Banking Interpretations

NYBL 555
NYBL 568

New York State Banking Department

To: Asst. Deputy Superintendent - Robert A. Mengani
From: Harry C. Goberdhan - Assistant Counsel

December 20, 2010

Subject: Premium Finance Agency License



Whether [---] (the “Company”), an entity that proposes to finance fully-collateralized, life insurance premiums should be issued a license as a premium finance agency under Article 12-B of the Banking Law?

Relevant Facts:

According to information provided, the Company proposes making loans to certain entities, which loans would be used for the payment of premiums on life insurance policies issued on the lives of individual insureds or groups of insureds. Insureds are required to collateralize the loans by a combination of: (i) the cash value of the life insurance policy; (ii) an irrevocable standby letter of credit; and (iii) other collateral acceptable by the Company and its counterparties.

The Company proposes charging the customers the following:

  1. Fees: Structuring and refinancing fees paid by the customer upon inception of the loan and on a periodic basis as appropriate: and
  2. Interest: Interest on the loan amount.

Relevant Banking Law and Analysis:

Article 12-B, Section 555 of the New York State Banking Law requires that every person that proposes engaging in the business of a premium finance agency, first obtain a license prior to being so involved.1  Premium finance agency means engaging in the business of entering into premium finance agreements with insureds, or acquiring premium finance agreements.2 A premium finance agreement is a promissory note or other written agreement by which an insured promises or agrees to pay to, or to the order of, either a premium finance agency or an insurance agent or broker, the amount advanced or to be advanced under the agreement for payment of premiums, together with a service charge as authorized and limited by law.3

In this case, the Department should refuse to issue a license to the Company in light of the fact that the Company's proposed business activity requires that insureds collateralize their premium finance loans with irrevocable standby letters of credit or other collateral acceptable by the Company. The costs incurred by insureds in the procurement of these letters of credit would run afoul of Article 12­B of the Banking Law, which limits the charges enumerated in Section 568 as being inclusive of all charges incident to the premium finance agreement.4 Additionally, the foregoing of income potential on the "cash and cash-like" assets set aside as collateral is also a cost not enumerated in Section 568 of the Banking Law.

Further, the "fees" that the Company proposes charging (Year 1: - 5% of 1st. year premium borrowed; Years 2 - 10 .5% of additional premiums borrowed) are different from, and in excess of, the service charge of "fourteen dollars per one hundred dollars per annum, plus an additional charge of ten dollars per premium finance agreement" permitted under Section 568(4)(a).

In conclusion, because the costs, direct and indirect, proposed to be imposed on insureds are not permitted by Article 12-B, the Department should refuse to issue a license to the Company as a premium finance agency.

Noted: MEG.

  1. New York Banking Law § 555(1)
  2. New York Banking Law § 554(1)(a) and (b)
  3.  New York Banking Law § 554(8)
  4. New York Banking Law§ 568(4)(e)