New York Senate Bill 1061A: Regulation of Commercial Finance Licensing
This correspondence was submitted on behalf of the National Private Lenders Association by Jonathan Hornik, Esq. and Peter Kelegian, Esq. of LaRocca Hornik Rosen & Greenberg, LLP.
New York Senate Bill 1061A
Regulates commercial finance licensing, establishes the minority- and women-owned business protection program, and provides for the study of certain impacts on underbanked and underserved areas.
Without the requested exemption, the bill as proposed would require every non-exempt real estate lender in New York to be licensed. This requirement would further hinder the already devastated NY real estate market, which is still reeling from the ill effects of Covid-19. Few states in the US were as negatively impacted.
Requiring all commercial real estate lenders to be licensed will:
- Negatively impact the flow of much-needed capital for New York real estate, including investment capital for the rehabilitation of 1 to 4 family residential units;
- Increase the cost of borrowing for NY real estate loans (including those used for 1 to 4 family residential units);
- Curtail creative solutions to the availability and affordability of homes in New York; and
- Cut back on the competition that incentivizes larger institutions to offer flexible underwriting designed for clients.
As currently drafted, SB 1061A (NY Commercial Financing Licensing Law) would require that a provider of “commercial financing” obtain a license in New York State. “Commercial financing” under SB 1061A would include NY real estate lenders as drafted.
It is vital to commercial mortgage lenders that the proposed NY Commercial Financing Licensing Law not apply to them. For the following reasons, an exemption for “commercial financing transactions secured by real property” should be added to Section 363-b of the bill:
While it does not appear from a close reading of SB 1061A that it was intended to apply to “commercial financing transactions secured by real property,” the intention of the drafters is to extend licensing to certain potentially vulnerable borrowers in factoring, sales-based, and other secured and unsecured transactions as SB 1061A does not otherwise expressly exclude commercial mortgage lending, the Section 363-b exemption be added to the bill. The bill, as drafted, would seemingly apply to private lenders who make real estate secured loans in New York. Without a clear exemption, real estate lenders and those that purchase those loans for securitization and other credit enhancement purposes would not have clarity on the applicability of the bill. They will likely mandate compliance in an abundance of caution.
Without the exemption, SB 1061A may have the unintended consequence of regulating virtually all commercial mortgage loans made to sophisticated commercial borrowers in New York State. These loans are already regulated by many of a panoply of state and federal laws and regulations covering licensing, fair lending practices, and adequate disclosures to consumer and commercial borrowers. These laws include the NY Banking Law, which sets forth licensing requirements for commercial lenders in New York; the SAFE Act (which mandates a nationwide licensing and registration system for residential mortgage loan originators); TILA (Reg. Z), which sets forth disclosure, advertising, and other requirements for various consumer credit transactions, including mortgage loans; RESPA (Reg. X), which prohibits kickbacks and unearned fees, requires disclosure of mortgage settlement charges, and regulates servicing activities such as escrow maintenance, imposition of force-placed insurance, and loss mitigation; HMDA (Reg. C), which requires covered financial institutions to collect and report data regarding mortgage loan originations, applications, and purchases; ECOA (Reg. B), which scrutinizes all deferred-payment credit transactions, including secured transactions involving real estate for discrimination on basis of race, national origin, religion, sex, gender, marital status, age, or public assistance status; and the FHA, which prohibits discrimination on basis of race, religion, sex, disability, etc.
Specifically, commercial mortgage lenders doing business in New York are already regulated by:
- The New York Banking Law, under which a license is required for any person engaged in New York State in the business of making a commercial or business loan to an individual in an amount less than $50,000. NY Bank. Law Section 340. (The Department of Financial Services is the regulator and licensor of loans that fit the description.)
- It should also be noted that real estate brokers have to be licensed in New York.
- ECOA (Equal Credit Opportunity Act): Commercial mortgage lenders are regulated by ECOA (15 USC §1691(a)), which prohibits discrimination “against any application with respect to any aspect of a credit transaction on the basis of race, color, religion, national origin, sex or marital status.” Lenders are required under Reg. B to provide prospective borrowers with Adverse Action Notices and are required to comply with a range of information gathering requirements, appraisal requirements, investigation procedures, standards of creditworthiness, terms of credit, furnishing of credit information, revocation/alteration/termination of credit, and collection procedures. Regulation B also requires that business purpose lenders on first-lien loans secured by a residential structure that contains one to four units disclose to applicants that they have the right to receive copies of appraisals and other written valuations. Enforcement is through the Federal Trade Commission and individual and class actions. Awards of punitive damages can be severe.
- FHA (Fair Housing Act) (42 USC 3601 et seq.): The FHA prohibits discrimination on the basis of race, color, national origin, religion, sex, familial status, and disability. The Act applies to any individual or entity whose business engages in “residential real estate-related transactions” and includes commercial mortgage lending secured by residential property. Enforcement is through HUD, the US Attorney General, and private actions for civil penalties and can be severe.
- HMDA (Home Mortgage Disclosure Act). Commercial mortgage lenders making loans on non-owner occupied properties primarily for the purpose of purchase, rehabilitation, and refinance are subject to the data collection and reporting requirements of HMDA. Loan-level data is collected and reported on ethnicity, race, sex, age, income, various factors in credit decision, action taken, reason for denial, interest rate, certain contractual features, etc. HMDA violations are subject to administrative and civil money penalties. Compliance is enforced by FRB, FDIC, HUD, and CFPB, among others.
Without the exemption, SB 1061A will subject commercial mortgage lenders to licensing costs and other requirements. SB 1061A would increase borrowing costs and discourage the entry of commercial mortgage lenders into the New York real estate market. This action would put the state’s mortgage lending and real estate market at a disadvantage vis-a-vis those of other states.
Private commercial mortgage lenders are regulated by a range of state and national laws and regulations tailored to the specific nature of the commercial product. The sophisticated commercial borrower generally does not require the level or type of regulatory oversight that can benefit less experienced and sophisticated consumers or borrowers. We respectfully request that similar to the NY TILA bill, recently passed, SB 1061A include an exemption for commercial financing transactions secured by real property.
NPLA Member’s Impact on Communities
The NPLA represents capital providers, private lenders, and real estate service providers that deploy millions into the New York economy each year. Our members offer investments for rehab to rental, fix & flip, new single-family residence (SFR), multi-family, commercial, ground-up construction, and more.
Private Lenders and members of the NPLA can be part of the solution for underbanked and underserved areas in New York.
Please contact Mr. Hornik at (212) 536-3529 or [email protected] with any questions.
Jon Hornik serves as the General Counsel to the NPLA, and is a senior partner at LaRocca Hornik Rosen & Greenberg, LLP.