April 16, 2007
Re: Article XII-B
Dear Mr. [---]
Your letter, of March 12, 2007, to the New York State Banking Department (the "Department"), has been referred to me for response. In your letter you asked whether [---] (the "Licensed Lender"), an entity licensed and regulated by the Texas Office of Consumer Credit Commission, would be required to obtain a license, under Article XII-B of the Banking Law, prior to being involved in certain activities in New York State.
According to your letter, the Licensed Lender is a lender licensed by the Texas Office of Consumer Credit Commission with its sole place of business located in Texas. The business of the Licensed Lender is stringently regulated by the Texas Office of the Consumer Credit Commissioner (licensing requirements entailing criminal background checks on officers/directors/10% shareholders, minimum capital requirements, fees and interest rate limitations, which are lower than would be permitted under New York banking law, consumer disclosure mandates as well as annual or more frequent regulatory reporting and field examinations). The Licensed Lender is in the business of providing non-recourse credit line accounts to borrowers (the "Borrowers"). The credit line agreements have no limitations on how the Borrowers may spend the proceeds they receive.
Each credit line account is secured by a lien in favor of the Licensed Lender on a life insurance policy owned by the Borrower, and for which the Borrower has previously paid the insurance premiums (the "Policy"). Borrowers assign their Policies to the Licensed Lender as the sole collateral for the advances made under the credit line (the "Collateral Assignment") as the credit lines would be non-recourse to the Borrowers.
Under the credit line agreements, the Licensed Lender is able to exercise a number of the Borrower's rights under the Policy, including the right to make advances under the credit line to pay the premiums due for the Policy in order to safeguard the Licensed Lender's collateral interest in the Policy, similar to the way in which a mortgage loan lender requires a homeowner-borrower to escrow homeowner's insurance premiums. Set forth below is a sample clause in a credit line agreement providing the Licensed lender with the protection right:
The undersigned Credit Line Account Owner(s) hereby request and instruct the Licensed Lender to pay timely all premiums as they may become due under the Insurance Policy directly to the issuer thereof from and after the commencement of the Draw Period until repayment of all Principal Debt, Finance Charges, costs and expenses owing under this Credit Line Agreement. It is understood and acknowledged that such payments of premiums to maintain the in force status of the Insurance Policy constituting "Advances" under this Credit Line Agreement are for our benefit.
The Borrower has the right to terminate the credit line and the Collateral Assignment at any time by repaying all amounts owed to the Licensed Lender.
Article XII-B, Section 555 of the Banking Law, dealing with the licensing of Premium Finance Agencies, provides that "[n]o person except a bank, state or federally chartered savings bank or savings and loan association, an authorized insurer or a lender licensed pursuant to article nine of this chapter shall engage in the business of a premium finance agency without a license therefor obtained from the Superintendent [of the Banking Department]..."
A premium finance agency is defined as "a person engaged, in whole or in part, in the business of entering into premium finance agreements with insureds, including a bank if so engaged." N.Y. Banking Law § 554. And a "Premium finance agreement" is defined as "a promissory note or other written agreement by which an insured promises or agrees to pay to, or to the order of, either a premium finance agency or an insurance agent or broker the amount advanced or to be advanced under the agreement to an authorized insurer or to an insurance agent or broker in payment of premiums on an insurance contract, together with a service charge as authorized and limited by law." Id.
Based on the information you provided, I am of the opinion that the Licensed Lender is not "engaged, in whole or in part, in the business of entering into premium finance agreements with insureds"; instead, its business to pay the insurance premiums, if and when necessary, is only tangentially related to its lending business, and is essentially a self-created obligation, created to protect its interest in the collateral – the life insurance. Therefore, the Department has no objection to the Licensed Lender conducting the contemplated activities in this State without obtaining a license under Article XII-B of the Banking Law.
I trust the foregoing is responsive to your inquiry.
Very truly yours,
Harry C. Goberdhan