Senate Bill 5462 (“S. 5462”), proposed by Sen. Joseph A. Griffo (R-47th (Utica)), Chairman of the Senate Committee on Banks (the “Committee”), was introduced last year in the New York State Senate and is currently pending in the Committee. If passed, this bill would significantly change the regulatory scheme for nonbank lenders with customers in New York. According to the most recent status update on the New York State Senate’s website, this bill was referred to the Committee January 4, 2012. While this bill has not seen much movement since being introduced last year and referred to the Committee in January 2012, the fact that it is sponsored by the Republican Chairman of the Committee on Banks, and is supported by the New York Department of Financial Services (the “Department” or “NYDFS”)—an agency headed by Superintendent Benjamin M. Lawsky, former Chief of Staff to Democrat Gov. Andrew Cuomo—suggests that should the bill make it through the Committee and pass the Senate, it will encounter little resistance from the Democrat-controlled New York State Assembly or Gov. Cuomo. Therefore, the time to influence this bill is now, while it is still with the Committee.
Under the current New York Licensed Lender Law (“NY-LLL”), a nonbank lender that makes loans to a New York resident, where the resident is a natural person, the interest rate on the loan is in excess of 16 percent, and the principal amount of the loan is not greater than $25,000 for consumer purpose loans and not greater than $50,000 for commercial purpose loans, the lender must be licensed by the Department. N.Y. Banking Law § 340. S. 5462 would change the scope and applicability of the NY-LLL in several ways, including the following:
First, under the current law, loans that are within the prescribed principle amounts that have an interest rate that does not exceed 16 percent are not subject to the NY-LLL. S. 5462 would appear to remove the interest rate trigger, thereby rendering all loans within the statutory limits coverage under the NY-LLL.
Second, the principle amount ceilings of $25,000 for consumer purpose loans and $50,000 for commercial purpose loans would be increased to $50,000 and $100,000, respectively, thereby expanding the range of covered loans.
Third, the bill would confirm that the NY-LLL is applicable to an otherwise covered lender regardless of the lender’s physical presence in New York. Specifically, the statute would be clarified to include lenders who solicit loans “by any means, including but not limited to, mail, electronic mail, telephone, radio, television, the internet or any other electronic means.” This is consistent with the interpretation adopted by the Department in a 2006 staff interpretation. See NYDFS Staff Interp. (Dec. 21, 2006).
Fourth, the range of covered borrowers would be expanded from “individuals then resident in [New York]” to “individuals then resident or located in [New York].” In the past, based on the existing language of the NY-LLL, the Department has interpreted the statute as not applying to borrowers who were in New York on a transient basis. See NYDFS Op. Ltr. (July 12, 2005), (determining that military personnel who are temporarily in New York state at the time they receive the loans are not “residents” for purposes of the NY-LLL). This change would have the effect of expanding the scope of the statute’s covered borrowers to include all individuals who are physically present in the state at the time of the loan, not just those borrowers who permanently reside in New York. There may be other policy reasons for this change, but on its face the change would likely be subject to challenge under the Commerce Clause to the U.S. Constitution. See Pioneer Military Lending, Inc. v. Manning, 2 F.3d 280 (8th Cir. 1993) (where the court determined that a state’s attempt to apply state lending laws to an out-of-state lender that only made loans to non-resident military personnel temporarily stationed in the state violated the Commerce Clause of the U.S. Constitution, which prohibits a state from regulating interstate commerce); Pioneer Military Lending, Inc. v. Dufauchard, 2006 WL 2053486 (E.D. Cal. 2006) (same). Moreover, the Department’s own staff interpretations appear to have suggested that attempts by a state to regulate an out-of-state lender that makes loans exclusively to customers that are not permanent residents (i.e., non-domiciles) of the state, implicates the Commerce Clause. See NYDFS Interp. (July 12, 2005), (discussing Manning with approval; as well as a May 11, 1994, Department interpretation that no longer appears to be on the Department’s website). However, Commerce Clause challenges are not easy cases to prove and can be costly to litigate.
Fifth, the safe harbor for “isolated, incidental or occasional” activities under the current statute, which has been criticized by some as vague, would be replaced with more precise language specifying that lenders who do not make more than five otherwise covered loans with an aggregate principal amount of not more than $100,000 are exempt from licensure.
Of the above proposed amendments to the NY-LLL, the one that is the most troubling for nonbank lenders is the removal of the current 16 percent interest rate cap below which the statute would not apply. This change would likely bring under the statute’s purview almost any nonbank lender that makes small- to moderate-sized non-real estate loans to customers in New York, thereby subjecting countless additional lenders to the NY-LLL. The result might be fewer lenders that are willing to make loans to New York customers, or the imposition of certain fee add-ons. Moreover, removal of the interest rate trigger would ignore the historical purpose underlying the statute’s original enactment, which was to bring under state regulation lenders who might otherwise charge exorbitant interest rates to desperate borrowers. See Beneficial New York, Inc. v. Stewart, 25 Misc. 3d 797 (Sup. Ct., Kings County 2009).
Our team of New York and Washington, D.C.-based legislative and regulatory attorneys are watching S. 5462, and working with industry stakeholders to develop ways correct deficiencies in the legislation before it becomes law.
Travis P. Nelson is a senior associate in the Financial Services Regulatory Group at Reed Smith LLP, resident in the Princeton and New York offices. Prior to joining Reed Smith, Travis was an Enforcement Counsel with the Office of the Comptroller of the Currency, U.S. Treasury Department, in Washington, D.C. Travis is also adjunct faculty at Villanova University School of Law, and a frequent lecturer at national and regional banking conferences. Leonard A. Bernstein, Chair of the Financial Services Regulatory Group at Reed Smith LLP, and resident in the Philadelphia and Princeton offices, assisted Travis with this article.