Banking Interpretations

NYSBL Sec. 108(5)
Personal Property Law 413

March 19, 1991

[ ]

Re: Bank Credit Card Access to Home Equity Line

Dear [ ]:

This is in response to your recent letter regarding access to home equity lines by way of a VISA credit card. By way of brief review, your client, a national bank with its principal place of business in California, has closed on a number of revolving credit lines secured by first or junior mortgages. The client would like to offer the borrowers a VISA card which could be used to purchase various goods and services, and the credit card would automatically draw on the secured credit line to satisfy the bill. You feel that section 413(11)(a) of the Personal Property Law would prohibit this, but your client does not agree, citing a recent Dime Savings Bank advertisement which purports to offer what your client wishes to offer. Dime actually is offering a VISA debit card, not a credit card.

New York law and regulations apply to home equity loans made in New York. See Banking Regulations, § 80.11. The regulations do not address the method by which a borrower may obtain advances on a revolving credit line.

On the issuance of the VISA credit card to access the home equity line, assuming that the VISA card will be issued in California, New York's personal property law and banking law are inapplicable, as the law of the state that issues the card controls. However, if the card will be issued in New York, a short discussion of the credit/debit card law in New York is necessary.

Under New York law, the only authority for New York banks to issue credit cards is section 413 of the Personal Property Law, which provides that credit cards cannot be secured by real property or fixtures of the buyer, except for a secured bank account. Personal Property Law, § 413(11)(a). It is clear that the New York legislature does not want the public using their homes to secure their casual consumer purchases.

Section 108(5) of the Banking Law is the authority for debit cards, although prior to a 1987 legislative change prohibiting it, the section had been relied upon by at least one bank in order to issue credit cards. Credit made under section 108(5) of the Banking Law may be secured, but the inability of a bank to pass along costs usually associated with loans secured by real estate makes any such practice impractical. See Banking Law, § 108(5)(e). In addition, if there are automatic transfers between the account set up under section 108(5) and a home equity line of credit, with no individual instructions by the customer to transfer the money each time a transfer is made, then the Banking Department may likely take the view that the card is directly secured by the home and would disapprove of the scheme. Moreover, when the change to section 108(5) was made, it was made clear that the legislature did not want to see debit cards being used as "disguised" credit cards, by use of a zero balance checking account tied to a debit card.

Thus, in conclusion, New York law covers the issuance of the home equity loan. Assuming that the VISA credit card in question will be issued in California, California law will cover the question of whether such a card can be used to access a home equity line of credit. Even if the card is controlled by California law, any automatic linkage with the home equity line raises questions under New York law. New York law prohibits the issuance of a credit card secured by real property. Finally, while not specifically prohibited, the issuance of a debit card in connection with a home equity loan would raise the policy concerns noted above.

I trust that this has been of assistance. If you need additional information, please advise.

Very truly yours,

Kathleen A. Scott Associate Attorney