The New York Department of Financial Services (NYDFS) has issued an Online Lending Report that calls for the application of New York usury limits to all online lending and increased regulation of online lenders making loans to New York consumers and small businesses.

A bill signed by New York Governor Cuomo required the NYDFS to study online lending in New York and issue a public report of its findings and recommendations by July 1, 2018. The report indicates that to gather data, the NYDFS asked 48 businesses believed to be engaged in online lending activities in New York to complete a “New York Marketplace Lending Survey.” The NYDFS received responses from 35 of those 48 businesses.  According to the report, the respondents varied in size “from small to some of the largest online lenders in the industry,” and of the 35 respondents, 28 were not currently licensed by the NYDFS and 7 were licensed by the NYDFS.

The report includes a background discussion of the NYDFS’s  supervisory authority and New York usury limits, payday lending, “lessons from the financial crisis,” “New York’s leadership in consumer protection,” and consumer litigation financing.  It also sets forth the survey results, which cover consumer and business loans and consist of statistical and other information about (1) customer and loan numbers, (2) duration of loans, (3) loan sizes, (4) APRs, (5) fees, costs, expenses, and other charges, (6) loan delinquencies (past due 30 days or more), (7) business models, (8) marketing and advertising, (9) credit assessment/underwriting, and (10) complaints and investigations.

The NYDFS had listed topics to be addressed in the report on its website and solicited public comments on such topics.  In the report, the NYDFS also summarizes the 12 comments it received in response to that solicitation.  The NYDFS describes the commenters as “technology and lending associations, chambers of commerce, business associations, and banking, mortgage and credit union associations.”

The report concludes with a discussion of the benefits and risks associated with the lending activities and practices of online lenders based on the survey results followed by the NYDFS’s conclusions and recommendations.  Most of these recommendations will require legislation.

Key items in the report consist of the following:

• Application of consumer protection laws to small business loans.  The NYDFS recommends that New York consumer protection laws and regulations “should apply equally to all consumer lending and small business lending activities.” According to the NYDFS, such protections include laws and regulations relating to transparency in pricing, fair lending, fair debt collection practices, and data protection.  The NYDFS further states that its “equal application” recommendation “includes robust consumer disclosures; the use of technology easily permits transparency, including disclosures of the full cost of a loan to a borrower and providing the consumer with full understanding of the long-term consequences of accepting short-term relief for a financial need.”  The NYDFS acknowledges that under existing federal law, small business loans are generally exempt from coverage.  To our knowledge, no state has ever subjected small business loans to the same regulations as consumer loans.  The report is devoid of any empirical data supporting this extreme recommendation.  The report does not even mention, let alone address, the risk that subjecting small business loans to the same state statutes that apply to consumer loans may lead to a reduction in the availability of small business loans and for an increase in pricing for such loans. The NYDFS does not even define what would be considered a “small business loan.”

• Application of New York usury laws to all online lending.  The NYDFS recommends the application of New York usury law “to all lending in New York.”   According to the NYDFS, “a loan is a loan from a borrower’s perspective, and  the borrower deserves to get the benefit of New York’s protections, whether the borrower borrows from a bank or credit union or from an online lender.”  While the report acknowledges that out-of-state banks are exporting their interest rates into New York, the report cavalierly suggests that, contrary to well-established U.S. Supreme Court precedent, New York can nevertheless apply its usury limits to such loans.  The recommendation follows earlier discussions in the report in which (1) the NYDFS observes that “a number of online lenders” have partnered “with federally chartered banks, or FDIC-insured banks located  in jurisdictions that do not have interest rate protections on par with New York’s” to expand their consumer lending “through their online platforms without regard to the type of loan offered, the size of the loans or the interest rates charged,” (2) the NYDFS expresses its support for the use of the “true lender theory” to challenge claims by such online lenders that loans they have made in partnership with banks are not subject to New York usury law, and (3) the NYDFS describes the Second Circuit’s holding in Madden v. Midland Funding that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act allows the national bank to charge, but makes no mention of the fact that the OCC believes Madden was wrongly decided.

Thus, in recommending that “all lending in New York” be subject to New York usury laws, the NYDFS appears to be taking the position that no online lender partnering with a bank can permissibly rely on the bank’s federal law power to export interest rates to charge the interest the bank is permitted to charge on loans the bank has assigned to the online lender when such interest exceeds New York usury limits. The NYDFS also notes its opposition to H.R. 4439, the “Modernizing Credit Opportunities Act,” which is intended to address the uncertainty created by “true lender” challenges.  (A group of 21 state attorneys general recently sent a letter to the Senate majority and minority leaders as well as to the chairman and ranking member of the Senate Banking Committee urging them to reject H.R. 4439 and H.R. 3299, the “Protecting Consumers’ Access to Credit Act of 2017,” a bill often referred to as the “Madden fix” bill.)

The NYDFS also appears to be willing to ignore the comments it discusses in the report highlighting the importance of the access to credit that online lending provides to consumers and small businesses.  The NYDFS’s recommendation is likely to further reduce credit availability for New York consumers and small businesses.  Indeed, a recent study showed that credit availability contracted sharply in Connecticut, Vermont, and New York after Madden was decided. See Colleen Honigsberg, Robert J. Jackson, Jr., and Richard Squire, “The Effects of Usury Laws on Higher-Risk Borrowers,” Columbia Business School Research Paper No. 16-38 (May 13, 2016).

• Expansion of licensing and supervision.  New York law currently requires a nonbank lender to obtain a “Licensed Lender” license if it makes consumer purpose loans of $25,000 or less or business purpose loans of $50,000 or less and the interest rate is greater than 16% (New York’s civil usury limit). The NYDFS comments in the report that “given the low level of national interest rates in recent years, certain online lenders have been able to offer profitable rates under New York’s usury limit such that they would not be required to be licensed and overseen by the Department.”  The NYDFS expresses its continued support for legislation that would “reduce the interest rate above which a non-depository lender is required to be licensed to 7 percent per annum from 16 percent per annum.”

• Scrutiny of consumer litigation financing.  The NYDFS “notes the growth of consumer litigation financing” and expresses concern “about the amounts that consumers are required to provide to financing companies, which can be a significant portion of the total recoveries from their lawsuits that would be usurious if lending rules were to apply.”  It also expresses concern “about the information many companies provide to consumers about the transactions and the manner in which they provide that information.”  The NYDFS calls for further study of these issues and  expresses its belief that “legislation could provide important safeguards for consumer that do not currently exist.”  The NYDFS does not provide a scintilla of empirical data for its apparent conclusion that legislation containing consumer safeguards is necessary.  It should be noted that the discussion of litigation financing consists of just one paragraph of a 31-page report.