Banking Interpretations
Superintendents Regulations Part 410 and NYSBL 590
February 21, 2006
TO: Principal Examiner Brennan
FROM: Alan M. Weinberg
Subject - Superintendent’s Regulations – Part 410.1(b)(2) – Line of Credit Requirement
Issue
- To what extent, if any, must a line of credit obtained by a mortgage loan company obligate the provider of the line to make advances in order to satisfy the line of credit requirement under Part 410.1(b)(2) of the Superintendent’s Regulations?
- To what extent, if any, should the Department require that trade names or fictitious names of a mortgage loan company be recited in a line of credit agreement obtained by a mortgage loan company, a letter from the provider of the line confirming the existence of the line, a side letter from the line provider or elsewhere?
Recommendation
- To satisfy the line of credit requirement under Part 410.1(b)(2) of the Superintendent’s Regulations, a line of credit obtained by a mortgage loan company should be in effect and should not be an illusory agreement. Where the letter states that the provider of the line does not have any legally binding commitment or obligation to make advances, the line of credit should be deemed to be illusory and the mortgage loan company should be considered to have failed to meet the line of credit requirement.
- In connection with the obligation of a mortgage loan company to demonstrate and maintain an existing line of credit under Part 410.1(b)(2) of the Superintendent’s Regulations, t here is no legal requirement that trade names or fictitious names of a mortgage loan company be recited in the line of credit agreement, a letter from the provider of the line confirming its existence, a side letter from the line provider or otherwise.
Background
The Mortgage Banking Division receives various forms of letters from providers of credit lines to mortgage loan companies attesting to the existence of credit lines of $1,000,000 or more in favor of the mortgage company. The Division accepts these letters as sufficient demonstration of the existence of lines of credit as required under Part 410.1(b)(2) of the Superintendent’s Regulations and does not examine the actual line of credit agreements, where such agreements exist.
A number of questions were raised by the Division relating to the sufficiency of the letters from the providers of credit lines. In particular, your memorandum dated January 5, 2006 questioned whether a letter from an approved provider of lines of credit is acceptable where it states that the line of credit is not a commitment and does not obligate the provider to lend. Also, you indicated that many providers are reluctant to include trade names or fictitious names of a mortgage loan company in a line of credit agreement or a letter from the provider of the line confirming the existence of the line. You (and at least one credit provider) asked whether such names could be included in a side letter from the line provider or elsewhere or not at all. I have restated your questions as the two “issues” stated above in order to answer them more generally.
Reasoning
“Committed” Line of Credit Requirement -- A mortgage loan company has the obligation to demonstrate and maintain an existing line of credit of $1,000,000 or more . Part 410.1(b)(2) of the Superintendent’s Regulations. The term “line of credit” is not defined in this regulation, but the term is used in other statutes and regulations and is commonly understood to mean
“the maximum amount of borrowing power extended to a borrower by a given lender to be drawn on by the borrower as needed.” Black’s Law Dictionary, Eighth Edition, 2004.
The terms and conditions of line of credit agreements or letters evidencing the existence of a line of credit are varied, but where the provider has no commitment or obligation to make advances the credit line is illusory and the mortgage loan company has not met the line of credit requirement set forth in regulation. In this situation, one can conclude that, in effect, there is no line of credit at all.
Borrowing may be subject to the satisfaction of conditions specified by the lender, however, without the conditions rendering the credit line illusory. For example, borrowing may be subject to the provider’s satisfaction with the mortgage loan company’s financial condition and performance or subject to the provider’s discretion on whether to make loan advances and still satisfy the line of credit requirement. Furthermore, a line of credit would not be illusory merely because the provider reserves the right to cancel it. (In the event advances are refused or the line is cancelled, the mortgage banker must immediately notify the Mortgage Banking Division and take steps to secure an alternate line of credit to comply with the requirement of maintaining the line of credit as provided in the regulation.)
Trade Names, Fictitious Names or DBAs -- As to mandating the inclusion of trade names or fictitious names of a mortgage loan company in the line of credit agreement, letter confirming the line from the provider, side letter from the provider or otherwise, there is no legal requirement to do so.
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Noted _____________
S.A.K.