WASHINGTON — The Federal Deposit Insurance Corp. is urging banks to perform due diligence and identify potential risks before conducting business with marketplace lenders.
In the Feb. 1 issue of the agency's Supervisory Insights publication, the FDIC said institutions "should perform a thorough pre-analysis and risk assessment on each marketplace lending company with which it transacts business." The journal also reported details of a survey of FDIC examiners on credit quality, which suggested a drop in high-risk portfolios.
Given their novelty, banks should be wary of the varying risk profiles of marketplace lenders and the products they offer, the FDIC said in the semiannual journal. For instance, "current credit loss reports or loss-adjusted rates of return may not provide an accurate picture of the risks associated with each market," the article said.
Instead, financial institutions should analyze each product carefully, the FDIC advised. "Using a nonspecific approach to risk identification could lead to an incomplete risk analysis in the bank's marketplace investments or critical gaps in bank management's planning and oversight of third-party arrangements."
The article suggested that banks should lean on marketplace lenders to develop policies and procedures that comply with state and federal laws. Banks should pay particular attention to compliance, transaction, servicing and liquidity risks before moving forward with a third-party arrangement, the FDIC said. Contracts between banks and marketplace lenders "should consider provisions allowing the financial institution the ability to control and monitor third-party activities (e.g., underwriting guidelines, outside audits) and discontinue relationships if contractual obligations are not met."
The journal also published results of its latest Credit Survey, which showed loans and leases on the uptick with high-risk credits falling. The article said 14% of survey respondents reported "high" risk in lending portfolios in the first half of 2015, a 9-point drop from two years earlier. In about 9% of the survey responses, examiners reported "generally liberal" underwriting processes in at least one portfolio during the first half of last year, representing just a one-point increase from the latter half of 2014.