New guidance being developed by the Federal Deposit Insurance Corporation (FDIC) to address risks associated with banks making loans through third parties could significantly impact marketplace lending, private label credit card, and dealer-assisted financing programs.

The FDIC's development of the guidance comes in response to the highly critical "Report of Inquiry into the FDIC's Supervisory Approach to Refund Anticipation Loans and the Involvement of FDIC Leadership and Personnel" issued last month by the FDIC's Office of Inspector General (OIG). Due to sensitive information contained in the report, the OIG did not publicly release the full report and instead only issued an executive summary. The report focused on the FDIC's efforts from approximately 2009 to 2012 to cause three of its supervised banks to exit the refund anticipation loans (RAL) business. A RAL is a loan representing an advance of a portion of the tax refund claimed on the consumer's income tax return offered by a bank through a tax preparation company.

In response to the OIG's draft report, the FDIC indicated that its actions were justified by safety and soundness concerns as well as "concern about the utility of the product to the consumer given high fees." The OIG, however, found an "absence of significant examination-based evidence of harm caused by RAL programs," and observed that "the basis for [the FDIC's decision to cause the banks to exit RALs] was not fully transparent because the FDIC chose not to issue formal guidance on RALs, applying more generic guidance applicable to broader areas of supervisory concern." That guidance included the use of "moral suasion" by FDIC examiners in an attempt to influence banks' risk management practices. The OIG noted that while informal discussions and persuasion is important to the supervisory process, "we believe more needs to be done to subject the use of moral suasion, and its equivalents, to meaningful scrutiny and oversight, and to create equitable remedies for institutions should they be subject to abusive treatment." (The OIG noted that the FDIC's actions caused "high costs," including "reputational damage," to the three banks.)

In its letter responding to the OIG's final report, the FDIC stated that, in response to the OIG's findings, it "has begun developing guidance to address the risks associated with banks making loans through third parties as well as risk management practices that would be expected of banks engaging in these activities to mitigate the risks." The new guidance is intended to supplement existing FDIC guidance on managing third-party risk and, according to the FDIC, "will specifically address the risks associated with banks making loans through rent-a-charter relationships, agent relationships, and other third-party relationships." The FDIC also committed to consider the need for it to issue specific regulatory guidance "as new products and delivery channels emerge."

The FDIC's recent publication of an article highlighting the risks for banks that partner with marketplace lenders made clear that marketplace lending is on the FDIC's radar screen. As a result, the new guidance can be expected to address the risks associated with bank-model marketplace lending programs in which banks and nonbanks typically partner in order to take advantage of federal laws giving banks the power to charge interest nationwide at the rate permitted by the law of the state where the bank is located.  It is also likely to address, at least indirectly, the risks associated with more long-standing bank third-party lending relationships, such as those involved in private label credit cards and dealer-assisted financing.

The new guidance could prove helpful to banks if it is used by the FDIC as an opportunity to provide them with clear guidelines as to how to structure such third-party relationships consistent with FDIC expectations. Such guidance would clearly be preferable to an approach in which the FDIC uses professed safety and soundness concerns on a case-by-case basis to criticize a bank's use of a third party relationship to offer a loan product that the FDIC disfavors because of its rate and fee structure or other features.

Hopefully the guidance will recognize that Congress has specified the interest rates that FDIC-insured banks may charge and has not given the federal banking agencies (or even the Consumer Financial Protection Bureau (CFPB)) authority to set stricter rate limits of their own.  

Marketplace and bank-model lending already have attracted the attention of the U.S. Department of the Treasury, which issued a request for information regarding online marketplace lending in July 2015, and the Consumer Financial Protection Bureau, which recently announced that it is accepting consumer complaints about loans obtained through marketplace lenders and has been sharpening its focus on small business lending, and state authorities in California, Maryland, and Pennsylvania.

Ballard Spahr's Marketplace Lending Task Force is nationally recognized for counseling marketplace lending businesses in both the peer-to-peer and business-to-business spaces. We offer soup-to-nuts guidance, working with startup alternative lenders, long-established market leaders, institutional investors, bank partners, and others. We document and advise on the structure and strategy of bank, platform, and investor relationships, assist in concluding account servicing arrangements, and provide extensive consumer regulatory advice and state licensing expertise.


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