February 2017

New York Broadens the Net of Its Licensed Lender Law: It May Now Include You!

N.Y. Banking Law § 340, known as the "Licensed Lender Law," requires certain people and entities to obtain a license from the superintendent in order to be able to make loans, which could be at a higher interest rate than otherwise allowed under law. The statute was enacted "to make credit available to high risk borrowers who would otherwise have no access to legal credit services."[1]

On January 16, 2017, Governor Cuomo included in the 2018 budget proposal proposed amendments to N.Y. Banking Law § 340.[2] The proposed amendments ostensibly allow the Department of Financial Services to better regulate the business practices of "predatory" online lenders.[3][4] However, the proposed amendments appear to affect not only online lenders but also (1) lenders without a physical location in New York, (2) lenders who acquire loans from other lenders who do business in New York, and (3) possibly lenders who make loans to corporate borrowers.

Specifically, the amendments provide as follows:

1. Adding language to clarify that the statute applies to both individuals and businesses who are borrowers of business and commercial loans of less than $50,000.

2. Eliminating the language that a person or entity must be licensed to "charge, contract for, or receive a greater rate of interest than the lender would be permitted by law to charge if he were not a licensee hereunder." It is not clear whether the impact of this proposed language change is to prevent lenders from charging higher rates of interest or to subject additional lenders, regardless of the interest rate imposed, to the statute.

3. Broadens the superintendent's powers by (1) allowing the superintendent to issue regulations involving exceptions to the article, (2) adding a provision which provides that, "[w]hen necessary to facilitate low cost lending in any community, the superintendent can adopt regulations that provide an exemption from the licensure requirement," and (3) adding a provision allowing the superintendent to adopt more rules and regulations to implement the terms of the statute. This language does not appear to broaden the superintendent's authority to sanction as much as it just allows the superintendent to issue exceptions.

4. Redefines what it means to be "engaging in the business of making loans in New York," so as to be subject to the requirements of the article. The current statute defines it as (1) soliciting loans in the amounts prescribed by this section (2) within this state and (3) making loans (4) to individuals then resident in this state. The proposed amendment eliminates the language "within this state" so that even a lender that does not solicit loans within New York could fall under the purview of this statute. The proposed amendment also increases the scope of activities that fall under "engaging in the business of making loans in New York" to include not just "making loans" but also "purchas[ing] or otherwise acquir[ing] from others loans or other forms of financing, or arrang[ing] or facilitat[ing] the funding of loans." The proposed amendment additionally includes within its scope those who lend not just to "individuals residing in this state" but also to "businesses located or doing business in this state."

5. Redefines the exclusion to the definition of "engaging in the business of making loans in New York." The current statute states that a person or entity is not considered as engaging in the business of making loans in New York "on the basis of isolated, incidental, or occasional transactions." The proposed amendment eliminates the word "incidental."

[1] Beneficial N.Y. Inc. v. Stewart, 25 Misc. 3d 797, 799, 884 N.Y.S.2d 643, 645 (Sup. Ct. 2009)
[2] New York State Budget (309 pages)
[3] 2018 State Budget Excelsior (140 pages)
[4] 2018 State Executive Budget (42 pages)

For more information, please contact your CSG attorney or the authors listed below.

Frank Peretore | Member of the Firm | fperetore@csglaw.com | (973) 530-2058

Robert L. Hornby | Member of the Firm | rhornby@csglaw.com | (973) 530-2032

Mindy P. Fox | Associate | mfox@csglaw.com | (973) 530-2122