Proposed legislation that would tighten lender licensing requirements in New York state could reduce the number of online lenders willing to do business there, according to attorneys Catherine Brennan, of Hudson Cook, and Scott Pearson, of Ballard Spahr.

The measure, tucked inside the 2018 New York state budget proposal, is intended to "allow the (New York) Department of Financial Services to better regulate the business practices of online lenders," according to the budget document put forth by Governor Andrew Cuomo (D).

By the end of March it will be known if the measure is advancing in time to meet the April 1 deadline for enacting the New York state annual budget.

Many online lenders operating in New York don't have licenses and "would not be able to continue doing business" there, Pearson said. "If this passes, credit availability in New York will be instantaneously restricted in a very significant way," he said.

Under the proposal, both online lenders that partner with banks and online lenders that lend directly to customers rather than through a bank partner would be required to have a state license, Pearson said. The legislation covers anyone that solicits loans, not just the banks that make the loans.

The state license would allow lenders to make consumer loans of up to USD 25,000 or business loans of up to USD 50,000 at an interest rate of 16% or below, Pearson said. Companies are already required to secure a New York license to lend over those amounts or at rates higher than 16%.

Applying for a license would not be quick. The application process in New York can take an entire year, according to Pearson.

Once "you get a license, you are then subject to supervision by the department," he said, "which adds a whole other level of compliance burden and expense."

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