Skip to main content
Menu Icon Menu Icon
Close

InfoBytes Blog

Financial Services Law Insights and Observations

Filter

Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.

  • NYDFS announces multistate investigation of payroll advance industry

    State Issues

    On August 6, NYDFS announced it is leading a multistate investigation into the payroll advance industry based on allegations of unlawful online lending. According to NYDFS, the investigation will focus on whether companies are violating state banking laws, including usury limits, licensing laws, and other applicable laws regulating payday lending. NYDFS alleges that some companies appear to collect unlawful interest rates disguised as “tips” as well as monthly membership and/or excessive additional fees, and may collect improper overdraft charges.

    In addition to New York, other states in the investigation include: Connecticut, Illinois, Maryland, New Jersey, North Caroline, North Dakota, Oklahoma, Puerto Rico, South Carolina, South Dakota, and Texas.

    State Issues Lending Online Lending State Regulators NYDFS Overdraft Usury Interest Rate

    Share page with AddThis
  • Online lending platform settles with SEC for $3 million

    Securities

    On April 19, the SEC announced that an online lending platform will pay a $3 million penalty to resolve allegations it miscalculated and materially overstated annualized net returns (ANR) to investors. According to the order, between 2015 and 2017, the company allegedly excluded securities linked to certain charged-off consumer loans from its calculation of ANR and allegedly failed to identify and correct the error, despite knowing that employees misunderstood the code underlying the ANR calculation and despite alleged complaints by investors. As a result, the company allegedly materially overstated the ANR to a total of more than 30,000 investors. After a large institutional investor complained to the company in April 2017, it notified investors of the misstatements and corrected the ANR in May 2017. In agreeing to a settlement, the company did not admit or deny the SEC’s findings, and the order acknowledges that the company has since instituted “a number of controls designed to prevent and detect similar errors in the future,” including new management supervision, quarterly reviews, and semi-annual testing.

    Securities Online Lending Securities Exchange Act Civil Money Penalties

    Share page with AddThis
  • NYDFS recommends online lenders be subject to state licensure and usury limits in new report

    Lending

    On July 11, the New York Department of Financial Services (NYDFS or the Department) released a study of online lending in New York, as required by AB 8938. (Previously covered by InfoBytes here.)  In addition to reporting the results of its survey of institutions believed to be engaging in online lending activities in New York, NYDFS makes a series of recommendations that would expand the application of New York usury and other statutes and regulations to online loans made to New York residents, including loans made through partnerships between online lender and banks where, in the Department’s view, the online lender is the “true lender.”

    In particular, NYDFS recommends, “[a]ll New York lenders should operate under the same set of rules and be subject to consistent enforcement of those rules to achieve a level playing field for all market participants….”  Elsewhere in the report, the Department states that it “disagrees with [the] position” that online lenders are exempt from New York law if they partner with a federally-chartered or FDIC-insured bank that extends credit to New York residents.  NYDFS criticizes these arrangements, stating its view that “the online lender is, in many cases, the true lender” because the online lender is “typically … the entity that is engaged in marketing, solicitation, and processing of applications, and dealing with the applicants” and may also purchase, resell, and/or service the loan.  

    NYDFS also noted that it opposed pending federal legislation that would reverse the Second Circuit’s decision in Madden v. Midland Funding, LLC, which held that federal preemption of New York’s usury laws ceased to apply when a loan was transferred from a national bank to a non-bank.  The Department expressed concern that, if passed, the bill “could result in ‘rent-a-bank charter’ arrangements between banks and online lender that are designed to circumvent state licensing and usury laws.”

    Noting that many online lenders remain unlicensed in New York, the Department states that “[d]irect supervision and oversight is the only way to ensure that New York’s consumers and small business owners receive the same protections irrespective of the channel of delivery….”  To this end, NYDFS recommended lowering the interest rate threshold for licensure from 16 percent to 7 percent.

    Although NYDFS stressed that its survey results may be unreliable due to uneven response rates, it reported that, for respondents, the average median APR for online loans to businesses was 25.9%, the average median APR for online loans to individuals for personal use was 14.8%, and the average median APR for the underbanked customers was 19.6% (New York currently caps interest for civil liability at 16% and at 25% for criminal liability).

    Overall, the report appears to forecast a more difficult regulatory and enforcement environment in New York for online lenders, as has been the case in West Virginia and Colorado.

    Lending State Issues NYDFS Online Lending Usury Consumer Finance Madden

    Share page with AddThis
  • New York governor signs bill authorizing NYDFS to study online lending in the state

    Lending

    On June 1, the New York governor signed AB 8938, which authorizes and directs the New York Department of Financial Services (NYDFS) to study online lending institutions that conduct business in the state, and requires NYDFS to submit a report containing analysis, assessments, and recommendations pertaining to online lending institutions by July 1. As previously covered in InfoBytes, NYDFS announced plans on April 24 to issue a report, which would include an analysis of the differences between online lending products and services and those of traditional lending institutions, the risks/benefits of the products offered, and the availability of various credit products in the absence of online lending. With the enactment of AB 8938, NYDFS is also tasked with, among other things, surveying existing state and federal laws and regulations applicable to the online lending industry. The act is effective immediately and shall expire July 1—the report’s due date.

    Lending Online Lending State Issues NYDFS

    Share page with AddThis
  • NYDFS announces online lending study

    State Issues

    On April 24, the New York Department of Financial Services (NYDFS) announced a study of the practices, economic impact, and operations of online lending in New York. The study will culminate in a public report with recommendations to the state legislature by July 1. NYDFS indicates that the report will cover, among other things, an analysis of the differences between online lending products and services and those of traditional lending institutions, the risks/benefits of the products offered, and the availability of various credit products in the absence of online lending. The report will also provide information on the business practices of online lenders operating in New York.

    NYDFS is requesting comments and feedback on this study by May 24.

    State Issues NYDFS Online Lending Consumer Finance

    Share page with AddThis
  • OCC Acting Comptroller Shares Thoughts on Agency’s Innovation Efforts

    Fintech

    On September 25, OCC Acting Comptroller of the Currency Keith Noreika spoke before the 2017 Online Lending Policy Summit in Washington, D.C. to discuss ways the maturing banking industry can respond to changing market conditions through the adoption of new business models and adjustments to long-term strategies. “Some pundits see the growth of the online lending industry as a response to the nation’s banking industry. And some say that if the industry had been sufficiently agile and fully met the need for lending, alternative lenders would not have grown so rapidly,” Noreika stated. “I do not share that view. I see the growth of online lending and marketplace lenders as the natural evolution of banking itself.”

    According to Noreika, about $40 billion in consumer and small business loans in the United States have been originated by marketplace lenders during the past decade, and since 2010, online lending has doubled each year. In fact, Noreika noted, “some analysts suggest that the market will reach nearly $300 billion by 2020, and others suggest as much as $1 trillion by 2025.” However, the online industry faces certain challenges and “adapting to new market conditions and effectively managing evolving risks” is pertinent to their success. Noreika highlighted recent innovation efforts by the OCC, such as the agency’s Office of Innovation’s “Office Hours,” which was created to facilitate discussions related to fintech and financial innovation. (See previous InfoBytes coverage here.) Another example is the OCC’s plan to develop “regulatory sandboxes” and bank pilot programs to “foster responsible innovation by OCC-supervised banks” as a means to expand the OCC’s own knowledge in this space. Importantly, Noreika addressed the OCC’s position concerning chartering of fintech companies that seek to expand into banking, along with the possibility of “offering special-purpose national bank charters to nondepository fintech companies engaged in the business of banking”—a concept currently being contested by both the Conference of State Bank Supervisors (CSBS) and the New York Department of Financial Services (NYDFS). According to Noreika, the OCC has not yet decided whether it will exercise its authority to issue special purpose bank charters. (See previous InfoBytes coverage of CSBS’ and NYDFS’ challenges here and here.)

    Finally, Noreika offered support for a legislative approach that would clarify the “valid when made” doctrine central to Madden v. Midland Funding, LLC by reducing uncertainty in establishing that “the rate of interest on a loan made by a bank, savings association, or credit union that is valid when the loan is made remains valid after transfer of the loan” and serving to reestablish a legal precedent that had been in place prior to the Madden decision, in which an appellate panel held that a nonbank entity taking assignment of debts originated by a national bank is not entitled to protection under the National Bank Act from state law usury claims. (See previous InfoBytes coverage here.)

    Fintech Agency Rule-Making & Guidance OCC Online Lending Department of Treasury Marketplace Lending Usury National Bank Act Madden

    Share page with AddThis
  • NYDFS Issues Interpretative Guidance Regarding Banking Law Approval Requirements

    Agency Rule-Making & Guidance

    On May 22, the New York State Department of Financial Services (NYDFS) announced it was issuing interpretative guidance regarding the New York Banking Law requirement that mandates prior NYDFS approval for an acquisition or change of control of a banking institution. The guidance was released in response to a request by the New York Bankers Association amid concerns that some investors have been developing non-transparent methods of acquiring and controlling banking institutions without obtaining NYDFS’ review and approval. According to the guidance, “control” is achieved by having direct or indirect power to direct or cause the direction of a banking institution’s management and policies through the ownership of voting stocks or otherwise, and that control is achieved when individuals or entities work together or act in concert to acquire control of a banking institution but with each individual or entity staying below the threshold required for seeking NYDFS’ prior review and approval. The Superintendent of Financial Services, Maria T. Vullo issued a reminder to state-chartered banks that “all proposed changes of control in any banking institution must be submitted to the Department for prior approval under our mandate to safeguard the institutions we supervise and regulate, and to protect the public they serve.”

    The guidance was released the same day Vullo testified at a New York State Assembly hearing on the “Practices of the Online Lending History,” which sought to “explore . . . predatory online lending practices which need to be mitigated, and potential regulatory or legislative action which may be needed to address [this issue].” Vullo urged legislators to clarify the statutory definition of “making loans” to include a wider range of companies and “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.”

    Agency Rule-Making & Guidance Online Lending NYDFS

    Share page with AddThis
  • Governor’s Proposed NY State Executive Budget Includes More Online Lending Supervision; State Assembly Budget “Rejects” Proposed Change

    State Issues

    Article 7 of the New York State Constitution requires the Governor to submit an executive budget each year, which contains, among other things, recommendations as to proposed legislation. On February 16, New York Governor Andrew Cuomo released a proposed 2017-18 Executive Budget that includes a proposed amendment to the New York Banking Law that would provide the New York Department of Financial Services (“NYDFS” or “DFS”) expanded licensing authority over online and marketplace lenders.  (See Part EE (at pages 243-44) of the Transportation, Economic Development and Environmental Conservation Bill portion of the Executive Budget).[1] 

    According to a Memorandum in Support of the Governor’s Budget, the proposed amendment would (i) address “[g]aps in the State’s current regulatory authority [that] create opportunities for predatory online lending,” and (ii) “ensure that all types of online lenders are appropriately regulated,” by (a) “increase[ing] DFS’ enforcement capabilities,” and (b) “expand[ing] the definition of ‘making loans’ in New York to not only apply to online lenders who solicit loans, but also online lenders who arrange or otherwise facilitate funding of loans, and making, acquisition or facilitation of the loan to individuals in New York.” If enacted, the NYDFS’s new authority would, under the Governor’s current proposal, become effective January 1, 2018.

    This proposal in the Governor’s Executive Budget has, however, been challenged by the New York State Legislature.  On March 13, after several hearings on the Governor’s proposed budget, the New York State Assembly released its own 2017-18 Assembly Budget Proposal (“Assembly Budget”), which, among other things, expressly rejected the aforementioned proposed amendment to the banking law found in “Part EE.” The Senate is now expected to release its own budget proposal shortly. And, once it is released, the two house of the State Legislature will reconcile the two bills in committees and pass legislation that stakes out the House’s position on the Governor’s proposals. From there, negotiations will begin in earnest between the Legislature and the Executive, with the goal of reaching a budget agreement on or before March 31, 2017.

     

    [1] See also 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). 

    State Issues Lending Fintech NYDFS Online Lending

    Share page with AddThis
  • CFPB Settles With Online Lender

    Federal Issues

    On September 27, the CFPB entered into a consent agreement with a California-based online lender for allegedly misrepresenting, among other things, the fees charged, the loan products that were available to consumers, and whether the loans would be reported to credit reporting companies. As part of the agreement, the CFPB indicated that the lender would be required to include the correct finance charge and annual percentage rate in all of its online disclosures, and must test those disclosures annually to ensure accuracy and compliance with the Truth in Lending Act.  As a result, the lender will be required to pay $1.83 million in consumer redress as well as $1.8 million as a civil penalty.

    Federal Issues Consumer Finance CFPB Online Lending

    Share page with AddThis
  • FDIC Seeks Comments on Proposed Guidance for Third-Party Lending

    Consumer Finance

    On July 29, the FDIC issued FIL-50-2016 to request comments on the agency’s proposed Guidance for Third-Party Lending, which aims to “set forth safety and soundness and consumer compliance measures FDIC-supervised institutions should follow when lending through a business relationship with a third party.” Pursuant to the proposed guidance, third-party lending would be defined as “a lending arrangement that relies on a third party to perform a significant aspect of the lending process.” Intended to supplement the FDIC’s 2008 Guidance for Managing Third-Party Risk, the proposed guidance seeks to establish specific expectations for third-party lending arrangements. FIL-50-2016 includes 10 questions related to (i) the proposed definition of third-party lending and the scope of the guidance; (ii) the potential risks arising from the use of third parties, with a particular emphasis on risks associated with third-party lending programs; (iii) the proposed expectations for establishing a third-party lending risk management program, including expectations around strategic planning policy development, risk assessment, due diligence and ongoing oversight, model risk management, vendor oversight, and contract structuring and review; (iv) supervisory considerations, including, but not limited to, credit underwriting and administration, loss recognition practices, and consumer compliance; and (v) the proposed examination procedures, which would establish “a 12-month examination cycle for institutions with significant third-party lending programs, including for those institutions that may otherwise qualify for an 18-month examination cycle.” Comments on the proposed guidance, with a particular emphasis on the questions posed in FIL-50-2016, are due by October 27, 2016.

    FDIC Online Lending Risk Management Vendor Management

    Share page with AddThis

Pages

Upcoming Events