In the Winter edition of their Supervisory Insights, the FDIC introduced marketplace lending to banks and provided guidance towards diligence banks may be doing on marketplace lending platforms.
The article is broken into three main sections: Marketplace Lending Defined, The Importance of Effective Risk Identification, and A Supervisory Perspective. The first section is fairly straightforward, but the risk identification section is relatively interesting as it focuses on what risks banks are exposed to with marketplace lending partnerships and what sort of diligence should be undertaken ahead of any arrangement.
Primarily, the article focuses bank risk into five main parts:
- Third-Party Risk – Banks lose control as they outsource services and rely on others.
- Compliance Risk – Banks must make sure platforms comply with all bank regulations that would pass through to them.
- Transaction Risk – Can platforms fulfill their duties as expected given the large volumes going through?
- Servicing Risk – Banks should review whether backup servicing is necessary given their bankruptcy exposure to both issuer and servicer.
- Liquidity Risk – Limited secondary markets mean investments in marketplace lending loans contain little liquidity.
While the FDIC is addressing banks specifically with these risks, almost any investor in this space should be reviewing the exact same issues.
Finally, the FDIC suggests supervision by the FDIC itself through FDIC examiners on any partnerships. FDIC examiners will attempt to identify the previously mentioned risks, address findings, and propose suggestions to the bank-platform relationship.
In conclusion, the FDIC acknowledges the attractive source of revenue for banks and does not guide against partnerships with banks. However, the FDIC does want to make sure banks adhere to regulations and manage their risks properly. This article is the FDIC’s attempt to prepare banks for this undertaking and act as a precursor for the FDIC and other regulators to weigh in on bank involvement in this industry.