Online lenders should be licensed and supervised by the state to “prevent risk” to the state’s financial markets, the New York State Department of Financial Services said Wednesday.
The recommendation was part of a report released by the agency on the online lending industry. Legislation mandating the report was signed by Gov. Andrew Cuomo in June.
The proposal is the result of a survey the DFS sent to 48 online lenders in New York. Thirty-five of those lenders responded to the survey.
One easy conclusion from the report: the online lending industry is growing. Those 35 lenders had 235,320 customers in New York last year, which was up 79 percent from 2015, the report said.
Those customers were lent more than $2.9 billion in 2017, a 42 percent increase from 2015. That amount is still 17 times less than what consumers borrowed in non-mortgage loans from banks, credit unions and other lenders chartered by the state in 2017, according to the report.
DFS Superintendent Maria Vullo said in a statement that while traditional banks still serve the majority of the state’s residents, online lenders should still be subject to the state’s rules.
“DFS supports the promise that new technologies are able to reach more consumers, but innovation must also be responsible, and all associated risks must be appropriately managed, including by strong underwriting standards, compliance with usury laws, and capital requirements,” Vullo said. “All lenders must operate on a level playing field and address market risk. As the regulator of the financial services industry in New York, DFS has and will continue to be a leader in enforcing robust market safeguards and consumer protections through strong state regulation, licensing and supervision.”
Unlike traditional banks, there is no requirement that online lenders be licensed and supervised by the state. Some are, but many are not, the DFS said in the report.
The DFS also recommended that online lenders be subject to the state’s usury limits, which cap the annual interest rates lenders can offer on consumer loans under $250,000. Lenders can currently bypass that regulation by operating exclusively online or by partnering with an out-of-state bank that’s not subject to the state’s laws, according to the DFS.
The report found that online lenders were regularly offering annual interest rates ranging from 14.8 percent to 25.9 percent. The limit on consumer loans from financial institutions chartered by the state is 16 percent.
Payday loans are especially problematic in that area, the DFS said. According to the report, interest rates on payday loans can reach as high as 400 percent on an annual basis. That can lead to a cycle of debt where consumers are taking out new payday loans to pay for the old ones, the report said.
That’s partly related to the third recommendation in the report, which suggests online lenders be subject to the state’s consumer protection laws and regulations. The state’s laws mandate transparency in pricing, fair lending, fair debt collection practices, and protection of consumer data.
The bill mandating the study was sponsored by Assemblyman Kenneth Zebrowski, D-Rockland County, and State Sen. Jesse Hamilton, a Democrat from Brooklyn.