The Competitive Enterprise Institute (CEI) contends that the New York Department of Financial Services’ recent report on online lending is “flawed.” In its July 30, 2018, release, the CEI asserts that the NYDFS report “makes dubious legal and economic arguments with little empirical evidence to back it up, omits important historical events that do not support its conclusions, and supports policies that would significantly inhibit credit markets in the state, harming consumers and small businesses alike.”
On July 11, 2018, the NYDFS released a report on online lenders based on a “New York Marketplace Lending Survey” sent by the agency to 48 institutions believed to be engaged in online lending activities in the state. Mandated by legislation, the NYDFS report includes an analysis of online lenders operating in New York, including: the lenders’ methods of operation; their lending practices, including interest rates and costs charged; the risks and benefits of the products offered by online lenders; the primary differences with products offered by traditional lending institutions; and complaints and investigations pertaining to online lenders. In addition, the report includes information regarding actions undertaken by the NYDFS to protect the state’s markets and consumers, as well as the state agency’s analyses and recommendations.
CEI’s contentions. Generally, the CEI maintains that, in a number of instances, the NYDFS study does not include “supporting evidence” or “makes broad assertions without substantiating the claims.” More specifically, the CEI:
- disputes the NYDFS report’s statement that “payday lenders often operate in a regulation-free environment,” and asserts that many federal laws cover consumer credit generally and that all 50 states “regulate small-dollar loans extensively”—with 18 states and the District of Columbia prohibiting high-cost payday lending entirely;
- takes issue with the report’s claim that small businesses “have reported dissatisfaction with their online loans because of both high interest rates and unfavorable terms that are not often clear to the owners,” because “no evidence is provided” to bolster that claim, and because certain market studies have found that “online lending can be cheaper and fairer than other sources;”
- argues that small businesses frequently cannot gain access to conventional bank financing, and that the emergence of new technologies giving rise to online business models to fill this void is a “positive development;”
- maintains that the high interest rates associated with online small-dollar lending “are also likely a genuine assessment of risk, demonstrated by the high level of competition in the marketplace;”
- asserts that the NYDFS report’s attempt to draw parallels between the “predatory lending” of the financial crisis and online consumer lending is unsubstantiated, threadbare, and without merit, especially because the NYDFS claim omits any discussion of “the two enormous government sponsored enterprises (GSEs) that drove underwriting standards to dangerous lows during the financial crisis;”
- observes that although commercial lending is a “completely different animal” from consumer lending, the NYDFS report fails to make this distinction in its proposed regulatory framework, and, therefore, “regulating business lending the same as consumer lending is conceptually flawed and will only further the exodus of innovative lenders from the New York market;” and
- opposes “NYDFS’s call for the application of New York usury limits to all online lending” because, among other things, not only would that approach conflict with the National Bank Act, federal preemption principles, and long-standing Supreme Court precedent, it also would “drastically reduce credit availability” for both consumers and small businesses and would create “a greater number of unbanked customers” in the process.
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