Banking Interpretations

Gen. Regs. of BB Part 38 and General Obligations Law 5-501

September 19, 2005 10:16 AM

Sharon Cherry/legal/NYSBD

To Edward Valdes/fcb/NYSBD@NYSBD
cc Sara Kelsey/legal/NYSBD@NYSBD, Rosanne Notaro/legal/NYSBD@NYSBD,Steven Barras/legal/NYSBD@NYSBD,Barbara
Subject Re: Fw: Issue of Fees at [ ]

With regard to item #1, we agree that the bank is in violation of Part 38.3(b)(1) and 38.3(e) since it is not issuing any pre-application disclosures to applicants.

With regard to item #2, Part 38.3(b)(1) (i) provides that prior to taking an application fee, credit report fee or property appraisal fee, every mortgage banker or exempt organization shall disclose in writing or via electronic media to each applicant the amount of the application fee, and the mortgage banker or exempt organization's good faith estimate of the credit report fee, property appraisal fee, the processing fee, if any and the terms and conditions, if any, under which such fees may be refundable. The bank is not disclosing its $500 application fee until closing. Therefore we agree that this constitutes a violation of Part 38.

We understand that the application fee is usually the same for everyone. However, if the bank wants to charge certain applicants less, it should be disclosed as a partial refund of the application fee for applicants denied by the bank or for applicants that cancel prior to the closing date.

The third item relates to Part 38.7(a)(15), which provides that no mortgage broker, mortgage banker or exempt organization shall accept a good faith deposit or any other deposit to induce the lender to process the loan, whether or not the deposit is refundable. You state that the bank's $250 "good faith deposit" accepted at the time of telephone or internet application is being used by the institution as an inducement to process the consumer's primary mortgage application. We agree that this is a violation.

The fourth item relates to a prepayment penalty that you believe violates Section 5-501(3) of the General Obligations Law ("GOL"). The bank's addendum to its open-end home equity line of credit account agreements apparently states that the bank will impose a $500 finance charge if the balance on an open-end junior mortgage falls below a predefined amount at any time during the first 24 billing cycles.

The issue is that if the $500 charge is in fact described as a "finance charge," instead of a prepayment penalty, this may cause the institution to charge in excess of the usury rate. The examiner indicated that he advised the bank to do the calculations for customers that paid this charge to determine whether it resulted in an APR exceeding 25%. We agree that is the proper course of action that should be undertaken by the bank. We note, however that this issue only arises if this charge is couched as a "finance charge." You indicated that it appears the institution is waiving some closing costs on the condition that the customer keep a certain minimum loan amount outstanding for a period of 24 months.

The Department has held that a lender may impose deferred third party closing costs on a borrower, without violating the previously noted section of the GOL. This type of provision would be acceptable as long as it is properly disclosed to the borrower and the closing costs in question are typically borne by the borrower.

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