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Regulator wants New York banks to launch online lending services

NEW YORK, Oct 18 (Reuters) - New York’s brick-and-mortar banks should pursue business opportunities in online lending, an industry now dominated by many out-of-state startup companies, the head of the state’s financial regulator said on Tuesday.

“Your competitors are, and will, be embracing fintech in all of its various forms,” said Maria Vullo, New York State Department of Financial Services (NYDFS) superintendent, referring to new types of financial services technology.

“Don’t be left behind,” she said at a New York Bankers Association conference.

The NYDFS, which oversees New York’s state-chartered banks, has held discussions with several banks that are considering online lending. The niche could help serve lower-income New Yorkers who have little or no access to banking, Vullo said.

Her remarks follow last week’s launch of an online lending business by Goldman Sachs Group Inc that targets borrowers saddled with credit card debt.

The business, Marcus by Goldman Sachs, will offer uncollateralized personal loans of up to $30,000 to so-called prime borrowers who want to manage their credit card debt. The loans can be paid off in two to six years. This type of borrowers typically has a credit score of at least 640.

The online lending industry has been dominated by a slew of lesser-known startup companies. Their business model has raised novel questions for banking regulators. That is because online lenders have shunned a traditional banking model that uses deposits to make loans, bypassing state regulations.

Instead, online lenders either connect borrowers directly with retail investors who want to fund loans, or they extend credit to borrowers, then quickly bundle the loans into securities that are sold to investors.

In May, NYDFS launched an investigation into the business practices of Lending Club Corp including the interest rates it charges consumers and its relationships with banks. In June, the regulator requested information about online lending activities from 28 companies.

“We shouldn’t permit marketplace lenders to evade state regulation,” Vullo said in the speech to bankers.

The group’s largest members include units of the Bank of New York Mellon Corp, Deutsche Bank and Citigroup Inc. Numerous community banks are also state-chartered.

By encouraging traditional banks in New York to cultivate online lending businesses, New York can expand an industry that is “protective of consumers,” Vullo said in an interview after her remarks.

“Some people are creating these businesses from their homes across the country and doing it horribly in a predatory way,” Vullo said. (Editing by Matthew Lewis)