Last week, the FDIC issued the latest in a series of Financial Institutions Letters dating back to 2008 on the subject of banks managing third-party risk. This most recent FIL deals with payment processing for third-party merchants engaged in higher-risk activities.

The FIL follows earlier guidance in setting forth the FDIC's expectation that banks providing payment processing for such merchants will perform appropriate risk assessments and conduct due diligence and monitoring adequate to ascertain whether the merchants are operating in accordance with applicable law. The FIL is an apparent response to congressional inquiries spurred by reports that the FDIC was actively encouraging banks involved in payment processing to payday lenders to discontinue providing such services. A recent letter from FDIC Chairman Martin J. Gruenberg to Congressman Blaine Luetkemeyer presaged the issuance of just such an FIL.

Without mentioning payday lending, the FIL—which applies to banks of all sizes, including community banks—emphasizes that banks "that properly manage these relationships and risks are neither prohibited nor discouraged from providing payment processing services to customers operating in compliance with applicable law." Thus, the FIL clarifies that banks can continue to assist payday lenders who have adopted a "state-by-state" model of operation and comply with the laws of the states where their borrowers reside. The FIL does not directly express a view on other models, including "tribal" models used by many online payday lenders.

The FIL asserts that higher-risk activities are typically characterized by high rates of return, high rates of unauthorized transactions, consumer complaints, and regulatory or criminal actions. The FDIC's reference to high rates of return comes amid reports that the Department of Justice is taking the position that rates of return exceeding 3 percent should raise red flags. In our view, any focus on return rates is questionable and overly broad in the context of a product serving a population with serious credit and liquidity problems.

Ballard Spahr’s Consumer Financial Services and Bank Regulation and Supervision Groups include experienced lawyers who, among other things, counsel banking clients and their boards of directors and senior management on a variety of risk management issues, particularly those that expose them to legal, regulatory, and reputational risk. For more information, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or, CFS Practice Leader Jeremy T. Rosenblum at 215.864.8505 or, or Keith R. Fisher in the Bank Regulation and Supervision Group at 202.661.2284 or




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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.


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