July 11, 2018
Contact: Richard Loconte, 212-709-1691
DFS ISSUES ONLINE LENDING REPORT
DFS Recommends Equal Application of Consumer Protection Laws, Application of Usury Limits to All Lending in New York and Licensing and Supervision of Online Lenders
Financial Services Superintendent Maria T. Vullo today announced the release of a report on online lenders. The report is the result of a bill signed by Governor Andrew M. Cuomo on June 1, 2017, requiring DFS to study online lending in New York State and submit a report of its findings. The bill requires that the report include, among other things, an analysis of online lenders operating in New York, including their methods of operations, lending practices, including interest rates and costs charged, the risks and benefits of the products offered by the online lenders, the primary differences with products offered by traditional lending institutions, and complaints and investigations relating to online lenders.
“Access to credit is essential to the well-being of consumers, the lifeblood of small businesses and a driver of economic growth, job creation and prosperity of our communities in New York,” said Superintendent Vullo. “Our review shows that while online lending has grown in recent years, our banking industry still supports the overwhelming majority of lending in New York while being subject to strong safeguards and oversight. 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. 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.”
As a result of the legislation, DFS sent a “New York Marketplace Lending Survey,” which requested information for the years 2017, 2016 and 2015. Of the 48 recipients of the survey, DFS received responses from 35, although not all of the 35 respondents answered all of the survey questions. The survey included questions relating to the business models and operations of the online lenders, quantity of New York consumers and small businesses served by them, including those that are unbanked or underbanked, specific loan terms, such as types of loans, loan amounts, loan duration, annual percentage rates (APRs), fees and charges, disclosures, underwriting standards, delinquencies, marketing and advertising, securitization practices, and complaints and investigations. The questions segmented borrowers into two groups: individual borrowers and small business borrowers, including those who are unbanked and underbanked.
DFS’s 31-page report thoroughly analyzes the survey responses, as well as comments received by other stakeholders. In addition, DFS provides a discussion of its oversight of state-chartered depository and non-depository institutions, and its strong enforcement of consumer protections laws. The report also discusses the numerous actions taken by DFS to enforce New York’s usury laws, including against payday lenders. Moreover, the report puts the current discussion of consumer lending in the context of the financial crisis involving mortgage lending just ten years ago.
A summary of the Report’s findings based on the survey responses is below.
Customer and Loan Numbers: The survey showed that far more individual customers than business customers received loans from the survey respondents, indicating that it is not small businesses that are mainly being served by online lenders. The 35 companies that provided information in response to the Department’s Survey reported that in 2017, the total number of New York customers, both individuals and businesses, was 235,320, up approximately 79% from their 2015 level. Of that total, 8,664 were New York business customers, and 226,656 were New York individual customers. The total number of loans to New York individual and business customers was 352,171, up approximately 118% from their 2015 level; and the total dollar amount of all loans to New York individual and business customers was $2,981,118,348, up approximately 42% from their 2015 level. These growth rates reflect several influences, including an increased level of activity by the existing participants, new participants that commenced activity in 2016 and 2017, and the fact that some of the respondents provided data only for 2017 and not for 2015 or 2016.
Notably, non-mortgage lending to individuals and small businesses by New York State chartered and licensed banks, credit unions and other lenders exceeded $51 billion in 2017, which is more than 17 times the lending by the 35 online lenders that responded to the survey. As the report notes, unlike online lenders, state chartered banks and credit unions hold substantial assets, which allow them to continue lending through differing economic and credit cycles.
Annual Percentage Rate Numbers: Response rates varied especially for participants reporting on New York loans to businesses. Of the respondents extending loans to businesses, the highest average of the respondent reported average median APR was 25.9%, followed by loans to individuals for business or commercial purposes at an average median APR of 22.2%; loans to the unbanked or underbanked customers were at an average median APR of 19.6%; and loans to individuals for personal, investment, or family purposes at an average median APR of 14.8%.
Fees, Costs, Expenses, and Other Charges: Based on responses from 29 respondents, lenders appear to charge a variety of fees, such as origination fees, closing fees, processing fees, maintenance fees, transactional fees, and penalty fees. Some lenders have reported a no fee policy. It is unclear from the responses received whether these fees and charges were included in the calculation of APRs. The most frequent fee mentioned by 20 respondents in 2017 was origination fees ranging from 0.9% to 6.0%.
New York Loan Delinquency Numbers (past due 30 days or more): The total number of delinquent New York loans (both to individuals and businesses) as of the end of 2017, was 18,725 (based on responses from 23 respondents), which represents an average of approximately 11% of the total number of New York loans outstanding as of the end of 2017 (based on responses from 22 respondents).
Complaints and Investigations: For 2017, 20 of the 35 respondents (approximately 57% of the respondents) reported complaints within a range of 1 to 533 complaints. Respondents reported that complaints related to the application process and disqualification of applicants, or the inability to obtain financing when it was sought. Other grounds for complaint included customer service, authorization or lack thereof to retrieve credit reports, reduced credit lines, and matters relating to servicing and fees. Respondents did not differentiate the complaints between the banked customers and those that were unbanked or underbanked.
As part of its work on this Report, DFS also solicited comments from the public, and received numerous comments from other stakeholders, including a number asserting that there should be a level playing field for all lenders and that they should be regulated under the same standards, whether lending is done online, over the phone or in person or any other way. In addition, one commenter stated that online lending should not develop into a way of avoiding traditional banking requirements.
Taking into account the survey results and comments, and DFS’s history and expertise in regulating financial services institutions in New York State, including New York’s robust state-chartered banking system, DFS recommends the following:
- Equal Application of Consumer Protection Laws. New York has strong consumer protection laws and regulations that apply to financial institutions, including those relating to transparency in pricing, fair lending, fair debt collection practices, and data protection. These protections should apply equally to all consumer lending and small business lending activities.
- Usury Limits Must Apply to All Lending in New York. Easy access to credit at usurious rates has long been prohibited in New York and allowing institutions to bypass this sound regulatory structure is counterproductive to sound economic development and consumer protection. All 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, which is the underlying principle of free markets and competition.
- Licensing and Supervision. New York State chartered banks, credit unions and licensed non-depositories are subject to regular examinations by the Department and, if applicable, federal agencies, that assess the overall condition of these regulated institutions from a safety and soundness perspective and proactively address concerns before an issue arises that could impact the institution, the broader market, or consumers. Currently, many online lenders remain unlicensed in New York with no direct supervisory oversight from a safety and soundness or consumer compliance perspective. Direct 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, and that all lenders operate their businesses and conduct their activities in a safe and sound manner so that they may continue providing credit access to New Yorkers, and to prevent potential risk to our financial markets in New York.
A full copy of the report can be found here.