Banking Interpretations

NYSBL 103(1) and 103(4) and GRBB Part 84

May 27, 2005

Your letter of December 15, 2004 addressed to Sara Kelsey, Deputy Superintendent & Counsel, has been forwarded to me for a response. I apologize for the delay in responding. You are General Counsel for [redacted] a New York State chartered bank, and you have questions regarding the lending limits set forth in Section 103 of the Banking Law.

According to your letter, your client often makes a loan secured by a real estate mortgage on vacant land that the borrower plans to subdivide and to construct the improvements required for such subdivision. The loan is divided into a loan to finance the borrower's purchase of the land (the acquisition loan) and a loan to finance the construction of the improvements (the building loan). Also, there is often a third loan to finance the construction of a model home. Your client is usually also called upon to issue a letter of credit on behalf of the borrower to the local municipality to ensure completion of the improvements to the subdivision that have been required by the municipality.

You explained that it is necessary for your client to divide up the loans in this manner in order to comply with Section 2 of the New York Lien Law. That Section restricts the use of building loan advances for the purpose of improvements or costs of improvements. As a result your client ends up with a loan secured by a first, second and sometimes third mortgage all to the same borrower on the same property, as well as with a letter of credit on behalf of the same borrower.

You state that it is your understanding that under Section 103, your client can make an unlimited number of loans secured by first mortgages, each of which can be in the amount of your client's maximum lending limit, but that all other loans must be aggregated together, and as aggregated, such other loans cannot exceed 15% of your client's capital stock, surplus fund and undivided profits.

I note that you have not indicated under which subsection of Section 103 the loans are being made. Pursuant to Banking Law Section 103(1), a bank may lend up to 15% of its capital stock, surplus fund, and undivided profits to one borrower, with an additional 10 % permitted for certain secured loans. Separate and apart from the restrictions of Section 103(1), Section 84.4 of Part 84 of the General Regulations of the Banking Board (the "Regulations"), which implements Section 103(4) of the Banking Law, provides that, "No bank or trust company shall make a mortgage loan in an amount in excess of 15 per centum of the capital stock, surplus fund and undivided profits of such bank or trust company." Contrary to your understanding, as stated in your letter, this limitation applies not just to loans secured by first mortgages, but to any loan where the lender relies upon real estate as the security for the loan, including loans secured by second or third mortgages.

The wording of section 84.4 of the Regulations leads to the conclusion that the 15% limit is per loan, not per aggregate total of loans to one borrower. However, in the case you described, the three loans are first, second and third mortgages on the same property and to the same borrower. Since the same property is being encumbered, the loans should be treated as a single mortgage loan subject to the 15% limit in section 84.4. Therefore, the loans when aggregated would have to be within the bank's 15% limit. (Please note that it is not completely clear from your letter as to the security for the third loan. If the collateral consists partly of real estate security and partly of other security, then you must comply with the requirements of 103(4) with regard to the amount that shall be considered a loan upon the security of real estate.)

With regard to the letter of credit on behalf of the borrower, it constitutes a loan for purposes of Banking Law Section 103. If it is unsecured then it would be governed by the Section 103(1) limitations. On the other hand, if the letter of credit is also secured by the same property, Section 103(4) would apply and the letter of credit would be aggregated with the other loans and the total amount would be subject to the 15% limit in section 84.4.

You also asked whether your client can reduce its calculation of loans outstanding to the borrower as the borrower completes improvements, thereby reducing your client's liability on the letter of credit to the municipality. While we cannot offer any specific guidance as to what documentation would substantiate such a reduction of legal commitment, if your client's legal commitment under the letter of credit is in fact reduced, as a matter of contract law, as the borrower completes improvements to the satisfaction of the municipality, then there is no reason under the Banking Law why your client's calculations of total extensions of credit to the borrower for purposes of Banking Law 103 also may not be reduced accordingly.


Sharon Cherry
Associate Attorney