Makes provisions allowing any individual to make limited loans to family members without requiring an individual to obtain a mortgage banking license

Section 590(5) (b) is amended to provide that mortgage brokers may solicit, process, place and negotiate mortgage loans only with a mortgage banker or exempt organization, thereby prohibiting relationships with unlicensed and unregulated private lenders.

Existing law

Section 590(2) of the Banking Law currently prohibits persons or entities from making five or more mortgage loans in anyone calendar year unless they have obtained a mortgage banker license from the Superintendent of Banks.

Justification

In order to protect consumers, legislation was enacted in 1981 to require the licensing and regulation of persons or entities who make mortgage loans. This law originally exempted anyone who made fewer than 20 mortgage loans within any 12 month period.

In 1986, New York's laws governing mortgage banking were overhauled and strengthened in response to continuing problems and abuses within the industry. As part of that effort, the licensing exemption was tightened so that anyone who made five or more mortgage loans in a calendar year had to be licensed. This revised exemption was intended to enable persons who are not in the regular business of making such loans -- such as a. person making a loan to a family member -- to make occasional mortgage loans without having to be subject to the statutory and regulatory scheme applicable to those whose primary occupation is that of a mortgage banker.

Unfortunately, the exemption continues to be subject to abuse by unscrupulous persons within the mortgage industry. In particular, the Banking Department has found that certain mortgage brokers have developed active mortgage businesses by steering consumers to exempt private lenders that they have recruited, thus exploiting this exemption. These private loans are not governed by the statutory and regulatory requirements which have been adopted in New York to protect consumers from deceptive and abusive lending practices. As a result, these loans are often made on grossly unfair terms to persons in distress, with brokers charging excessive points and the lenders charging the maximum allowable interest rate and structuring the loan in a manner which typically leads to foreclosure. While the Banking Department has received complaints about these types of private loans,

they have been unable to provide assistance as these private lenders are not subject to regulation.

By tightening the licensing exemption, this bill should help ensure that borrowers are protected from the abusive practices which are currently being committed by some unlicensed and unregulated private lenders. Higher risk customers, who are typically involved in these loans, can be better served by dealing with licensed entities that are subject to the consumer protections, disclosure requirements and regulatory structure established by the Banking Law. These borrowers have an increasing number of legitimate alternatives, from government-sponsored programs to loans from regulated mortgage companies which have expanded their market to better serve borrowers who may have less desirable credit histories.

This bill seeks to ensure that the licensing exemption remains limited to the person or entity that makes the occasional mortgage loan to family or friends, rather than persons or entities who engage in such activities as a business venture. Private lenders who have relationships with mortgage brokers or mortgage bankers are clearly involved in the business of making mortgage loans, and should be regulated to the same extent as other mortgage lenders. Potential borrowers who have gone to a mortgage broker or banker should be assured that they will be afforded all of the existing statutory and regulatory protections applicable to licensed mortgage bankers.

Fiscal impact

None.

Effective date

The same date as Section 8 of Chapter 472 of the laws of 2008 takes effect or the first of January next succeeding the date on Which it shall have become a law, whichever is later.