The recommendations come after an NYDFS survey of online lenders prompted by a bill from New York governor Andrew Cuomo last year amid concerns about the payday lending market.

The regulator sent out its survey to 48 firms, receiving responses from 35, and also talked to other industry players, before concluding: "The Department is exceedingly concerned with efforts to avoid regulation and New York’s ban on payday lending."

To address this concern, the report says that the laws relating to transparency in pricing, fair lending, fair debt collection practices, and data protection must apply to all consumer and small business lending.

In addition, New York rules on usury limits must also be applied to these new online lenders. Currently, many firms partner with national banks, which are designated the "true lender" and are exempt from state usury caps.

Finally, the NYDFS says that the current situation, where many online lenders remain unlicenced in New York with no direct supervisory oversight from a safety and soundness or consumer compliance perspective, is unacceptable. The watchdog wants direct supervision, with regular examinations.

Financial Services Superintendent Maria Vullo says: "DFS supports the promise that new technologies are able to reach more consumers, but innovation must also be responsible, and all associated risks must be appropriately managed, including by strong underwriting standards, compliance with usury laws, and capital requirements. All lenders must operate on a level playing field and address market risk.

"As the regulator of the financial services industry in New York, DFS has and will continue to be a leader in enforcing robust market safeguards and consumer protections through strong state regulation, licensing and supervision."

Read the full report: