N.Y. Regulator Challenges Bank-Fintech Partnership Model

By Lydia Beyoud

New York’s top financial regulator is challenging a fundamental principle of fintech-bank partnerships in a bid to clamp down on lenders avoiding state interest rate caps.

All lenders should comply with state usury limits, the New York Department of Financial Services said in a July 11 report. The state regulator said it “disagrees” with the notion that a national bank that partners with an online lender is the “true lender,” or the party responsible for making the loan and whose charter dictates the usury limit. National banks are exempt from state usury caps.

That recommendation marks a major departure from the national bank partnership model many online lenders use to avoid low state interest rate caps, in addition to the types of partnerships often employed by payday lenders.

“The Department is exceedingly concerned with efforts to avoid regulation and New York’s ban on payday lending,” DFS said. High-interest rate lenders, including payday lenders, as well as other types of “high-interest, short-term small dollar loans,” are “Illegal in New York,” it added.

The agency didn’t detail which steps it may take to implement its recommendations that all lenders in New York should be subject to the state’s interest rate caps. The rate cap is 16 percent for loans less than $250,000 made by nonbank lenders or New York-chartered banks, according to information provided by the NYDFS. Loans above 25 percent could trigger criminal usury limits in the state, the agency said.

“The report speaks for itself,” DFS spokesman Ronald Klug told Bloomberg Law by email.

However, it seems plausible the agency intends to investigate some bank-online lender partnerships, multiple sources said.

“I’m sure they’re looking very closely at bank partnerships,” particularly those that try to use banks as a “fig leaf” to cover up usurious lending, Lauren Saunders, associate director at the National Consumer Law Center, told Bloomberg Law.

Although the report targets high-interest rate payday lenders specifically, it does little to distinguish them from other online lending business models, including those that partner with banks.

Catherine M. Brennan, a partner in Hudson Cook’s Hanover, Md., office, said the report tries to conflate online lenders as the true lender in cases where it may not be appropriate. She called the report a “political document” that, in many respects, “does not reflect what businesses do.”

“If DFS wants to take actions against specific partnerships because it feels those are sham partnerships, it should do so directly instead of impugning an entire industry,” Brennan told Bloomberg Law.

The DFS may struggle to apply New York law and direct supervision to national banks, Saunders said, adding that the report’s other recommendations, such as more direct supervision of online lenders through licensing requirements, would add “an important level of protection” to consumers.

Rapidly Growing Online Loans

The statutorily mandated survey and report found online lending, particularly for consumers, is on the rise in New York state.

New York online lending customers numbered more than 235,000 in 2017, up 79 percent from 2015 levels, according to responses from 35 companies. Total online lending was approximately $3 billion, the report said.

For broader context, non-mortgage lending to individuals and small businesses by New York state-chartered and licensed banks, credit unions, and other lenders exceeded $51 billion in 2017.

That amount is more than 17 times the lending by the 35 online lender respondents, the report said.

To contact the reporter on this story: Lydia Beyoud in Washington at lbeyoud@bloomberglaw.com

To contact the editor responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com

Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.