On August 26, New York State Senator Zellnor Myrie introduced Senate Bill S10688, legislation that would enact an express “opt out” from key provisions of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA), purporting to impose New York’s interest rate limitations on a broad range of consumer credit transactions. The bill was referred to the Senate Committee on Rules the same day. This proposed legislation marks the latest development in a continuing trend of state efforts to regulate state-chartered banks and fintech partnerships and impose restrictions on bank-model lending.
Background
Enacted in 1980, §§ 521 through 523 of DIDMCA extended federal interest rate authority to FDIC-insured state-chartered banks, allowing those institutions to “export” the interest rate of their home state into other states by preempting local usury laws. Section 525 of DIDMCA preserved the right of any state to opt out of those provisions with respect to loans made in that state.
New York’s proposed opt-out arrives at a moment of significant legal uncertainty surrounding DIDMCA opt-outs. As we have covered in prior posts, Colorado enacted its own DIDMCA opt-out under H.B. 23-1229, which remains the subject of ongoing en banc proceedings before the Tenth Circuit in National Association of Industrial Bankers v. Weiser. The central question in that case, whether “loans made in such State” under § 525 refers to the location of the bank or the locations of both the borrower and the bank, remains unresolved, with the panel opinion that had favored Colorado’s broader reading now vacated (discussed here). The Federal Deposit Insurance Corporation (FDIC) filed an amicus brief in the Tenth Circuit siding with the industry plaintiffs and urging a reading of “loans made in such State” focused on where the bank performs key lending functions, a position that would significantly narrow the reach of any state’s opt-out (discussed here). The Office of the Comptroller of the Currency likewise submitted an amicus brief in support of the appellees, urging the Tenth Circuit to affirm the district court’s issuance of a preliminary injunction.
Oregon followed Colorado by enacting HB 4116, which applies a 36% interest rate cap to consumer finance loans made by out-of-state, state-chartered banks to Oregon borrowers, only to face an immediate federal court challenge on both federal preemption and dormant Commerce Clause grounds (discussed here).
New York’s S10688 represents the latest entry into this evolving landscape.
What the Bill Does
S10688 would amend the New York Banking Law and create a new Article 11 of the Financial Services Law. Its key provisions include:
- DIDMCA Opt-Out. The bill provides that the amendments made by §§ 521, 522, and 523 of DIDMCA shall not apply to covered consumer credit transactions made in New York on or after the bill’s effective date. This includes federal interest rate authority codified at 12 U.S.C. § 1831d.
- Broad Definition of “Covered Consumer Credit Transaction.” The bill covers loans, credit sales, lines of credit, open-end credit plans, credit card accounts, balance transfers, and cash advances to “consumers,” but notably excludes credit secured by a first lien on real property or a dwelling. The bill restricts the term “consumer” to natural persons who are residents of New York who are extended credit primarily for a personal, family or household purpose, effectively excluding commercial credit.
- Transactions “Made in This State.” Consistent with the borrower-location reading of § 525 that Colorado and Oregon have adopted, S10688 adopts an expansive, multi-factor test for determining when a transaction is “made in” New York. A transaction would be deemed “made in” New York when the consumer is a New York resident at account opening or consummation of the transaction and one or more material acts occur in the state, including solicitation, application submission, execution of an agreement, receipt of funds, or use of a New York payment account. Remote and digital lending is expressly captured. The bill provides that a contractual choice-of-law clause selecting another state would not override this determination.
- Covered Participants. S10688 reaches beyond the originating institution to any person that markets, arranges, funds, services, purchases, acquires, securitizes, collects, or enforces a covered transaction, or receives a material portion of its revenues, where the person relies upon the bank’s interest rate authority.
- Enforcement. Both the New York Superintendent of Financial Services and the Attorney General may enforce the new Article 11, with civil penalties of up to $2,500 per violation and up to $10,000 for knowing or willful violations.
Effective Date
If enacted, S10688 would take effect 180 days after becoming law, with regulatory implementation authorized to begin immediately upon enactment.