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Aug. 12 — The latest guidance to banks from the Federal Deposit Insurance Corp. (FDIC) on partnerships with marketplace lenders could have a chilling effect on some of the deals, based on industry and legal reaction to the proposal.
“It’s going to make a lot of those banks very skittish,” Brayden McCarthy, vice president of strategy for Fundera, an online loan broker that works with several marketplace lenders and banks, told Bloomberg BNA.
“Banks tend to be risk-averse,” McCarthy said. And under the guidance, he said, “They’re responsible, that institution, for everything that third party does.
“That is a very hard burden for a bank to shoulder.”
The FDIC issued its 15-page “Examination Guidance for Third-Party Lending” on July 29, and is taking comments on it through Oct. 27. The guidance builds on and extends earlier cautionary advice from the agency.
In the Winter 2015 edition of the FDIC publication “Supervisory Insights,” Angela M. Herrboldt of the agency's Division of Risk Management Supervision wrote that a bank must regard extensions of credit through the partnership with a marketplace lender the same as it considers extensions of credit on its own — and that FDIC examiners will be holding them to it. The article expanded on an FDIC advisory issued in November that cautioned banks to tread carefully in their partnerships with marketplace lenders.
The new guidance “is sort of a more fulsome response to the question of what is the responsibility of a bank that is collaborating with a marketplace lender,” Richard Eckman, a partner with Pepper Hamilton LLC in Wilmington, Del., and an expert in marketplace lending, told Bloomberg BNA.
“It’s certainly comprehensive, but I think it’s just designed to put the banks on notice that they really need to sort of underwrite the whole program that the marketplace platforms are offering or providing so that they cover all aspects of risk,” Eckman said.
“It’s a deeper piece of guidance,” Michael Nonaka, a partner in the Washington office of Covington & Burling LLP, told Bloomberg BNA. “It also makes these requirements a lot more real, by putting it in the context of the examination process and what they refer to as increased supervisory attention.”
The guidance says banks with “significant” partnerships with third-party lenders will be subject to FDIC examination at least once a year — and more often if the associated risk is itself “significant,” which could be due to increases in loan originations by the bank or in partnerships.
“Examiners will conduct targeted examinations of significant third-party lending arrangements and may also conduct targeted examinations of other third parties where authorized,” the guidance reads.
“That’s pretty significant for a small bank that doesn’t receive an examination every year,” Nonaka said, referencing those banks that are “punching above their weight” by forming partnerships with marketplace lenders.
Marketplace lenders accept loan applications online and apply computerized formulas to evaluate them and render a decision within hours or days on whether to grant a loan. The technology reduces underwriting costs, and the overhead for the companies is low relative to banks because of the absence of brick-and-mortar branches. That has allowed the lenders to make money from smaller-dollar loans to small businesses and consumers, a market that had been largely abandoned by conventional banks.
Banks increasingly have formed partnerships with marketplace lenders. In some cases, a bank simply refers its own customers seeking smaller loans to the website of its marketplace partner. In other cases, the bank may purchase loans that are originated by the marketplace lender. And in an arrangement addressed at some length in the guidance, a bank may issue a loan for an online platform, selling it to the marketplace lender within a few days for resale to investors.
Various federal regulators, such as the Office of the Comptroller of the Currency and the Federal Trade Commission, have sponsored forums or issued reports looking at marketplace lending, though none at the level of detail in the FDIC guidance.
McCarthy said he recognizes and appreciates the need for the FDIC to reduce risk, as the taxpayer-backed federal insurer of bank deposits. But the agency should coordinate better with other regulators, he said. Instead, he said, each agency is pursuing a separate path to regulation of online lending.
“I’ve called it ‘whack-a-mole’ regulation, where regulators are narrowly focused on supervising their own turf,” he said. “It should be broad-based. It should be a universal playing field.”
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