In his proposed budget for fiscal year 2017-2018, New York Governor Andrew Cuomo advanced changes to the New York Banking Law that would give the Department of Financial Services (NY DFS) increased licensing authority over online and marketplace lenders.[1] The proposed budget would prohibit any entity from engaging in the business of making loans in New York of $25,000 or less to individuals for personal, family, household, or investment purposes except as authorized by regulations issued by the Superintendent of NY DFS and after first obtaining a license. Similar restrictions would be imposed on entities making business loans of less than $50,000. If enacted, this requirement would take effect Jan. 1, 2018.
According to the proposal, an entity would be considered to be engaging in the business of making loans in New York even if it is not the lender, but instead an entity that “purchases or otherwise acquires from others loans or other forms of financing, or arranges or facilitates the funding of loans” to individuals residing in the state of New York. Depending on the regulations eventually issued by the NY DFS, this change in the law could require companies currently engaging in small-balance lending to NY borrowers to cease their activities in New York until they obtain a license. Obtaining such a license could take a significant amount of time, and cause a significant interruption to the entity’s business, unless the NY DFS were to authorize entities to continue business while the license application is pending.
The New York Legislature is in the process of completing hearings on the Governor’s proposed budget. The Senate and Assembly is each expected to introduce and pass legislation that stakes out the House’s position on the Governor’s proposals on or before March 15. From there, negotiations will begin in earnest between the Legislature and the Executive, with the goal of reaching a budget agreement on or before March 31, 2017.
This development further highlights the significance of the plan by the Office of the Comptroller of the Currency (OCC) to charter financial technology companies under a special-purpose federal charter.[2] Any entity granted a federal banking charter would be largely exempted from such state licensing requirements, just as federally chartered banks are not typically subject to state licensing. The preemption of state licensing and regulatory authority was cited by the Conference of State Bank Supervisors as one of reasons that they were “firmly opposed” to any special-purpose federal charter for Fintech companies.[3] While the requirements of an OCC charter may prove to be unpalatable or difficult to satisfy for certain Fintech companies, if the licensing regulations promulgated by the NY DFS impose similar regulatory burdens, or if other states follow suit with similar or more stringent requirements, then the comparative appeal of an OCC charter is likely to improve.
[1] https://www.budget.ny.gov/pubs/executive/eBudget1718/fy18artVIIbills/TEDArticleVII.pdf at Part EE.
[2] See GT Alert, “OCC Consideration of Special Purpose Fintech Charters Draws Rapid Reaction from State Banking Regulators,” Dec. 15, 2016.
[3] See Letter to Comptroller Curry from the Conference of State Bank Supervisors dated Nov. 14, 2016, p. 2.