Banking Law 590(5)(a)
Gen. Reg. of the BB Parts 38 & 39
August 30, 2004
RE: Mortgage brokers making construction loans
Dear Mr.( )
Your June 28, 2004 letter to the Legal Department, New York State Banking Department (the "Department"), has been referred to me for response. In your letter you requested an advisory opinion as to whether a mortgage broker can originate a residential construction loan in its name as an exempt product, and then broker the end loan on the residence.
Construction loans, as identified by Part 39.5(b) of the General Regulations of the Banking, are exempt from the requirements of Article 12-D of the Banking Law (the "Banking Law") and Part 38 of the General Regulations of the Banking Board ("Part 38"), and therefore not regulated by the Department. As an exempt, unregulated product, construction loans can close in the name of mortgage brokers.
After the construction is complete, the property will be considered a residential real property as defined by Part 38.1(p) of the General Regulations of the Banking Board. At this stage the mortgage broker can act as a broker in placing the loan with a lender. Note that in the above scenario, the "take out" or "permanent" loan, after construction is complete, would not be in the name of the mortgage broker, and therefore, not a violation of §590 (5)(a).
Additionally, your letter asked whether loans made to "enhance existing residential dwellings" could be accorded the above treatment. Under Part 39.5(e) of the General Regulations of the Banking Board ("Part 39.5(e)"), "home improvement loans" are also exempt from the requirements of the Banking law and Part 38. In the event the loans made by the mortgage broker to "enhance existing residential dwellings' can be considered "home improvement loans" under Part 39.5(e), then it will be exempt form the requirements of the Banking Law and Part 38.
Further, it should be noted that a "construction loan" is classified as such, not based on whether the holder is a company requiring licensing or not, but based on a determination made after a review of the loan's form and substance. This review of both form and substance, would also prevent a mortgage broker from escaping the requirements concerning residential lending by merely "slap[ping] a building loan agreement on record" in an attempt to convert a mortgage loan into a construction loan.
I trust the foregoing is responsive to your inquiry.
Very truly yours,
Harry C. Goberdhan