The New York State Department of Financial Services ("DFS") found that online marketplace lending has increased dramatically since 2015. In the newly published report, DFS analyzed responses from a "New York Marketplace Lending Survey" along with comments from relevant stakeholders.

Based on data from 2017, DFS found that:

  • the total number of loans increased approximately 118% and the total dollar amount of all loans increased approximately 42% as compared to 2015 levels;
  • many more individuals were being served in this market than small businesses;
  • lenders generally charge a variety of fees (e.g. origination fees, closing fees, processing fees, maintenance fees, transactional fees, and penalty fees), with origination fees being the most common;
  • delinquent loans (both to individuals and businesses) represent approximately 11% of the total number of loans outstanding as of the end of 2017; and
  • respondents used "internal models with various inputs provided by the applicant such as employment history, business history, bank statements and tax records" to determine whether a borrower qualifies for a loan.

DFS stated that it welcomes innovation and expanding credit access, but that innovation also must be responsible and risks must be managed. DFS recommended that (i) consumer protection laws should apply equally to all consumer lending and small business lending activities, (ii) all New York lenders should operate under the same set of rules, including usury limits (which the report emphasized, citing Matter of Madden v. Midland Funding), and be subject to consistent enforcement of those rules, and (iii) direct supervision is the only way to guarantee that New York consumers, as well as small business owners, "receive the same protections irrespective of the channel of delivery."

Commentary / Steven Lofchie

The new DFS report does a reasonable job of making a case against non-bank lenders. It is also obvious that the authors are as interested in selling the benefits of government regulation as they are in understanding the particular business at issue. Most significantly, the report does not attempt to address the question of why borrowers seek credit from online lenders. Is it because borrowers are deceived as to the costs of obtaining credit from such lenders or is it because they are otherwise denied credit?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.