Proposed legislation to implement New York Governor Andrew Cuomo's 2018 Fiscal Year Executive Budget would amend the New York Licensed Lender Law to significantly extend its licensing requirements. The proposal threatens to impose substantial burdens on financial services providers dealing with New York residents and businesses and to significantly curtail the availability of credit in the state. It contains a January 1, 2018, effective date.

For the first time, the licensing requirements would extend to:

  • Lenders making consumer-purpose loans of $25,000 or less to individuals at interest rates of 16 percent per annum or less;

  • Lenders making business-purpose loans of $50,000 or less to corporations, limited liability companies, and certain other business entities (regardless of interest rate);

  • Lenders making business-purpose loans of $50,000 or less to individuals and sole proprietorships at interest rates of 16 percent per annum or less; and

  • Persons that solicit loans in those amounts and also purchase or otherwise acquire such loans or other "forms of financing" or arrange or otherwise facilitate the funding of such loans.

Currently, the licensing requirements imposed by the Licensed Lender Law are limited to certain loans made at rates of interest not otherwise permitted by law without a license. This means that the licensing obligation does not apply to loans made at interest rates up to 16 percent per annum because such loans are permitted pursuant to the New York General Obligations Law. It also means that loans by out-of-state state-chartered banks, which obtain their usury authority from federal law, do not trigger licensing obligations. The proposal would remove the licensing rate trigger. Thus, low-rate consumer loans of $25,000 or less made by any lender, and higher-rate consumer loans in such amounts made by state-chartered banks, would for the first time trigger licensing requirements under the Licensed Lender Law.

The licensing requirements of the Licensed Lender Law currently apply to certain business and commercial loans of $50,000 or less where the rate is not otherwise permitted by law. The proposal would expressly encompass any business or commercial loan in a principal amount of $50,000 or less, made to either "an individual or a business," without regard to the rate of interest, the lender’s authority outside the Licensed Lender Law to charge such interest, or the nature of the borrower (individual, corporation, LLC, etc.). Thus, as a matter of New York law, all loans of $50,000 or less made to a New York business, including loans by state-chartered banks and loans to corporate entities, will trigger the licensing requirement.

Currently, the licensing requirements are limited to persons that actually make loans. The proposal would amend the Licensed Lender Law to provide that a person or entity is deemed to be "engaging in the business of making loans" in New York if it solicits covered loans and, in connection with such solicitation, "purchases or otherwise acquires from others loans or other forms of financing, or arranges or facilitates the funding of loans" to New York residents or "to businesses located or doing business in this state …." Thus, a whole range of new activities—arranging or facilitating loan funding and acquiring loans or other forms of financing—would be covered for the first time so long as the solicitation requirement is satisfied.

By its literal terms, the proposal would apply to loans made to all business borrowers "doing business" in New York. Thus, the proposal is not even limited to commercial borrowers and financing recipients with a physical presence in New York but instead could extend to any company that does business in New York.

Under the proposal, the New York Department of Financial Services (NYDFS) would be afforded the power to adopt regulations exempting any person or entity from licensing "[w]hen necessary to facilitate low cost lending in any community."

As noted previously, for loans not in excess of the $25,000 (consumer) and $50,000 (business-purpose) thresholds, the proposal would require licensure for out-of-state state banks even though they have the authority under federal law to charge the interest allowed by the laws of the state where they are located. It also would apparently require licensure for their nonbank partners as well for entities purchasing business-purpose retail installment contracts. (Purchasers of consumer-purpose New York retail installment contracts are already subject to licensure under Section 492(1) of the New York Banking Law, relating to sales finance companies.) Conceivably, it could be argued that merchant cash advance companies and similar companies are subject to licensure on the theory that they are providing a "form of financing" to their customers, although such companies would not seem to purchase or acquire forms of financing (rather, they purchase receivables) or to solicit "loans."

The NYDFS recently argued that a proposal of the Office of the Comptroller of the Currency to grant national bank charters to financial technology (Fintech) companies would have significant negative effects on existing state regulatory regimens applicable to nonbanks and would encourage Fintech companies to engage in regulatory arbitrage to avoid state consumer protection and usury laws. However, New York arguably provides a perfect example of the pitfalls of some state regulatory regimens.

Already, marketplace lenders typically deny credit to New Yorkers entirely or, alternatively, to New Yorkers who do not qualify for credit at interest rates of 16 percent or less. This is because of the uncertainty created by the Madden decision and the difficulty of obtaining lending licenses from the NYDFS. Typically, the NYDFS takes up to a year or more to grant loan-related licenses that other states process in a month to 90 days. If New York expands the class of entities needing lending licenses and the class of covered loans, the availability of credit will be reduced even further.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance.

Ballard Spahr's Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions.

The firm's Marketplace Lending Task Force is nationally recognized for counseling marketplace lending businesses in both the consumer and small business spaces. We offer soup-to-nuts guidance, working with startup alternative lenders, long-established market leaders, banks, institutional investors, and others. We document and advise on the structure and strategy of bank, platform, and investor relationships; assist in concluding account servicing arrangements; provide extensive consumer regulatory advice, documentation and diligence assistance; and help with state licensing.

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