When Is A Lender Not A “Lender”?

• Posted on: May 11 2018

On several occasions, this Blog has treated issues related to problems faced by mortgagees foreclosing on certain residential loans.  “Appellate Division Second Department Tells Foreclosing Residential Lender to ‘SHOW ME THE EVIDENCE’” addressed the sufficiency of evidence necessary for a foreclosing lender to demonstrate compliance with the requirement under RPAPL §1304 that ninety days prior to the commencement of an action to foreclose a home loan, a lender must send a letter to the borrower that, among other things, the loan is in default.  “The Second Department Denies Summary Judgment To Another Foreclosing Mortgagee Due To The Insufficiency Of Evidence Presented On The Motion” addressed the sufficiency of evidence necessary for a lender to demonstrate that it is the holder of the underlying note and mortgage and, thus, has standing to prosecute the foreclosure action.  Finally, “The Second Department Reverses Another Grant Of Summary Judgment To A Foreclosing Lender On A Home Loan Due To The Insufficiency Of Proof Of Mailing Statutorily Required Notices To The Borrower” addressed the sufficiency of evidence required by a lender to prove that the “ninety-day” default notice required by RPAPL §1304 was properly mailed.

Many of the onerous residential foreclosure rules apply only to “lenders” and, therefore, mortgagees that are not deemed “lenders” under the applicable rules need not comply with such rules.  For example, the requirements of RPAPL 1304 are applicable to “lenders”.  “Lender“ is defined in RPAPL §1304 as a “mortgage banker” as defined in Banking Law §590(1)(f) or an “exempt organization” as defined in Banking Law §590(1)(e).  Section 590(1)(f) of the Banking Law defines “mortgage banker” as “a person or entity who or which is licensed pursuant to section five hundred ninety-one of [the Banking Law] to engage in the business of making mortgage loans in [New York]” and §590(1)(e) of the Banking Law defines “exempt organization” as “any insurance company, banking organization, foreign banking corporation licensed by the superintendent or the comptroller of the currency to transact business in this state, national bank, federal savings bank, federal savings and loan association, federal credit union, or any bank, trust company, savings bank, savings and loan association, or credit union organized under the laws of any other state, or any instrumentality created by the United States or any state with the power to make mortgage loans [and, in certain circumstances, the subsidiaries of such entities].”

Moreover, Banking Law §590(2)(a) provides that “[n]o individual, person, partnership, association, corporation or other entity shall engage in the business of making mortgage loans without first obtaining a license from the superintendent in accordance with the licensing procedure provided in this article and such regulations as may be promulgated by the superintendent.  Exempted from the licensure requirement of §590(2)(a), are, among others, “exempt organizations” and, in general, individuals, persons, partnerships, associations, corporations or other entities that do not make “more than three such loans in a calendar year, nor more than five in a two year period.” (See Banking Law §590(2)(a)(i) and (iii).)

Not all mortgagees are “lenders” as defined in the Banking Law.  Sometimes, for example, a seller of residential property will take a mortgage as part of the sale transaction if the purchaser is a relative, cannot obtain financing from a bank and/or if the seller treats the sale as a business deal and is motivated by a favorable rate of return that might be obtained as part of the transaction.  Similarly, private lenders may make mortgage loans, but not a sufficient number to require licensure under Banking Law §590(2)(a)(iii).

Frequently, defendants in mortgage foreclosure actions assert defenses based on requirements imposed on “lenders” despite the fact that the foreclosing mortgagee is not a deemed “lender” under the RPAPL/Banking Law.  Such was the case in NIC Holding Corp. v. Eiseneggert (Sup. Ct. Suffolk Co. April 25, 2018).  The plaintiff in NIC was a member of the New York Mercantile Exchange and one of its traders was relocating to Oklahoma.  In order to facilitate the sale of the trader’s home in conjunction with the move, plaintiff agreed to fund the defendant’s purchase of the home and, as security for the repayment of the loan, took back a $1,050,000 mortgage on the property.

The NIC defendant defaulted and plaintiff commenced a mortgage foreclosure action.  In opposition to plaintiff’s motion for summary judgment and an order of reference to compute, defendant argued that the action should be dismissed because plaintiff failed to serve the ninety-day notice required by RPAPL §1304.  In response, plaintiff argued that it was not a “lender” and, therefore, was not required to serve such a notice.

The NIC court agreed with the plaintiff and granted its motion.  The court determined that plaintiff, although it was a private lender, it was not a “lender” under RPAPL §1304 and did not have to send a ninety-day notice.  In this regard, the court credited the affidavit of plaintiff’s controller in which it was averred that “plaintiff is in the petroleum business and is not in the business of giving loans collateralized by mortgages for the purchase of residential homes.”

TAKEAWAY

The NIC court does not address the question of the number of mortgage loans that plaintiff may have made in the one or two-year period around the time that the subject loan was made.  (See Banking Law §590(2)(a)(iii).)  Perhaps this issue may be argued if an appeal is filed.

Individuals and entities that make a number of mortgage loans for business reasons, as accommodations to employees (as was the case in NIC) or otherwise, should take note of Banking Law §590(2)(a)(iii) and determine whether licensure under the Banking Law is necessary.