Scrutiny for Online Lending in New York

Financial Services Law

The New York Department of Financial Services (DFS) may be taking a closer look at online lending, thanks to bills pending in the state legislature.

What happened

In December 2017, New York Governor Andrew Cuomo signed legislation that created a seven-person task force responsible for analyzing online lending activity in the state. The legislative findings for S.6593 recognized that “financial and technological firms have used electronic platforms to develop a completely new sector of business, known as online lending.”

Although the legislature recognized that such platforms can reduce costs and expand availability for small personal and commercial loans to residents and businesses in the state, it also expressed concern for the “potential for unscrupulous online lenders to exploit consumers through predatory practices. While the state has an interest in fostering its economy and its businesses, it likewise has an interest in protecting its consumers and the well-being of its residents.”

To that end, the seven-person committee (comprised of three gubernatorial appointees and two members each appointed by the speaker of the Assembly and the president of the Senate) was created. The committee was directed to submit a report on the state of online lending in New York by April 15, 2018, to both houses of the legislature and the Governor.

However, on Jan. 5, 2018, a proposed amendment to the law was introduced that would eliminate the task force established under the original bill and instead direct the DFS to study and create a public report on or before July 1, 2018. S.07294 passed the Senate Committee on Rules but still needs the approval of both houses of the state legislature.

If enacted, the report—prepared in consultation with stakeholders including online lenders, consumers and small businesses—would analyze the lending practices of the online lending industry in New York.

Pursuant to the legislation, the report would include an analysis of the online lenders presently operating in the state, including the common means and methods of their operations, the disclosure practices and interest rates and costs charged by online lenders, and the primary differences between online lending products and services and those of traditional lending institutions. The risks and benefits of the products offered by online lenders as well as the other forms of credit that would be available to borrowers in the absence of online lending opportunities must also be studied.

In addition, DFS would be tasked with explaining the types and availability of credit products for individuals and businesses and analyzing data regarding the type and number of complaints, actions and investigations related to online lenders.

Finally, the report would include a survey of the existing state and federal laws and regulations that apply to the online lending industry, as well as the impact of such laws and regulations on consumers and the access to credit through online lenders (such as the availability and cost of such credit opportunities to startup or emerging businesses).

If enacted, the measure would take immediate effect.

To read S.6593A, click here.

To read S.07294, click here.

Why it matters

Whether through an appointed committee or the DFS, online lenders in New York will be under close scrutiny in the first half of 2018. The proposed New York legislation should be viewed in conjunction with federal initiatives of potentially pre-emptive effect directed to online banking and lending. Earlier this week the House passed, and with strong bipartisan support, the Making Online Banking Initiation Legal and Easy (MOBILE) Act, H.R. 1457 that would allow banks to both scan and retain personally identifiable information for verification purposes from a consumer driver’s license whenever that person applies for an account, a loan, or another financial product or service online. The bill is intended to establish a “new national standard” with pre-emptive effect on laws such as that being considered in New York.