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OCC Establishes New Third-Party Risk Management Expectations, Including for Bank Relationships With Marketplace Lenders

Client Alert

Authors: Mark T. Dabertin and Richard P. Eckman

2/21/2017
OCC Establishes New Third-Party Risk Management Expectations, Including for Bank Relationships With Marketplace Lenders

The bulletin requires relationships between banks and marketplace lenders to be treated with the same rigor of due diligence and ongoing oversight as other relationships with third parties.

On January 24, the Office of the Comptroller of the Currency (OCC) issued a new bulletin, OCC Bulletin 2017-07 (Supplemental Examination Procedures for Risk Management of Third-Party Relationships). The stated purpose of the bulletin is to assist bank examiners in evaluating the third-party risk management practices of national banks and federal savings associations (collectively, banks). For the most part, Bulletin 2017-7 reinforces existing OCC supervisory expectations. In several notable respects, however, the bulletin breaks new ground, including by addressing relationships with marketplace lenders.

In October 2013, the OCC issued Bulletin 2013-29 (Risk Management Guidance: Third-Party Relationships), which revised longstanding OCC guidance by placing a stronger emphasis on the internal systems that are relied upon in managing third-party relationships. The new bulletin implements the 2013 guidance by identifying particular practices that are expected to be in place at every bank regardless of size, including:

  • methodologies for assigning a risk ranking to all third-party relationships

  • ongoing monitoring that addresses certain specified minimum risk factors

  • processes for holding applicable bank employees personally accountable for identified material weaknesses in third-party oversight

  • ongoing reviews of online activity, publicity, public reports and social media for adverse events involving third parties or their subcontractors.1

In establishing risk management expectations for relationships between banks and marketplace lenders in its new bulletin, the OCC is following the lead of the Federal Deposit Insurance Corporation (FDIC), which issued its own supervisory expectations for these relationships in late 2015. As in the case of the FDIC’s guidance, the OCC bulletin broadly defines the term “marketplace lender” to include any “companies engaged in Internet-based lending businesses (other than payday lending).”2 Specific examples of marketplace lenders stated in the OCC Bulletin include online companies that make small business loans, consumer loans, student loans and real estate loans.3

If a bank plans to contract with a marketplace lender to “perform some, if not all operational functions, including processing, underwriting, closing, funding, delivering, and servicing of loans,” OCC Bulletin 2017-7 requires the bank to have sufficient support “systems, controls, and personnel [in place] to adequately support the volume of planned loan origination, servicing, or collection activities.”4 In addition, if the bank is considering contracting with a marketplace lender to originate or purchase loans, the bank must determine whether the lender’s underwriting methods are “new, nontraditional, or different from the bank’s underwriting standards.”5 Finally, if the bank will be investing directly or indirectly in, or will be providing warehouse lines or other credit facilities to, any third-party lender, including a marketplace lender, the bank must determine whether the third-party lender’s underwriting standards are consistent with the bank’s own underwriting standards.6

In addressing relationships with marketplace lenders, OCC Bulletin 2017-7 implicitly acknowledges that these relationships are likely to continue, regardless of whether the OCC begins issuing national bank charters to fintech companies. In this regard, as we noted in Pepper’s January 24 webinar concerning the OCC’s pending fintech charter proposal, the anticipated requirements for fintech companies that apply for a special purpose national bank charter, including the need to make a binding three-year commitment to a defined business plan, are likely to prove unfeasible for all but the largest and most stable participants in the fintech lending industry.

Pepper Points

  • OCC Bulletin 2017-7 establishes supervisory expectations for specific third-party risk management practices that may not already exist at some national banks and federal savings associations, particularly at smaller institutions.

  • By requiring relationships between banks and marketplace lenders to be treated with the same rigor of due diligence and ongoing oversight as other relationships with third parties, the new OCC bulletin follows the lead of the FDIC.

  • In establishing supervisory expectations for relationships between national banks and marketplace lenders, the OCC implicitly acknowledges that these relationships are likely to continue, regardless of whether the OCC starts issuing special purpose national bank charters to fintech companies

Endnotes

1 OCC Bulletin 2017-7, at 10-17.

2 OCC Bulletin 2017-7, at 5.

3 Id.

4 Id. at 5.

5 Id. at 8.

6 Id. at 10.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.