June 25, 1999
Re: [ ] Credit Union
Dear Mr. [ ]:
Your April 21, 1999 letter regarding whether your client, C[ ] Credit Union ("[ ]"), may require a borrower to reimburse for closing expenses incurred by C[ ] when the borrower cancels a line of credit secured by a junior mortgage within the first three years of its opening has been referred to me for response. According to your letter, C[ ] is frequently unable to recoup its closing costs if the borrower cancels such a line of credit within the first few years.
Section 80.10(e) of Part 80 of the General Regulations of the Banking Board states that, "no prepayment penalties shall be permitted where such junior mortgage loan secures a revolving line of credit." However, the NYSBD has previously opined that a loan program in which the lender pays certain closing costs with the caveat that if the borrower pays off the loan before a certain time, the borrower will have to reimburse it the lender for certain closing costs. Accordingly, by conditioning the waiver of such charges upon the expiration of three years, the borrower receives a financial benefit to continue with the loan program rather than incurring a prepayment penalty that is prohibited by Part 80 §80.10(e).
In addition, you should also be aware that there appears to be authority in Section 5-501(b) of the New York General Obligations Law ("GOL") for a prepayment penalty to be taken during the first year of such loan. GOL §5-501 states, "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." Therefore, even if an adjudicatory body were to reach a different conclusion than stated above with respect to the recoupment of certain closing costs, it is likely that GOL 5-501(b), in this respect, preempts the prepayment penalty bar in Part 80 of the General Regulations of the Banking Board. Additionally, before you undertake to structure such a program, please investigate any changes that may be made in this session of the Legislature.
I trust this is responsive to your inquiry.
Very truly yours,