Recent FDIC Enforcement Actions: Two Practical Takeaways for Banks and Fintechs

BY CHRIS NAPIER AND CHRIS KUSHMIDER

As widely reported, the FDIC continues to pursue enforcement actions against banks that partner with fintechs. How can banks and fintechs establish and carry out their partnerships to decrease the likelihood of a consent order and/or to reduce its impact? Below, Mitchell Sandler’s fintech team shares two takeaways for fintechs and banks drawn from its extensive experience in this space.

Fintechs

Fintechs should exercise care in selecting a bank partner. While finding willing bank partners can be difficult, companies should be mindful of a prospective bank’s experience with partnerships, knowledge of the product being developed, level of resources and the strength of its fintech third-party risk oversight program. Engaging with an inexperienced bank that will subject a fintech to minimal scrutiny may make it “easier” to get a product off the ground in the short term, but it may not be a recipe for sustainability in the long run.

Once a suitable bank partner is identified, a contingency plan should be established in case the partner bank begins to de-risk. Transitioning to a new bank requires time and effort, including bank due diligence and negotiating a new bank partnership agreement. Fintechs should assess the termination and “wind down” rights in their bank partnership agreement in order to develop a legal strategy addressing the potential for termination by either the fintech or the bank partner due to regulatory considerations. Fintechs entering into new relationships should be mindful of these issues when negotiating their partnership agreements.   

Banks

Banks are required to have a strong fintech due diligence process and to require the fintech to enter into a robust bank partnership agreement. However, these are the initial components of an overall process. Specifically, the bank must monitor and oversee the fintech’s activities, typically through third party audits and reports prepared by the fintech.

Overall, regulators increasingly expect that banks will take a “hands on” approach to its fintech oversight obligations, which can take many forms. For example, the bank needs to meaningfully participate in the audit process in order to ensure that it is adequately designed to detect compliance risks. The bank must allocate sufficient internal resources to actually review the reports and audits that it receives, and for there to be appropriate senior management and/or board oversight regarding those reviews. The bank must have a well-developed legal strategy to address fintechs that present undue risk in a manner that complies with the underlying bank partnership agreement and regulatory expectations.  Importantly, avoid creating a silo that can allow risks to go undetected; fintech “business lines” should be integrated into the broader institution’s existing risk, compliance, audit and third-party risk management functions. 

* * *

Mitchell Sandler routinely represents banks and fintechs (including BaaS providers) on regulatory and compliance matters, contract negotiations, enforcement actions, and dispute resolution. Please contact Chris Napier to further discuss bank partnership matters.

About The Author

Chris Napier is a Partner at Mitchell Sandler. His practice focuses on providing regulatory counseling, strategic advice and representation during government enforcement matters, including matters involving commercial, consumer and alternative credit products; money transmission and payments; deposit issues; and partnerships between fintech companies, depository institutions, and lenders. LEARN MORE ABOUT CHRIS NAPIER

Chris Kushmider is a Senior Associate at Mitchell Sandler. His practice focuses on transactional and corporate matters for a wide range of bank and non-bank clients in financial services, including mortgage companies and fintech lenders. He is experienced in M&A and securities transactions as well as a wide variety of contract types: master services and supplier agreements, loan purchase and servicing agreements, bank partnership arrangements, credit agreements, and CRA qualifying investments and including EQ2s. Chris has also advised on regulatory matters related to making, brokering, and servicing commercial loans, consumer loans, and retail installment sales contracts. LEARN MORE ABOUT CHRIS KUSHMIDER

SIGN UP FOR UPDATES

Never miss our news, insights or events.

FEATURED NEWS