Extends the effectiveness of open end loans

BILL NUMBER:S5531

Title of bill

An act to amend chapter 223 of the laws of 1996, amending the banking law relating to permissible fees in connection with open end loans, in relation to extending the effectiveness thereof

Purpose

To continue, for another two years, the existing statutory authority of licensed lenders to charge annual fees on open-end personal loans.

Summary of provisions

This bill amends the effective date of Chapter 223 of the Laws of 1996 to extend, for an additional two years (to June 30, 2013), the authority of licensed lenders to charge annual fees on open-end personal loans.

Existing law

Since 1996, Section 351 of the Banking Law has authorized licensed lenders to charge annual fees on open-end loans.

Justification

In 1996, legislation was enacted to authorize licensed lenders to charge annual fees on open-end loans. The law further provided that any such fee may not exceed the lesser of 1% of the loan amount or $50. This 1996 law contained a sunset date of June 30, 2000. Since that time, several laws have been passed to continue the provisions of the 1996 law. The provisions of the 1996 law are currently scheduled to expire on June 30, 2013.

The 1996 law recognized that annual fees are a commonly used feature in the pricing of open-end loan products, such as credit cards, home equity loans and personal loans. This type of fee reflects the fact that additional costs are incurred in the administration of revolving loans, such as the preparation and mailing of monthly billing statements, the processing of transactions, and increased monitoring costs.

Annual fees provide financial institutions with greater flexibility in pricing their loan products. Without this type of fee, lenders would have to rely solely on the interest rate to cover all of their costs. This would have the effect of elevating the interest rate. For example, many accounts, especially passive or low-balance accounts, may not generate sufficient interest income to offset the expenses incurred. To help recover such costs, a lender can either charge an annual fee to each customer, or they can increase the interest rate for all customers. The problem with the latter approach is that the impact of such rate increases falls disproportionately on persons who carry a high balance. In contrast, the ability to charge an annual fee enables lenders to better apportion their costs between account holders to reflect the actual costs incurred.

For these reasons, banking institutions have long had the ability to charge annual fees on open-end loans products. Licensed lenders have also had the ability to charge annual fees on certain open-end

products, such as credit cards and home equity loans. However, prior to 1996, they did not have the authority to charge annual fees on open-end personal loans. Chapter 223 of 1996 gave licensed lenders the same pricing flexibility as banking institutions in regard to charging annual fees on open-end personal loans. Licensed lenders should continue to have this flexibility in pricing their loan products. Therefore, this bill would extend the provisions of the 1996 law for another two years.

Legislative history

New bill.

Fiscal implications

None.

Local fiscal implications

None.

Effective date

Immediately.