As part of the 2017-2018 budget process, New York Governor Andrew Cuomo's proposed budget included a "Part EE" that would have greatly expanded the scope of New York's Licensed Lender law and the New York Department of Financial Services' (DFS) ability to regulate fintech companies. As more fully explained in our previous article, the proposed changes would have:
- Removed a provision limiting the scope of the law to loans with interest rates of more than 16% per year;
- Clarified the law's application to commercial and business loans; and
- Expanded the activities that trigger licensing, from simply "making" a consumer loan under $25,000 or a business-purpose loan under $50,000, to any company that "purchases or otherwise acquires" such loans from others or that "arranges or facilitates the funding" of such loans.
If passed, these sweeping changes would have affected companies in numerous different industries, including fintech companies in the platform lending and loan marketplace spaces, other types of lead generators and loan brokers, and secondary market debt purchasers.
However, in response to the governor's budget proposal, each branch of the New York legislature introduced its own budget, each of which expressly rejects Part EE. As the Senate's version states, "The Senate denies the Executive proposal to authorize the Superintendent of the Department of Financial Services to expand the regulation of small loan lenders."
Thus, while the budget process is ongoing, the Assembly and Senate versions do not include the previously proposed changes to the licensing law. Further, with the April 1 deadline for a new state budget swiftly approaching, it appears unlikely that Part EE, or a similar provision, will make its way into the budget legislation.
That said, celebration among some fintech companies may be premature. As many are aware, on December 2, 2016 the Office of the Comptroller of the Currency (OCC) announced plans to accept applications for a limited purpose national bank charter for fintech companies. In a show of its commitment to the proposal, the OCC released additional guidance on March 15, 2017, including a draft supplement to the Comptroller's Licensing Manual for fintech charters. If approved for a bank charter, a fintech company would not be subject to state licensing and supervision requirements.
On the same day that Governor Cuomo released the Executive Budget Proposal, the DFS submitted a comment letter to the OCC strongly opposing the OCC's plan to grant fintech charters. In the letter, DFS Superintendent Maria Vullo stated that "The OCC should not use technological advances as an excuse to attempt to usurp state laws that already regulate fintech activities where they intersect with banking and lending, whether depository or nondepository" and confirmed that "New York will continue to protect our markets and consumers."
Indeed, the DFS has taken a number of steps in recent years to expand and solidify its authority over technology-based financial services companies providing products and services to New York residents, whether or not they are located in New York. As Superintendent Vullo pointed out in her letter to the OCC, the DFS has aggressively pursued online payday and other small-dollar lenders operating outside of New York, where their products allegedly violated New York laws and DFS regulations. The DFS has also been at the forefront of regulating money transmission and internet-based money movement technologies, including development of the first state license specifically for virtual currency transactions. On March 1, 2017, new DFS cybersecurity regulations became effective, imposing cybersecurity requirements on all DFS-regulated entities (and their third-party service providers), which, in some cases, are more stringent than current federal regulations. Most recently, as noted in the memorandum in support of the governor's proposed budget, the intended purpose of Part EE was to "allow the Department of Financial Services (DFS) to better regulate the business practices of online lenders."
Thus, while the immediate danger of a broad expansion to the Licensed Lender Law may be passing, online lenders and other non-bank financial services platforms shouldn't breathe a sigh of relief just yet. Viewed within the larger context of DFS efforts to regulate the fintech industry, the inclusion of Part EE in the governor's executive budget is only the latest attempt.