Financial services providers, marketplace lenders and secondary market purchasers doing business in the state of New York can breathe at least a temporary sigh of relief this week. Controversial changes proposed to the state's Licensed Lender Law included in a pair of companion budget bills were dropped when these bills were amended on Monday. Assembly Bill 3008 and Senate Bill 2008, as introduced in the legislature on January 23, 2017 would have expanded the scope of consumer and commercial loans, and types of business activities, subject to licensing by the New York Department of Financial Services (the "Department") under the Licensed Lender Law. If enacted into law, these proposed amendments would have triggered new licensing obligations for companies doing business in the state, potentially reaching marketplace lenders, other Fintech companies and secondary market purchasers.
The Licensed Lender Law licenses certain consumer finance activities, and is one of the few state statutes that licenses commercial or business finance activities. The law's reach is limited, however, as it imposes a licensing obligation only to make (i) consumer loans of $25,000 or less, or (ii) commercial or business loans of $50,000 or less to an individual or sole proprietorship, each with an interest rate in excess of New York's civil usury limit, which is 16%.
The Licensed Lender Law does not provide any statutory exemptions from the licensing obligations, including for any banks, and the legislation did not provide for any exemptions. National banks can rely on their federal preemption authority, and with the interest rate trigger intact, foreign state-chartered banks can rely on their interest rate exportation authority to remain beyond the reach of the Licensed Lender Law.
As originally introduced, Assembly Bill 3008 and Senate Bill 2008 would have made three key changes to the applicability of the Licensed Lender Law, by:
- eliminating the interest rate component of the licensing trigger, such that loans within the regulated dollar amounts would be subject to licensing regardless of the interest rate charged;
- expanding the commercial lender licensing requirements to cover loans of $50,000 or less made to corporations, limited liability companies and other legal entities, instead of just to individuals and sole proprietorships; and
- expanding the business activities subject to licensing from only lending, to reach a person that "purchases or otherwise acquires from others loans or other forms of financing, or arranges or facilitates the funding of loans" to New York residents.
These proposed amendments had the potential to significantly increase the universe of companies requiring a license to operate in New York.
These proposed amendments were an attempt by the Department to regulate bank partner arrangements and marketplace lenders. The changes were likely a direct response to the OCC's special purpose national bank charter that would bestow preemption authority on Fintech companies and, thereby, provide them with relief from state licensing obligations, usury limits, and certain other state consumer protection provisions. This legislation is also an example of a broader attempt by states generally to regulate Fintech activities and the bank partner model. While the legislation would not have prohibited parties from using the bank partner model, it would have undermined this model as it would subject the participants to licensing, and the supervision and examination that flows from any licensing regime. As New York's license approval process is the most time-consuming of any state, the legislation would have seen companies scrambling to submit an application in the hopes of obtaining approval before the changes took effect.
While the latest versions of these bills do not include the proposed changes described above, these measures are still working their way through the legislative process and may be amended again at any time.
*Daniel Pearson is not admitted to practice law in the District of Columbia
Originally published March 16, 2017
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