Proposed FDIC guidance on marketplace lending could have far reaching impact on industry

By Sean Mahoney

Following up on its recent Supervisory Insights article on marketplace lending and Advisory on Effective Risk Management Practices for Purchased Loans and Purchased Loan Participations, the FDIC on July 31, 2016 released its proposed Examination Guidance for Third-Party Lending.  If nothing else, this series of recent developments demonstrates the FDIC’s concern with the role of banks in marketplace lending.  Unlike the prior two releases, the July proposed guidance is subject to public comment, with a comment period expiring October 27, 2016.

All three issuances share a common set of fundamental concerns.  These include concerns that (a) a bank may rely on a marketplace lending platform to an unjustified extent; (b) the marketplace lending activity may not fit within a bank’s corporate strategy; (c) that lending through a marketplace platform may not be consistent with the bank’s underwriting standards; (d) that the bank may not adequately assure that the activity is being conducted in accordance with applicable law; and (e) that the bank may not otherwise adequately manage risks inherent in the activity.  The Proposed Guidance goes a few steps further by requiring that banks that engage in marketplace lending activities have specific, detailed policies and procedures addressing a set of prescribed parameters.  Further the Proposed Guidance would mandate that contracts between a bank and marketplace lending platform provide the bank with, among other things, (i) the right to mandate that the platform adopt policies and procedures governing any activity outsourced to the platform, and (ii) rights to performance data, audits and funding information.

While the Proposed Guidance will only apply to state-chartered, FDIC-insured banks that are not members of the Federal Reserve System, it could have far-reaching effects given the increased prevalence of state-chartered banks of all types in marketplace lending.  Moreover, the Proposed Guidance may strain the tension between financial innovation and comprehensive regulatory oversight inherent in much of FinTech.