FDIC Enters Consent Order with Fintech Focused Bank | Morrison & Foerster LLP
To reflect expected increased regulatory scrutiny of fintech-bank partnerships, the Federal Deposit Insurance Corporation (FDIC) issued a consent order for a bank deep in the bank-fintech sponsorship space over alleged “unsafe or unsound banking practices” related to its compliance with fair lending laws and regulations. The bank often collaborates with fintech and digital asset companies to offer banking services to consumers. According to the FDIC, the bank allegedly failed to establish and maintain internal controls, information systems and sound underwriting practices, but the FDIC did not delve into the specific practices that prompted it to issue the order.
Key requirements for consent ordering
Although the consent order does not describe the specific unsafe or unsound banking practices that the bank allegedly engaged in, the consent order describes the remedial requirements that the bank must undertake in order to comply with the order. The consent order requires, among other things, that the bank’s board must immediately increase supervision and management of management and internal controls and systems to ensure that the bank complies with current fair lending laws and regulations.
More specifically, the consent order also requires the bank to provide the FDIC with a list of all applicable credit products and all third-party partners that offer credit products. This list will be subject to the FDIC Regional Director’s review and comment or non-objection. In addition, any new credit products or new third-party partners offering credit products will require notification to the FDIC Regional Director and the Director’s non-objection before offering a new credit product. The consent order outlines specific requirements that must be included in the non-objection request, which include a third-party risk assessment, the proposed agreement with a third-party partner, and detailed descriptions of procedures and processes to ensure compliance with laws and regulations and monitoring and oversight of third parties.
The bank must also conduct an internal risk assessment of all its credit products and third parties to identify fair lending risk, and any non-compliance with applicable fair lending laws and regulations. These internal assessments must also be supplemented by independent third-party assessments of the bank’s fair lending resources and historical compliance with fair lending laws and regulations. The bank must use these assessments to develop a fair lending compliance plan and fair lending internal controls which, among other things, must include guidelines and procedures to address and reduce previously identified risks.
In addition, the bank must develop internal controls to ensure third-party partners’ compliance with fair lending laws. At a minimum, these must include policies and procedures for handling corrective actions that must be taken by third parties for non-compliance with fair lending laws.
Important takeaways
This consent order relates to several areas on which the federal banking regulators have increased focus.
Regulators are increasingly focused on banking and fintech partnerships, particularly with regard to banks exercising proper oversight of fintech partners. In September 2022, the Office of the Comptroller of the Currency conducted a enforcement action against another bank related to the bank’s supervision of its fintech partnerships. Banks working with fintechs should ensure that they have appropriate controls in place to perform appropriate due diligence, monitor their fintech partners and take corrective action if fintech partners do not comply with applicable law or contractual obligations. Similarly, fintechs that have or are considering partnerships with banks should be aware of the increasing scrutiny from federal regulators that may affect the relationship, particularly where the bank has the right to terminate the relationship at the direction of its regulators and where a bank must obtain regulatory consents or approvals in connection with its partnerships.
In addition, federal regulators have been particularly focused on fair lending issues, and creditors should ensure that they have proper fair lending compliance programs in place to comply with applicable fair lending laws.
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