by Charles D. La Fiura¹

The Schenck, Price, Smith & King LLP Banking and Finance Practice Group often acts as New Jersey counsel to out-of-State lenders in their lending transactions. Three questions of New Jersey law related to such transactions that are often asked of us are answered below.

Is the out-of-State lender permitted by the State Of New Jersey to conduct the proposed lending business?

New Jersey law makes a distinction between bank and non-bank, out-of-State lenders. Prohibitions against non-bank, out-of State lenders making loans to New Jersey borrowers or loans secured by New Jersey real or personal property generally do not exist. The New Jersey Licensed Lender Act, however, may require an out-of-State lender, which is not a depository institution, trust company or insurance company, to obtain a State license before engaging in the State in the consumer loan business, the secondary mortgage loan business or the mortgage banking business.

The New Jersey Banking Act (the “Banking Act”) imposes its regulatory scheme upon out-of State bank lenders by first making a distinction between banking institutions and foreign banks. A “banking institution” is defined as follows:

“a bank [organized under the Banking Act], an out-of-State bank having a branch office in this State, an out-of-country bank having a branch office in this State, savings bank and a national banking association having its principal or a branch office in this State” (Hereinafter in this article referred to as a “Banking Institution”).

A “foreign bank” is defined as follows:

“a company, other than a banking institution, organized under the laws of the United States, another state, or a foreign government, which is authorized by the laws under which it is organized to exercise some or all of the powers specified [to banks by the Banking Act]” (Hereinafter in this article referred to as a “Foreign Bank”).

The Banking Act provides that no Foreign Bank organized under the laws of a foreign government shall transact business in New Jersey. Exceptions to this prohibition exist for such banks that establish and operate foreign bank offices and affiliates in New Jersey in accordance with the requirements of the Banking Act.

The Banking Act also provides that a Foreign Bank organized under the laws of the United States or of another state may not transact business in New Jersey other than a trust business.

Exceptions to the forgoing prohibitions applicable to Foreign Banks are provided by the Banking Act as follows: (a) acquiring loan participations from a Banking Institution; (ii) enforcing in New Jersey obligations acquired by a Foreign Bank in the transaction of business outside of New Jersey or acquired in a loan participation transaction with a Banking Institution; and (iii) acquiring, holding, leasing, mortgaging, contracting with respect to, or otherwise protecting or conveying property in New Jersey assigned, transferred, mortgaged or conveyed to a Foreign Bank as security for loans made by it or obligations acquired by it in the transaction of business outside of New Jersey or in a loan participation transaction with a Banking Institution.

A Foreign Bank is not entitled to maintain any action in any court of New Jersey on any cause of action arising out of its transaction of business in New Jersey in violation of the provisions of the Banking Act. Additionally, a Foreign Bank which violates any of such provisions and its directors, officers, agents and employees who participate in any such violation will be guilty of a misdemeanor. Therefore, a Foreign Bank that expects to (a) have access to the courts of New Jersey in order to enforce a particular lending transaction or the security therefore and (b) avoid committing a misdemeanor with respect to that transaction, should be sure that such lending transaction is either (i) the acquisition of a loan participation from a Banking Institution or (ii) the acquisition of a loan obligation in the transaction of its lending business outside of the State of New Jersey. Whether or not the loan has been made by the Foreign Bank in the conduct of its lending business outside of the State of New Jersey or in the conduct of business within the State of New Jersey is a question of fact that can be determined only upon an analysis of the Foreign Bank’s conduct with respect to the particular lending transaction.

Is the lender required to report the proposed lending business To a New Jersey state agency?

The New Jersey Corporation Business Activities Reporting Act (the “Reporting Act”) requires every foreign corporation, which during any calendar or fiscal accounting year carried on any activity or owned or maintained any property in New Jersey, to file a notice of business activities report (the “Notice”) with the State’s Director of the Division of Taxation of the State Department of the Treasury (the “Director”). The activity or property ownership or maintenance that triggers the reporting requirement need not rise to the level of “doing business in New Jersey” within the customary meaning of that phrase. Activities or property maintenance in New Jersey which are listed in the statute as requiring foreign corporations to file the Notice are the following: (i) the maintenance in New Jersey of an office or other place of business; (ii) the maintenance of personnel in New Jersey, including the presence of employees, agents, representatives or independent contractors in connection with the corporation’s business, even though not regularly stationed in New Jersey; (iii) the ownership or maintenance of real and/or tangible personal property directly used by the corporation in New Jersey; (iv) the ownership or maintenance of tangible and/or intangible property in New Jersey which is used by others; (v) receiving payments from persons residing in New Jersey, or businesses located in New Jersey, aggregating in excess of $25,000.00 regardless of any other connection with New Jersey; (vi) the derivation of income from any source or sources within New Jersey; or (vii) any other activity or property in, or interrelationships with, New Jersey as designated by the Director. A foreign corporation is not required to file the Notice if (a) by the end of the accounting period for which it was otherwise required to file the Notice, it had received a certificate of authority to do business in New Jersey or (b) a timely return has been filed under the State’s Corporation Business Tax Act or the State’s Corporation Income Tax Act for such accounting period. The Reporting Act denies access to the courts of the State to an out-of-State corporation that fails to file the Notice when required.

New Jersey’s Supreme Court has held that the Reporting Act, which imposes reporting requirements on foreign business corporations, does not apply to Foreign Banks. Therefore, an out-of-State bank that makes loans to a persons residing in New Jersey or to businesses located in the State or that takes as security for loans personal property or real property that is located in the State need not comply with the reporting requirements of the Reporting Act.

However, a foreign corporate lender which is not a Foreign Bank is subject to the Reporting Act. Such a foreign corporate lender, even one that does not maintain an office or personnel in the State or own or maintain property in the State, will be required to file the Notice if it makes loans to persons residing in New Jersey or to businesses located in New Jersey from which it receives payments on the loans aggregating in excess of $25,000 during any calendar or fiscal accounting period or if it derives income from the loans. The requirement to file the Notice will also arise in the event that the foreign corporate lender takes ownership of or maintains real or personal property in New Jersey that has served as collateral for loans.

If the usury laws of the State of New Jersey are applicable To the proposed loan, would the interest rate payable on the proposed loan violate such laws?

The State’s civil usury laws provide that contracts for loans in the amount of $50,000 or more, except where the security given is a first lien on real property on which there is erected or to be erected a structure containing one, two, three, four, five or six dwelling units, a portion of which structure may be used for nonresidential purposes, may provide for any rate of interest upon which the parties agree. Thirty percent (30%) per annum. however, is the maximum rate of interest permitted by the State’s criminal usury laws; provided, however, that the rate may be up to fifty percent (50%) per annum in the case of loans made to corporations, limited liability companies, or limited partnerships without resulting in criminal usury.

Conclusion

Out-of-State lenders need to exercise care in order to comply with the New Jersey regulatory framework when they are considering making loans to individuals or businesses located in New Jersey or secured by property located in the State.

1. Charles La Fiura is a partner of the law firm of Schenck, Price, Smith & King, LLP.