court nevertheless inserted obiter dictum that is extraneous to its holding and also without basis. As you note, the court wrote:
By virtue of Section 340 of the Licensed Lender Law, the Defendant is not subject to the statutory limits on the rates of interest that may be charged pursuant to Section 5-501 of the New York General Obligations law ("GOL") and Section 190.40 of the New York Penal Law (emphasis supplied).
Watkins, supra, at 672. To be sure, Sections 340 and 351 grant licensed lenders authority to extend small loans at "a greater rate of interest than the lender would be permitted to charge by law if he were not a licensee." B.L. § 340. A "greater rate," however, is not an illegal one. loan rates that may exceed the criminal usury limit are set forth in the General Obligations Law, where there is no exception for small loans by licensed lenders.3
Nor is there merit to the notion that "the New York legislature has, for 100 years, allowed licensed lenders to make small personal loans at interest rates far in excess of those set forth in the civil and criminal usury statutes." Watkins, supra, at 672. In fact, nearly two decades prior to Watkins, particular mention was made of the legislative intent that criminal usury limits apply where they are not expressly excepted. Chapter 883 of the laws of 1980 amended a number of New York statutes, including Banking Law Section 351, to deregulate many forms of consumer credit. The memorandum accompanying the Governor's Program Bill for these amendments plainly warned that,
except as provided for in Section 54 [authorizing registered securities dealers and brokers to charge customers 8 points above the prime interest rate on margin loans to their customers, even if such rate exceeded the criminal usury rate], the bill does not authorize or permit any interest rate in excess of the rate prescribed by the criminal usury laws for any type of transaction currently subject to the criminal usury laws.
Governor's Program Bill Memorandum L.1980 ch. 883 at 4-5, ¶9 (emphasis supplied).For the reasons set forth, the Department maintains the position that a licensed lender may not exceed a 25% annual rate of interest in extending an otherwise legal small loan. For licensees that violate New York's usury laws it remains our policy to commence administrative action and, when appropriate, make referrals to law enforcement agencies.
I hope I was able to provide some assistance with this matter.Very truly yours,
- In this context, a "small loan" is one that that does not exceed a principal amount of $25,000 for an individual or $50,000 for a business. See B.L. § 340.
- A person is guilty of criminal usury in the second degree when, not being authorized or permitted by law to do so, he knowingly charges, takes or receives any money or other property as interest on the loan or forbearance of any money or other property, at a rate exceeding twenty-five per centum per annum or the equivalent rate for a longer or shorter period.
P.L. § 190.40.
- See GOL § 5-501.5 (FHA and VA loans); GOL 5-501.6-b (loans of $2.5 million or more); GOL § 5-525 (broker/dealer margin account loans).