By Suzanne Barlyn and Michael Erman

(Reuters) - New York state's financial regulator sent a letter to 28 companies this week requesting information about their online lending activities, according to a person familiar with the matter and a copy of the letter seen by Reuters.

The New York Department of Financial Services sent the letter to San Francisco-based Prosper, the second-largest online lender, as well as to Avant, Funding Circle, Upstart and others, according to the person, who was not authorized to publicly discuss the matter.

The business is raising some novel questions for banking regulators, because online lenders have shunned a traditional banking model that uses deposits to make loans, and bypass their 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.

The department demanded "immediate compliance" with New York licensing requirements for debt collection, money transmission and mortgage lending activities, according to a copy of the letter reviewed by Reuters.

Online lenders that do not believe they require New York licenses must respond with descriptions of products and services they provide to New Yorkers, as well as cash flow charts, the letter said.

The department also requested details about types of loans and fees the companies pay to, or receive from, other financial institutions. The letter was sent out on Tuesday and Wednesday.

Funding Circle has not received a letter from the agency, but when it does receive inquiries it aims to cooperate fully and respond, spokeswoman Liz Pollock said in an email.

Upstart had not received a letter as of Friday, general counsel Alison Nicoll said in a phone call.

Avant said it received the letter and would respond in a timely fashion.

Representatives of the other companies could not be immediately reached for comment.

(Reporting by Suzanne Barlyn and Michael Erman; Editing by Phil Berlowitz and Richard Chang)