Proposed Guidance for 3rd-Party Lending at Banks

Aug. 08--Stakeholders will now have more time to comment on proposed guidance for third-party lending at the nation's financial institutions.

On July 29, proposed third-party lending guidance was published indicating that comments would be accepted until around Sept. 12.

But interested parties subsequently submitted requests in response to the guidance asking for additional time to consider the proposal.

So on Monday, the Federal Deposit Insurance Corp. issued a statement indicating that the comment period has been extended to Oct. 27.

The guidance addresses risks that accompany third-party lending -- which can supplement, enhance or expedite lending services for banks' customers.

Third-party lending can help banks lower the cost of delivering credit products as well as achieve strategic or profitability goals.

The regulator noted that institutions' boards of directors and senior management are ultimately responsible for managing activities conducted through third-party relationships and managing the risk.

"Institutions that engage in new or significant lending activities through third parties will generally receive increased supervisory attention," the guidance stated. "Third-party lending arrangements will be considered significant if, for example, they have a material impact on revenues, expenses, or capital; involve large lending volumes in relation to the bank's balance sheet; involve multiple third parties; or present material risk of consumer harm."

Among the processes handed off by banks in third-party lending are marketing, underwriting, pricing and originations. Other such tasks include compliance, servicing and reporting.

The proposal outlined several types of third-party lending arrangements such as when the bank lacks the necessary licenses, desires to export interest rates or leaves it to the other party to provide loan funding. Sometimes the loan volume at these banks exceeds their balance sheets.

Another arrangement involves third parties generating leads and originating loans that are held on the institution's balance sheet.

In some cases, end-to-end lending platforms are developed by third parties to generate loans that are generally retained by the institutions.

Risks with third-party lending include strategic risks where adverse business decisions don't align with the bank's strategic goals. Operational risks arise when underwriting, servicing or other customer interaction are not under the direct supervision of the bank. Large volumes of loans originated or multiple third parties or agents involvement can create transactional risk.

Other risks faced include pipeline and liquidity risk, financial model risks and credit risks from third parties as well as compliance risk.

The FDIC noted that third-party lending activities should be incorporated into the strategic planning process. Third-party lending policies also need to be established, and the relationships should be evaluated and monitored.

A risk assessment should be developed to ensure the proposed third-party lending relationship fits within the institution's strategic plan and business model. It should also ensure that management has the requisite knowledge to analyze, and later oversee, the appropriateness of a particular third-party lending relationship.

Comprehensive due diligence and oversight should be conducted that involves a review of all available information about a third party -- focusing on the entity's policies and procedures, financial condition, its specific experience and quality of management, and the effectiveness of its operations and controls.

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