Online lenders are evading New York regulations by claiming their loans are “made” by federally chartered or out-of-state partner banks, the state’s top financial regulator told lawmakers in Albany Monday.
Maria Vullo, superintendent of the New York State Department of Financial Services, urged legislators to clarify the statutory definition of “making loans” to include a wider range of companies.
“You have to look at that question, who’s the true lender?” she said. “They are partnering with these out-of-state banks, often a Utah bank that doesn’t really have usury limits … but the online lender is really the true lender that needs to get the license, so they cannot utilize preemption provisions.”
Hence, the definition should be broadened “to include situations where an entity, in addition to soliciting a loan, is arranging or facilitating the funding of a loan, or ultimately purchasing or acquiring the loan,” Vullo said.
Her remarks come as state regulators are engaged in a turf battle with Washington over regulation of nonbank fintech companies. Vullo's agency and the Conference of State Bank Supervisors have filed separate lawsuits seeking to block the Office of the Comptroller of the Currency's proposed national fintech charter.
“We believe the preemptive impact of that would have significant consequences for consumers and for community banks,” Vullo said of the OCC's plan.
To close another loophole that she said bad actors are exploiting, Vullo also recommended expanding licensing requirements to cover small-dollar lenders that charge 7% or more. Currently, companies that make loans under $25,000 for consumers or $50,000 for businesses must obtain licenses from her department only if they charge 16% or higher. The state caps interest rates at 25% for licensed entities.
The 16% threshold was set in 1980, when the Federal Reserve’s short-term interest rate target was higher than 20%, Vullo said. Lowering the floor to 7% would not place a burden on upstanding companies, she argued.
"Under our proposal, if you want to lend under 7%, then you’re not required to have a license and that’s because we know there are a lot of good, well-meaning community-based lenders that are providing that kind of lending to their communities."
Vullo arrived with specific recommendations even though the hearing was billed as a strictly informational session for the legislature, and several lawmakers made it clear they were already taking a critical view of the online lending industry.
“My community was ravaged by the mortgage meltdown of 2007, so we tend to look at these things with a more cautious eye,” said State Sen. James Sanders. “Every new technology brings about some bad actors, some people who’ve decided to game the system for their personal advancement, and I’m sure this will be no exception.”
Speaking before Vullo’s testimony, State Sen. Leroy Comrie described the existing 16% cap for unlicensed lenders as “more than reasonable and generous.”
He added, “Moreover, any company that promises to charge its customers a higher interest rate than even Bernie Madoff promised to his investors can take their business elsewhere.”