The latest regulator attempting to rein in controls on the marketplace lending industry is the Federal Deposit Insurance Corp. (FDIC). Marketplace lending to consumer borrowers generally runs through state-chartered banks. The FDIC is in the unique position of being able to regulate state-chartered, nonmember banks because most of them rely on their federal supervision in order to export their home state maximum interest rate under the Federal Deposit Insurance Act. Despite there being no history of reported claims by any marketplace lender that could threaten the deposit insurance fund of the FDIC, the FDIC is poised to take the offensive in regulating this industry,so as to better ensure the safety and soundness of its supervised banks. Thus, the FDIC has released multiple pieces of guidance on issues including third-party lending and changes to the supervisory appeals process as well as a reminder to financial institutions to maintain communication with examination staff.
Not taking a vacation this summer, the FDIC recently published three financial institution letters on important issues for banks.
In FIL-50-2016, the agency requested comment on draft guidance regarding third-party lending. The guidance provides safety and soundness and consumer compliance measures that FDIC-supervised institutions should follow when lending through a relationship with a third party, the agency explained, supplementing the FDIC’s existing Guidance for Managing Third-Party Risk, issued in 2008.
Defining third-party lending as “an arrangement that relies on a third party to perform a significant aspect of the lending process,” the proposed guidance references categories such as institutions originating loans for third parties, originating loans through third parties or jointly with third parties, and originating loans using platforms developed by third parties.
Managing and controlling the risks of third-party relationships can be “challenging,” the FDIC noted, particularly when origination volumes are significant or numerous third-party relationships are in place. To cope with the challenges, institutions should establish a third-party lending risk management program and compliance management system commensurate with “the significance, complexity, risk profile, transaction volume, and number of third-party lending relationships,” the agency advised.
As set forth in existing guidance, the risk management program and compliance management system should comprise four elements: risk assessment, due diligence and oversight, contract structuring and review, and oversight.
When reviewing such programs, examiners would consider credit underwriting and administration, loss recognition practices, the applicability of subprime lending guidance, capital adequacy, liquidity and funding, profitability and budgeting, accounting and allowance for loan and lease losses maintenance, consumer compliance, programs for safeguarding customer information, and information technology.
The proposed guidance would establish increased supervisory attention for institutions that engage in “significant” lending activities through third parties, defined to cover banks where such lending has a material impact on revenues, expenses or capital; involves large lending volumes in relation to the bank’s balance sheet; involves multiple third parties; or presents material risk of consumer harm. In such situations, the FDIC proposed a 12-month examination cycle, concurrent risk management and consumer protection examinations, off-site monitoring, and the possibility of the agency’s review of the third parties involved.
Comments on the proposal will be accepted until Oct. 27. The FDIC specifically asked for public input on the scope of the definition of third-party lending, whether the three categories delineated appropriately capture the various types of third-party lending arrangements, whether additional risks posed by the use of third parties should be recognized by the agency and whether the expectations for a risk management program provide an adequate framework.
Feedback about supervisory considerations and examination procedures—particularly the increased supervision for institutions engaged in “significant” lending activities—was likewise requested.
The FDIC also asked interested parties to weigh in on updates to guidelines for institutions to appeal certain material supervisory determinations in FIL-52-2016. Intended to expand the circumstances under which banks may appeal a material supervisory determination, the proposed amendments to the Guidelines for Appeals of Material Supervisory Determinations would be effective upon adoption.
Specifically, the changes would permit appeal of the level of compliance with an existing formal enforcement action and provide that a formal enforcement-related action or decision does not affect an appeal that is pending under the guidelines.
In another change, financial institutions would have additional appeal rights with respect to material supervisory determinations in certain circumstances, such as where the FDIC has provided an institution with a written notice of a recommended or proposed formal enforcement action but does not pursue the action within 120 days of the written notice or in the case of a referral to the attorney general for certain violations of the Equal Credit Opportunity Act.
Finally, the FDIC reissued a 2011 financial institution letter to reinforce the agency’s expectations for communications with banks. “An open dialogue with bank management is critical to ensuring the supervisory process is effective in promoting an institution’s strong financial condition and safe-and-sound operation,” according to the letter.
Prior to the conclusion of an examination, examiners will “thoroughly discuss” their findings and recommendations with senior management and provide management with an opportunity to respond, the FDIC said. Examiners will also engage in informal communication with bankers during the exam process, perhaps making verbal suggestions to address minor issues or describing effective practices they have observed at other institutions.
“This discourse fosters an effective flow of information between the regulator and the financial institution and helps ensure regulatory findings and recommendations are well understood,” the agency wrote. “The FDIC encourages bank management to provide feedback on FDIC supervisory activities and engage FDIC personnel in discussions to ensure full understanding of the FDIC’s supervisory findings and recommendations.”
If an institution disagrees with examination findings, it has several informal and formal avenues for raising its concerns, the FDIC noted, such as discussing the matter with the examiner-in-charge, contacting the appropriate field office or regional office personnel, filing a request for review under the FDIC’s formal appeals process for material supervisory determinations, or reaching out to the FDIC Office of the Ombudsman.
The agency also took the opportunity to note that FDIC policy prohibits “any retaliation, abuse or retribution by an agency examiner or any FDIC personnel against an institution,” and that banks should contact their regional directors if they believe retaliation has occurred.
To read FIL-50-2016, click here.
To read FIL-52-2016, click here.
To read FIL-51-2016, click here.
Why it matters
The FDIC explained that the revisions to the guidelines for institutions to appeal certain material supervisory determinations and the additional proposed guidance for third-party lending demonstrated an effort by the agency “to improve the transparency and clarity of the FDIC’s supervisory policies and practices, and to ensure that institutions have clear and fair avenues to pursue when there are differences of opinion regarding supervisory matters.” As for the reissued financial institution letter encouraging communication, the FDIC emphasized the importance of an open dialogue between banks and examiners, which it said can promote an institution’s financial condition and safe-andsound operation.