Client Alert: Avoiding New Third-Party Lending Risks for Banks
- Scrutinize your institution's third-party lending relationships carefully.
- Consider external reviews to ensure compliance and to conform to industry best practices.
- Develop strategies for addressing any issues before and during your next examination.
Banks Increasing Use of Third-Parties in Lending
Banking regulators are focusing on the use of third-parties in all aspects of lending. Banks are increasingly using third-parties in various lending functions to augment, supplement, enhance and/or expedite their lending services. Some areas in which third-parties are used include marketing, originating, underwriting, pricing, servicing and collecting. In these areas, banks are considering third-party Fintech and E-lending platforms.
These new developments have not escaped the banking regulators' attention. A recent example of this concern is the FDIC-issued proposed Guidance for Third-Party Lending, which would augment the FDIC's existing Guidance for Managing Third-Party Risk.
The guidance focuses on three types of third-party relationships:
- Banks originating loans for third-parties;
- Banks originating loans through third-party lenders; and
- Banks utilizing third-party lending platforms (e.g., Fintech developed platforms).
Although the banking regulators generally do not oppose banks using third-party vendors, the proposed guidance iterates the various risks of which banks must be mindful when engaging in these types of activities. Accordingly, the trend is for the banking regulators to increasingly hold banks accountable for the acts of their third-party vendors used in lending, especially in consumer lending.
Prudently Using Third-Parties in Lending
As mentioned above, using third-parties in lending can offer banks many benefits. However, the banking regulators will hold banks accountable for any compliance issues raised by their use.
Your bank should scrutinize these relationships carefully, especially when formalizing any agreements with a third-party. Besides the bank's internal review, we also can review these agreements to ensure that they are compliant and conform to industry best practices. We also can advise during the pendency of the relationship to ensure continued compliance. Finally, we can help you develop strategies for addressing any issues before and during your next examination.
We Can Help You
Please call us if you are interested in discussing these issues or to seek counsel in reviewing your third-party relationships.
- FDIC-Issued Proposed Guidance for Third-Party Lending (FIL-50-2016)
- FDIC-Issued Guidance for Managing Third-Party Risk (FIL-44-2008)