Banking Interpretations

General Regulations Part 38,39 and 82

December 6, 2005

[ ]

Re: Part 82 – Prepayment Penalties

Dear [ ],

This is in response to your November 28, 2005 letter to Sara Kelsey, Deputy Superintendent and
General Counsel of the Banking Department, inquiring whether "exempt organizations" are subject to
the Part 82 restrictions on prepayment penalties for variable rate loans of less than $250,000.

As you point out in your letter, Part 82 provides authorization for certain lenders (i.e., banks, trust
companies, savings banks, savings and loan associations, credit unions, persons and entities engaging
in the business described in section 590, Article 12-D of the Banking Law, and branches or agencies of
foreign banking corporations licensed pursuant to Article II of the Banking Law) to make first-lien,
variable rate residential mortgage loans of less than $250,000. Part 82 excludes from its purview
certain "federal lenders" (i.e., federally licensed branches and agencies of foreign banking corporations,
national banks, federal savings banks, federal savings and loan associations, federal credit unions and
their subsidiaries that are exempt from licensing as mortgage bankers). Thus, Part 82 does not apply
to these "federal lenders" and they are not subject to the Part 82 restrictions on prepayment penalties
for loans subject to Part 82.

These "federal lenders," however, are not precisely the same as the group of lenders that are exempt
from licensing and that are defined as "exempt organizations" under Section 590 of the Banking Law,
which provides

(e) "Exempt organization" shall mean any insurance company, banking organization,
foreign banking corporation licensed by the superintendent or the comptroller of the currency
to transact business in this state, national bank, federal savings bank, federal savings and
loan association, federal credit union, or any bank, trust company, savings bank, savings and
loan association, or credit union organized under the laws of any other state, or any
instrumentality created by the United States or any state with the power to make mortgage
loans. Subject to such regulations as may be promulgated by the banking board, "exempt
organization may also include any subsidiary of such entities;

(See, also, Part 39 of the General Regulations of the Banking Board.) Therefore, an "exempt
organization" that is also a "federal lender" is not subject to the Part 82 restrictions on prepayment
penalties for loans subject to Part 82; whereas, an "exempt organization" that is not also a "federal
lender" is not excluded from Part 82, including the restrictions on prepayment penalties for loans
subject to Part 82.

Furthermore, as you mention in your letter, all "exempt organizations" are subject to the Part 38
requirements relating to advertising, solicitation, applications, commitments and disclosures.

In addition, you may wish to take note of General Obligations Law, Section 5-501(3)(b), which provides,
with respect to residential loans, in general, that:

notwithstanding any other provision of law, the unpaid balance of the loan or forbearance may
be prepaid, in whole or in part, at any time. If prepayment is made on or after one year from the
date the loan or forbearance is made, no penalty may be imposed. If prepayment is made prior
to such time, no penalty may be imposed unless provision therefore is made expressly in the loan

If you have any other questions, you may call me at (212) 709-1660.

Very truly yours,
Alan M. Weinberg
Assistant Counsel