Tucked away in the Transportation, Economic Development and Environmental Conservation Bill portion of the New York State 2018 Executive Budget is a proposed amendment to New York’s Licensed Lender Law that would “[a]llow the Department of Financial Services . . . to better regulate the business practices of online lenders.”[1]
Currently, the Licensed Lender Law requires licensure of persons (1) in the business of making loans of $25,000 or less for personal, family, household, or investment purposes, and loans of $50,000 or less for business or commercial purposes, and (2) charging interest greater than 16%, generally.[2]
The Bill would make three significant changes to the Licensed Lender Law:
- Remove the Interest Element of the Licensing Requirement. Licensing would be required for making consumer loans of $25,000 or less and business loans of $50,000 or less at any interest rate.
- Potentially Implicate Licensing for Marketplace Lending Platforms Using a Bank Partnership Model. The Bill would broaden the meaning of “engaging in the business of making loans in New York” to cover soliciting[3] loans in covered amounts and, in connection with such soliciting, purchasing or acquiring loans.[4] In a bank partnership model, platform companies may both solicit loans made by the bank partner and later purchase some of the platform loans. In the Bill, soliciting loans coupled with purchasing loans appears to implicate licensing.
- Potentially Cover Merchant Cash Advances and Invoice Factoring. The Bill would also expand the meaning of “engaging in the business of making loans in New York” to a person that “solicits [covered] loans . . . and, in connection with such solicitation . . . purchases or . . . acquires . . . other forms of financing.”[5] The amendment does not define the phrase “other forms of financing” but presents the possibility that the intent here is to reach merchant cash advances and invoice factoring. Certainly, more clarity is needed because the solicitation and purchase/acquisition elements are at odds – on one hand the solicitation element covers soliciting loans, but on the other hand the purchase/acquisition element covers seemingly different products, that is purchasing or acquiring “other forms of financing” – and both elements would be required to trigger licensing. This ambiguity should be a particular focus of the merchant cash advance and factoring industries as the Bill moves forward.[6]
Once licensed, licensees are subject to a number of requirements and limitations contained in the Licensed Lender Law, including business activity restrictions, fee limits and regulator examinations.
If the bill is passed by the legislature and signed by the governor, these changes would take effect January 1, 2018.
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[1] See Part EE on the Table of Contents at:https://www.budget.ny.gov/pubs/executive/eBudget1718/fy18artVIIbills/TEDArticleVII.pdf
[2] In New York, the civil usury rate is 16%, but corporations and limited liability companies cannot plead civil usury as a defense. N.Y. Banking Law § 340; N.Y. Gen. Oblig. Law § 5-501(1); N.Y. Banking Law § 14-a(1); N.Y. Gen. Oblig. Law § 5-521(3); N.Y. Ltd. Liab. Co. Law § 1104(a). The criminal usury limit is 25% in New York, generally. N.Y. Penal Law § 190.40.
[3] Soliciting a loan includes “any solicitation, request or inducement to enter into a loan made by means of or through a direct mailing, television or radio announcement or advertisement, advertisement in a newspaper, magazine, leaflet or pamphlet distributed within [New York], or visual display within [New York], whether or not such solicitation, request or inducement constitutes an offer to enter into a contract.” N.Y. Banking Law § 355(2).
[4] FY 2018 New York State Executive Budget: Transportation, Economic Development and Environmental Conservation Article VII Legislation, pgs. 243-4.
[5] Id (emphasis added).
[6] Indeed, without the benefit of legislative history as the Bill contains none, another possible reading of the intent here is to also cover marketplace lending platform companies that buy receivables underlying platform loans solicited by the platform and made by a partner bank.