October 25, 2004
To: Regina Stone
Licensed Financial Services Division
From: Alvin A. Narin
First Assistant Counsel
Subject: [ ] - Sales Finance Company license application and request for exemption from certain submissions.
Issue: Whether [ ] ("Company") is required to obtain a sales finance license pursuant to Article XI-B of the Banking Law ("Article XI-B"). If the Company is required to obtain a sales finance license, whether the Company may obtain a waiver of the requirement that the directors and senior officers directly responsible for the operation of the Company submit personal questionnaires, personal finance statements, investigation reports and banking references in connection with its application.
Recommendation: The Company must obtain a sales finance company license. Whether to waive the required submissions for the directors and senior officers responsible for the operation of the Company is a policy decision to be determined by the Licensed Financial Services Division ("LFSD").
Background: The Company, a New York corporation with offices in New York, New York, is a direct wholly-owned subsidiary of [ ], a Delaware corporation with its principal place of business in Delaware. The Company is also an indirect subsidiary of [ ] the global financial services firm.
The Company intends to purchase pools of motor vehicle retail installment contracts ("Contracts") from various finance companies that previously purchased the Contracts from motor vehicle dealers throughout New York State ("Financing Program"). The purchased Contracts would be either be held by the Company and serviced by institutional loan servicers under a contract with or sold outright, in participation, or in a securitized format.
Counsel for the Company states in his letter to the Licensed Financial Services Division ("LFSD") that he believes the Company may be exempt from licensing based on the definition of "sales finance company" set forth in Banking Law §491(7), which excludes from the definition, "[t]he pledgee of an aggregate number of contracts to secure a bona fide loan thereon." Counsel then refers to a December 6, 1993 letter opinion from the Department stating that licensing under Article XI-B is not required for an entity formed for the limited purpose of holding, servicing or facilitating the securitization of the portfolio transferred to it by a licensed sales finance company. (A copy of said letter is attached hereto.)
In addition, the Company requested that the directors and officers having decision-making authority over the Company's operation not be required to submit personal questionnaires, personal financial statements, investigation reports and banking references to the Department for review. The request is based on the fact that the officers and directors will not be providing any capital to the Company and they will not be shareholders of the Company. Further, the continuing financial soundness of the Company is not dependent on the personal finances of the officers and directors since it is an indirect subsidiary of [ ] Finally, each of the officers and directors previously satisfied stringent background investigation requirements in connection with their employment at [ ].
Reasoning: The facts set forth in the December 6, 1993 letter can be distinguished from the instant matter. In that instance, the subsidiary's business was limited to holding and servicing the portfolio of retail installment sales contracts transferred to it by the sales finance company. Thereafter, the subsidiary would issue notes or bonds to third-party purchasers that would be secured by the portfolio. The Department opined that the subsidiary would not be required to obtain a sales finance license pursuant to Article XI-B in order to have the contracts assigned to it for the purpose of securitizing the portfolio.
In this instance, the Company will engage in activities beyond merely servicing the contracts, including holding the contracts and having them serviced under contract with institutional loan servicers or selling them, either outright, in participation or in a securitization. Accordingly, this matter is not analogous to the one described above and a sales finance license is required to engage in these activities.
With respect to whether the Company's request for a waiver from the requirement that its officers and directors responsible for the operation of the Company submit certain information is not a legal matter but is rather a policy decision to be made by LFSD.