Banking Interpretations

Banking Law §6-1
Part 41 - GRBB

September 17, 2004

Re: Part 41 Inquiry

Dear [                ]:

Your inquiries regarding Sections 41.1(e)(6)(iii) and 41.1(f) of Part 41 of the General Regulations of the Banking Board, "High Cost Home Loans," ("Part 41") has been referred to me for response.

You state that with respect to the limitations on the exclusion of up to two (2) bona fide discount points set forth in Part 41 §41.1(e)(6)(iii), the initial rate on Adjustable Rate Mortgages ("ARM's") are often fixed for up to seven (7) years on a 30 year mortgage.  In exchange for the extended period during which this initial rate is applicable, the borrower pays a higher initial rate than he would pay if the first rate adjustment occurred in a shorter period of time from closing, such as one year.[1]

You do not believe that it is economically feasible to use the identical 1% over the comparable US Treasury security test regardless of the term of the initial period.  Rather, you believe the Banking Department should give consideration to the fact that the borrower has elected this higher initial interest rate to obtain the benefit afforded by the longer initial period.

You request guidance as to whether there is an alternate method by which this calculation can be adjusted to reflect the economic reality of the benefit received by the borrower by having the initial rate applicable for an extended period.

You also inquired about the definition of "total loan amount" found in Part 41 §41.1(f).  According to your letter, your institution does not normally finance points and fees.  However, at closing, borrowers often request that checks be cut to your institution and other parties from the loan proceeds to pay fees associated with the loan.  You do not believe that this practice constitutes financing of these fees since the loan amount is not increased.  However, you are concerned that by distributing these fees directly from the loan proceeds on checks drawn from the loan principal at the request of the borrower, those fees may become deductible in determining the total loan amount.  As a result, the calculation of the high cost home loan threshold for points and fees under Part 41 §41.1(f) would be affected.

With respect to your inquiry regarding the calculation of the total loan amount in Part 41 §41.1(f), the payment directly from loan proceeds of fees that have not increased the total loan amount does not require that those fees be deducted from the total loan amount.  Accordingly, honoring the request of borrowers to cut such checks from the loan proceeds would not cause the loan to become a high cost home loan. 

Regarding your Part 41 §41.1(e)(6)(iii) inquiry, that language is the same as the language found in Section 6-l(1)(g)(ii)(1) of the Banking Law.  Without addressing the economic feasibility issue raised by you, please be advised that due to the specific language of the statute, the Department is constrained from offering any alternate method by which the calculation can be adjusted.

Thank you for your attention to the above.

Very truly yours,

Alvin A. Narin
First Assistant Counsel

[1]  You note this does not take into consideration the lower introductory rate, the so-called "teaser" rate, prevalent in the case of one year ARM's.