Martorano v. Capital Finance Corp. , 289 N.Y. 21 ( 1942 )

I cannot agree with the decision about to be made which involves an interpretation of the following portion of section352 of the Banking Law:

"§ 352. * * * In addition to the maximum rate or amount of interest, consideration, or charges above specified, no furtheror other charge or amount whatsoever for any examination, service, brokerage, commission, expense, fee, or bonus orother thing or otherwise shall be directly or indirectly charged, contracted for, or received, except the lawful fees, if any, actually and necessarily paid out by the licensee to any public officer for filing, recording, or releasing in any public office any instrument securing the loan, which fees may be collected when the loan is made or at any time thereafter. Ifany interest, consideration or charges in excess of thosepermitted by this act are charged, contracted for, or receivedthe contract of loan shall be void and the licensee shall have no right to collect or receive any principal, interest, or charges whatsoever." (Emphasis supplied.)

The quoted portion of the statute gives us evidence of a studied effort by the Legislature to enact a law which will accomplish the elimination of the "loan shark" evil. To that end there were inserted in section 352 prohibitions which are broad in scope — broad enough, as I believe, to prohibit a licensed lender under article IX of the Banking Law from requiring, as a prerequisite to a loan, that the borrower shall furnish prepaid fire and theft insurance covering the mortgaged chattel. It may well be that as a matter of practical dealing between business men, such a requirement is a matter of common practice and certainly is good judgment. But we are concerned here with limitations upon those rights given to a licensed lender by a statute designed to protect the borrowers of small sums against excessive charges in connection with that method of financing — charges which have been the subject of grave abuse. If the Legislature had intended to permit the practice which is to be approved by a majority of the court, it would have enacted a law which would specifically permit such a practice, as has been done in the States of California, Florida, Colorado and Oregon.

In London Realty Co. v. Riordan (207 N.Y. 264), this court was called upon to determine whether the exaction from a borrower of a payment of ten dollars to a licensed lender's attorney, for services in examining the title to mortgaged property, had the effect of making the loan void. That decision was in 1913 when the statutory prohibitions were not as broad in scope as they are today. In the course of the opinion Chief Judge CULLEN stated for the court: (p. 268) "I think that the case fell directly within the terms of the statute, not necessarily as a device for excessive interest, but as a charge which, under the statute,the lender is forbidden to exact either in its own favor or infavor of any one else." At that time the court made clear its intention not to extend the charges which a licensed lender might require of the borrower as a condition of the loan.

In the present case I attach importance to that paragraph of the agreed statement of facts which states — "That in order toobtain said loan * * * the plaintiff was required at the time of the making said loan and before its completion, to apply for insurance. * * *" (Emphasis mine.) The appellant-lender asserts that the requirement which is made, that insurance upon the mortgaged chattel be furnished by the borrowers, was merely preliminary to the loan. We are told that there was no contractual relationship with respect to insurance between the borrowers and lender. I do not so interpret the agreed facts. The requirement by the lender that the borrowers should furnish fire and theft insurance upon the chattel with premium prepaid — which insurance we may assume would have to be kept in force until the loan is paid — cannot be said to be merely a preliminary requirement but is a part of the contract of loan. The agreed facts inform us that "* * * the plaintiff wasrequired at the time of the making of said loan and before its completion, to apply for insurance on said 1936 Oldsmobile and that said insurance was obtained and the premium paid out of the proceeds of said loan * * *." Furthermore, I think it significant that the fire and theft insurance coverage which the borrowers furnished was a participation in a master policy issued by an insurance company to the lender with loss, if any, payable to the lender and borrowers as their interests may appear.

I am not left in doubt that by such an arrangement —"required" of the borrowers as a prerequisite to the loan — the lender receives a benefit at the expense of the borrowers who must pay a premium for a stated term before the "completion" of the loan. That benefit is something of value received by the lender in connection with the loan. Indeed, it is the view of a majority of the court, as expressed by the opinion herein, that "Here, the cost of the insurance gives to the lender the indirect benefit of better security for the repayment of the loan." I believe that such benefit, concededly received by the lender, is — within the language of section 352 — "in addition to the maximum rate or amount of interest, consideration, or charges" which the statute permits. (Cf. Stuback v. Sussman, 8 N.Y. Supp. [2nd] 141; affd., 256 App. Div. 903; affd., 281 N.Y. 719.)

While the rule of practical construction of a statute by an administrative officer may be influential in interpreting a law, I do not think it may be applied in the present case. The Banking Department of this State was not consistent in its attitude toward the problem which this case presents. It promulgated in 1934 a regulation (art. V, par. "h" of regulations of June 21, 1934) which from 1934 to 1938 forbade the charging of a fee from the borrower "for insurance or examining the security or property or for the drawing of papers, or for any services or upon any pretext whatsoever except court and statutory costs actually provided for by law." As to that regulation the appellant makes the doubtful comment that it did not "prohibit the requirement of insurance. It merely prohibits a lender from charging any fee for its services as broker or as agent for the borrower in connection with the requirement of insurance." That regulation was deleted from the Department's regulations published on December 31, 1938, and there was nothing promulgated upon the subject until March 15, 1941 — after the decision in Krulik v. Confidential Personal Loan Co. ([Appellate Term] 176 Misc. Rep. 138). At that time a special bulletin was sent to all licensed lenders which called attention to the then recent ruling in the Krulik case (supra) and advised them to regard the decision as controlling. In theKrulik case the Appellate Term had ruled that an item of expense for the insurance of the mortgaged chattel was not permitted by section 352 of the Banking Law and that accordingly the debt there involved was discharged and the security avoided. This brief history of the Banking Department's attitude toward the question whether an item of expense for insurance may berequired of a borrower by the lender does not impress me as strong evidence of practical construction favorable to the appellant.

I believe the rule of London Realty Co. v. Riordan (supra) is decisive in the case at bar. There, as we have seen, the lender required the borrower to pay for the services of attorneys to examine the title of the mortgaged property; and there the lender received no part of the attorneys' fees. So, in the case before us, the lender required the borrower to pay for fire and theft insurance upon the mortgaged chattel and received no part of the premium. In the Riordan case the benefit to the lender was assurance of good title; in the present case the benefit to the lender is assurance against loss of the chattel by fire or theft.

My conclusion is that the expense item of six dollars which was"required" of the borrowers by the lender "at the time of making of said loan and before its completion" is, in the circumstances disclosed by the agreed facts, a substantial item. I do not regard it in this instance as a device to cover an excessive interest charge. However, as a benefit to the lender incidental to the loan, I believe the requirement of prepaid insurance upon the mortgaged chattel bears such a reasonable relation to the amount charged by the lender for the loan as to violate the prohibitions contained in section 352 of the Banking Law.

Accordingly, I dissent and vote for affirmance.

LOUGHRAN, FINCH and RIPPEY, JJ., concur with LEHMAN, Ch. J.; LEWIS, J., dissents in opinion in which CONWAY and DESMOND, JJ., concur.

Judgment accordingly.