The New York Department of Financial Services (DFS) is calling for increased supervision of online lending to New York residents. The DFS Online Lending Report, released on July 11, 2018, makes the following recommendations:
- Apply New York's consumer protection laws equally to all consumer and small business lending activities, including those related to loan pricing disclosures, fair lending, fair debt collection, and data protection.
- Impose New York's usury laws on all credit extended to New York residents.
- Require all companies involved in online lending to obtain a license from the DFS.
The report takes into account information provided by 35 companies that responded to an online lending survey conducted by the DFS in spring 2018.
What prompted the DFS survey and report?
On June 1, 2018, New York Governor Andrew Cuomo signed legislation requiring DFS to study online lending in New York State and submit a public report of its findings and recommendations. The bill required DFS to analyze online lenders operating in New York, including methods of operation, lending practices, interest rates and fees charged, risks and benefits of the loan products offered, differences with traditional lending institutions, and complaints and investigations related to online lenders.
How does DFS define "online lender" in its report?
DFS does not put forward a specific definition of "online lender." Rather, for purposes of its report, DFS states that "online lending," "marketplace lending," and "alternative lending" refer broadly to lending-related activities that mostly or solely operate online and use investment capital, automation, data analytics, and technology-enabled underwriting models for direct or indirect origination of primarily unsecured loans to consumer and small businesses.
What information did DFS request and what responses did it receive?
Of the 48 companies surveyed, DFS received answers to some or all of its questions from 35 respondents. The survey requested information from each company on the number and dollar volume of loans made to New York residents, the annual percentage rate (APR) imposed on borrowers, and the lending model used to originate loans, among other questions. Highlights from the responses are below:
- Lending Volume: The 35 companies that responded to the survey reported a total of 352,171 loans to New York residents, including 319,544 loans to individuals and 32,627 loans to businesses. Loans to individuals represented a dollar volume of approximately $2.48 billion, and loans to businesses represented approximately $500 million, for a total volume of $2.98 billion. According to DFS, this represents a small fraction of the $51 billion in non-mortgage lending by New York banks, credit unions, and other DFS-licensed lenders in 2017.
- Loan Pricing: DFS found that the average median APRs from respondents were 14.8% for consumer loans, 22.2% for non-consumer loans to individuals, and 25.9% for loans to business entities. However, maximum APRs among respondents were as high as 25% for consumers, 62.3% for non-consumer loans to individuals, and 61.8% for business entities.
- Business Models: A smaller number of participants responded to DFS questions about their business model. However, based on the responses received, a much greater number of loans were originated "in collaboration or partnership with other financial institutions" than the amount made "solely" by the respondent. Presumably, this means fewer loans were made by direct lenders than the number made through a form of the bank partner origination model.
In addition to direct responses to its survey, DFS also accepted comments from other industry stakeholders, including consumer advocacy groups, banks and credit unions, and others.
What is the DFS view of bank origination arrangements in online lending?
DFS devotes a specific section of the report to addressing arrangements between non-bank platforms that work with a depository institution to originate consumer or commercial loans. DFS disagrees with the argument that, because the loans are made by the bank partner, the loans are exempt from New York usury laws and the platform is exempt from licensing requirements. DFS explicitly adopts the position that the non-bank platform is the "true lender," particularly where it:
- Markets and solicits the loans;
- Processes loans applications;
- Is the borrower-facing entity;
- Purchases the loans from the bank;
- Services loan payments; and
- Sells whole loans or securitized loan products to investors.
DFS believes that, at least in some cases, these arrangements have been fashioned specifically to avoid licensing and oversight.
What are DFS' recommendations?
- Equal Application of Consumer Protection Laws
Based, in part, on comments by consumer advocacy groups, DFS believes that loans to small business borrowers should be subject to the same New York laws that govern consumer lending. DFS quotes the U.S. Treasury Department's 2016 report on marketplace lending statement that small business loans "under $100,000" share characteristics with consumer loans. However, the DFS report does not specifically define a "small business" and does not clarify whether its recommendation is intended for all commercial credit based on the size of the loan or only commercial credit to individual (non-entity) borrowers.
In terms of which consumer protection requirements DFS recommends applying to small business credit, the report includes transparency in pricing, fair lending, fair debt collection practices, and data protection. In particular, DFS focuses on disclosing "the full cost of a loan" to a borrower and providing the borrower a "full understanding of the long-term consequences" of accepting a loan.
- Imposing New York Usury Law on All Loan Transactions
DFS recommends that New York usury law apply to all loans to New York residents, regardless of the character of the loan or the type of lender. In the context of online lending, this position appears to stem from the DFS' belief that the "true lender" in a bank partner arrangement is the non-bank entity. In other words, because a non-bank entity is the lender in DFS' eyes, DFS believes the loans should not receive the preemption from state usury laws that would normally be available to bank-originated credit.
New York law generally prohibits unlicensed lenders from making loans with annual interest rates above 16% and prohibits a rate in excess of 25% on any type of loan. If all loans to New York residents are subject to these limits, some companies that responded to New York's survey would need to reduce their rates.
- Require Companies Involved in Online Lending to Be Licensed and Supervised
Currently, a New York Lender License is required make consumer loans of $25,000 or less, or commercial loans of $50,000 or less, if the loans provide for interest of more than 16% per year. DFS is concerned that many companies involved in online lending are unlicensed in New York and are not subject to direct supervisory oversight from a safety and soundness or consumer compliance perspective. The DFS believes that many of these companies should have a license, which may be due, in part, to the DFS' position that non-bank companies partnering with banks are the "true lenders." Of the 35 companies that responded to the survey, DFS reports that 28 are not currently licensed. DFS appears to be interested in broadening the scope of the Lender License and reiterated a recommendation to reduce the threshold for licensing from 16% to 7% per year.
These recommendations are largely consistent with previously proposed amendments to the Licensed Lender law that were included in the New York governor's proposed budget in 2017. Those proposals would have removed the provision limiting the scope of the license to loans with interest rates of more than 16% per year, clarified the license's application to commercial loans, and expanded the activities subject to licensing from simply "making" loans to purchasing, acquiring, arranging, or facilitating such loans.
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