Banking Interpretations

NYSBL 590-a(2)
GRBB. Part 80
NYGOL 5-501

September 12, 2006


Re: Prepayment Penalties on Junior Mortgage Loans

Dear [---]:

In your April 20, 2006 letter regarding a possible conflict between the New York State Banking Department's April 7, 2005 interpretive letter which states that prepayment penalties are permitted on junior mortgage loans and Article XII-D of the New York Banking Law had been assigned to me for response. I apologize for the delay in getting back to you. In this letter, you essentially state that you wish to confirm whether or not prepayment penalties are permissible on any junior mortgage loan in New York State.

Under New York State law and regulations, a licensed mortgage banker may contract for and charge a prepayment penalty on any fixed rate loan less than $250,000 (or any Adjustable Rate Mortgage ("ARM") with an initial fixed period of at least five years) secured by a junior mortgage on an owner-occupied one-to-four family residence when the loan is prepaid in whole or in part less than one year after the date of the loan. Also, please note that according to New York Gen. Oblig. Law 5-501 (3)(b), the prepayment penalty may be charged only if "provision therefore is expressly made in the loan contract." Subject to the foregoing, the licensed mortgage may do so without regard to Banking Law Section 590-a(2) and Part 80.9(e).  For any junior mortgage loans in the amount of $250,000 or more, only New York Gen. Oblig. Law 5-501 (1) is applicable.

I note that there appears to be an inconsistency on this subject between the New York Banking Law and the General Obligations Law. Given this situation, the New York State Banking Department's opinion concerning the above is not binding on a court of competent jurisdiction.

I trust that this is responsive to your inquiry. If you have any questions, I can be reached at (212) 709-1642.


Christine M. Tomczak
Assistant Counsel