Banking Interpretations

Regs Part 39.5

August 15, 2001

Howard W. Newman, Esq.
Lamb & Barnosky, LLP
534 Broadhollow Road
CS 9034
Melville, NY 11747-9034

Re: LARIBA Islamic home financing

Dear Mr. Newman:

Your June 22, 2001 e-mail to Barbara Kent, Director, Consumer Affairs and Financial Products, regarding whether a home purchase financing product known as the Shared Home Appreciation in Rent and Equity ("SHARE") offered by the Islamic financial institution American Finance House Lariba ("AFHL") has been referred to me for response.[1]

In your letter, you ask the Banking Department to provide an opinion as to whether SHARE is an exempt product pursuant to Section 39.5 of Part 39 of the General Regulations of the Banking Board.  Further, you request confirmation that if the Department determines that SHARE is not an exempt product, then AFHL is required to obtain a mortgage banker license to offer this product in New York State.

According to the information on the AFHL website, SHARE enables Moslem homeowners to avoid paying interest, which is barred by Islamic law, by entering into a "lease-to-purchase" agreement in which the borrower and AFHL purchase the property jointly rather than the borrower holding title to the property and AFHL filing the mortgage against the property.  The borrower provides at least 20% of the purchase price and AFHL provides the additional funds required to complete the purchase.  Since the property is the borrower's residence, the borrower pays AFHL fair market rent proportionate to AFHL's ownership interest in the residence.[2] Part of each monthly payment is allocated toward the fair market rent for AFHL's ownership interest and the remaining amount is applied toward the buyout of AFHL's share.  Although the monthly payment is fixed, the portion of the monthly payment allocated toward rent decreases as the borrower's ownership in the house increases.  Additionally, during the life of the loan, the house is appraised annually and any necessary adjustments are made regarding the allocation of the monthly payment toward rent and purchasing AFHL's ownership interest.

After determining the monthly payment, AFHL inputs information regarding the monthly payment and other relevant financial information regarding the purchase transaction into a traditional mortgage calculation program that generates an "implied rate of interest" for the monthly payment, which AFHL then discloses to the borrower in order to comply with the Truth-in-Lending Act ("TILA").  Additionally, AFHL uses the information generated by the traditional mortgage calculation program to make any other disclosures required by state banking and consumer lending laws.  By making these calculations and disclosures, a portion of the monthly SHARE payment qualifies for tax deductibility under Federal and state tax law.  Additionally, AFHL has been approved by Freddie Mac as a seller and servicer under its single family (one to four family) mortgage program.

While AFHL states that SHARE is a "lease-to-purchase" agreement rather than a mortgage loan, its characteristics are such that it must be considered a mortgage loan subject to the provisions of Article 12-D of the Banking Law and Part 38 of the General Regulations of the Banking Board.  As with a mortgage loan, under the SHARE program, the borrower's monthly payment reduces the outstanding amount owed by the borrower to obtain 100% ownership of the residence.  Further, AFHL treats its joint purchase agreements under SHARE as if they were mortgage loans for the purposes of TILA and other applicable laws and regulations regarding disclosure requirements.

Additionally, SHARE does not qualify as an exempt under the provisions of Article 12-D of the Banking Law and Part 39 of General Regulations of the Banking Board.  Since the purchase agreements are considered mortgage loans by the Department and AFHL is not an exempt organization under Article 12-D of the Banking Law, it must obtain a mortgage banker license in order to offer this product in New York State.

Thank you for your attention to the above.

Very truly yours,

Alvin A. Narin
Assistant Counsel

[1] Information regarding the products and services provided by AFHL is available on its website at  According to the website, Lariba does not operate in New York State.

[2] AFHL, as a co-owner, also shares in the cost of insurance and property taxes.  Additionally, if the home is sold prior to the buyout of AFHL's ownership interest, sale proceeds are divided between AFHL and the borrower according to their proportionate ownership rather than the borrower having to payoff the balance of a mortgage prior to receiving any proceeds from the sale.