New York seeks to expand authority over fintechs

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WASHINGTON — The New York State Department of Financial Services is hoping to expand its authority to marketplace lenders, brokers, merchant cash advance companies and others that previously could operate in the state without a license.

Tucked inside New York Gov. Andrew Cuomo’s proposed budget for the coming year, the changes would force a wide range of companies to become subject to the state regulator.

“New York is trying to throw a wide net for everyone who solicits business in the state of New York through the internet,” said Richard Garabedian, a counsel at the law firm Womble Carlyle.

If passed, the measure would expand licensing requirements to all companies that make personal loans of $25,000 or less or commercial loans of $50,000 or less, regardless of the interest rate charged. Previously, the state required companies in that category to obtain a license only if they charged more than 16% interest.

Moreover, the measure would expand coverage to companies that are involved in the loan process, whether or not they are directly making the loan. The new definition covers any company that “solicits … purchases or acquires … [or] arranges or facilitates” the origination of loans to New York residents.

This would include marketplace lenders – the platforms that connect lenders and borrowers – as well as merchant cash advance companies and any firm that trades loans. Online lenders that partner with out-of-state banks would also be covered, but the banks themselves would not have to get a license.

The measure would also make space for New York’s superintendent of financial services to exempt companies that “facilitate low cost lending in any community” from the licensing requirement.

Still, the changes could have a significant impact on the fintech industry in New York, observers said.

“It typically takes a year or more to grant licenses,” said Scott M. Pearson, a partner at Ballard Spahr. “Anybody who decides to go through that process would have to stop their lending activities for a while until they get their license.”

And beyond that, the process of being supervised by the New York regulator might be beyond these fintech companies’ capacities.

“You're going to be subject to supervision by the New York Department of Financial Services, and that adds a whole new layer of costs and burdens to doing business in the state,” Pearson said.

The proposal underscores the difficulty states will face in uniting to create a more coherent licensing system to compete with the Office of the Comptroller of the Currency's fintech charter. It may also hasten a likely battle between state regulators, which oppose the federal charter, and the OCC over the legality of the comptroller's actions. State regulators have said the OCC lacks the power to offer a charter of this kind for fintech firms.

The New York banking regulator began inquiring into the activities of online lenders in June, asking 28 companies to detail their activities. That followed a similar move from the California Department of Business Oversight, which had sent out letters to 14 companies months earlier.

But the two states are responding in very different ways. California’s commissioner of business oversight, Jan Owen, on Tuesday asked fintech companies to advise her on improving the state-by-state licensing system.

Instead, New York is aiming to create a tougher regulatory environment at a time when the state model is facing competition from the OCC’s plan to grant limited-purpose national bank charters to fintech companies.

If New York approves the measure, that could make the OCC fintech charter – which would pre-empt state licensing requirements – even more enticing.

“If you have a national charter, you're immune from state licensing,” Garabedian said.

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Marketplace lending Fintech regulations NYDFS OCC