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Banking Interpretations

Part 82


September 14, 2006


Re: Call Options

Dear [---]

Your letter, dated August 2, 2006, to the New York State Banking Department (the "Banking Department"), has been referred to me for response. In your letter you asked whether there is any prohibition on having a call option included in the terms of a first lien residential mortgage transaction.

General Regulations of the Banking Board Part 82.1 (a), entitled "Alternative Mortgage Instruments" authorizes banks and other lending institutions "... to make, sell, purchase or participate in mortgage loans in a principal amount of less than $250,000 other than fixed-rate, equal payment, self-amortizing loans." However, Part 82.1 (b) in pertinent part, specifically states that "[n]othing in this Part authorizes a mortgage loan which contains a demand feature ... " Therefore, based on the fact that a "call option" is a "demand feature," such call options may not be included in the terms of a first lien residential mortgage transaction.

Note that, this conclusion does not prohibit terms, embodied in mortgage loan agreements that provide for an acceleration of the principal sum due only after a default has occurred, as such terms serve both as a deterrent to nonpayment, and as a means by which the lending institution can protect its position by promptly proceeding against the security for the debt.

I trust the foregoing is responsive to your inquiry.

Very truly yours,

Harry C. Goberdhan
Assistant Counsel

Department of Financial Services


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