On December 28, 1940, the plaintiff borrowed from the defendant the sum of $300, giving to the defendant a promissory note for that amount with interest from date "payable monthly, at the rate of 3% per month on any part of the unpaid principal balance of this loan not in excess of $150.00 and 2 1/2% per month on any remainder of the unpaid principal balance of this loan until said loan with interest as aforesaid is fully paid." As security for the loan the plaintiffs executed a wage assignment and chattel mortgage upon their household goods and upon an Oldsmobile motor car. *Page 23
"In order to obtain said loan, Salvatore Martorano, the plaintiff, was required at the time of the making of said loan and before its completion, to apply for insurance" on the automobile and "said insurance was obtained and the premium paid out of the proceeds of said loan" by means of a check dated December 28, 1940, in the amount of six dollars, which was payable to Salvatore Martorano and delivered to the plaintiff as part of such proceeds at the time the loan was consummated. The plaintiffs claim that by reason of these conceded facts the contract of loan violates section 352 of article IX of the Banking Law, chapter 524 of the Laws of 1941 as thereafter amended. The controversy was submitted to the Appellate Division upon a statement of agreed facts. By a divided court the Appellate Division directed judgment in favor of the plaintiffs.
Section 352 of the Banking Law (Cons. Laws, ch. 2), provides in part: "In addition to the maximum rate or amount of interest, consideration, or charges above specified, no further or other charge or amount whatsoever for any examination, service, brokerage, commission, expense, fee, or bonus or other 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. If any interest, consideration or charges in excess of those permitted by this act are charged, contracted for, or received the contract of loan shall be void and the licensee shall have no right to collect or receive any principal, interest, or charges whatsoever."
Without insurance a chattel mortgage upon an automobile provides, it is plain, less security for the repayment of a loan than a chattel mortgage upon an automobile which is insured. Certainly mortgagees of real or personal property not infrequently recognize that; and as a condition of granting a loan they stipulate that an insurance policy upon the mortgaged property payable to the mortgagee as interest may appear, must be obtained. The cost of the insurance which the mortgagor must purchase is an expense which the mortgagor must bear in order to meet the conditions upon which the lender is willing to make the loan. The cost of *Page 24 repairing the mortgaged property would also be an expense to the mortgagor if the lender refused to make a loan upon property in need of repair, but neither is an "expense" which is "directly or indirectly charged, contracted for or received" by the lender within the meaning of the statute.
As the prevailing opinion of the Appellate Division (263 App. Div. 79,80) states: "It seems plain that the intention of the statute was that the interest fixed therein should completely compensate the lender for all charges and expenses of every character attached to the loan with the exception of those specifically set forth in the statute. To hold otherwise would open the door to the imposition of charges and alleged expenses which would add to the burden of the borrower and confer upon the lender compensation in excess of that contemplated by the statute." The test, then, is whether the lender has placed upon the borrower the burden of an additional charge in order to give to the lender "compensation in excess of that contemplated by the statute." That is in accord with the test formulated by the court under an earlier statute in London Realty Co. v. Riordan (207 N.Y. 264, 268).
Here the cost of the insurance gives to the lender the indirect benefit of better security for the repayment of the loan. It can give to the lender no other benefit. Under no circumstances can the lender receive more than the principal amount of the loan and the compensation expressly permitted by the statute. Out of that compensation the lender pays for every service connected with the making of the loan and every other expense to which the lender might be put in connection with the loan, and the lender has not stipulated for reimbursement for such expenses. The statute does not forbid the lender from demanding, as a condition of making the loan, that the borrower shall provide the form of security for repayment of the loan which the lender deems adequate, even though the borrower may be put to some expense in order to furnish the stipulated security. The lender may, of course, not impose such condition as a cover for obtaining greater compensation than the law permits, and here there is no claim that the lender could or did obtain additional compensation in any form. That the borrowers for their own convenience chose to pay the cost of insurance out of the proceeds of the loan, of course, does not render illegal what would otherwise be legal. *Page 25
In other jurisdictions the courts have construed analogous statutes in manner which sanctions the practice which has been condemned in the courts below. (Auto Owners Finance Co. v.Coleman, 89 N.Y. 356; Platz v. Lapinski, 263 Mich. 240;Niles v. Kavanagh, 179 Cal. 98.) The Department of Banks of this State sanctioned it until 1941 when the Appellate Term of the Supreme Court of the first department decided otherwise in the case of Krulik v. Confidential Personal Loan Co. (176 Misc. Rep. 138). Such administrative rulings upon which lenders rely are entitled to weight. We find no violation of the statute by the lender in this case.
The judgment of the Appellate Division should be reversed and judgment directed in favor of the defendant, without costs.