OCC: Marketplace Lenders Are Third-Party Vendors
Are marketplace lenders considered third-party vendors? The OCC sure thinks so.
In January the agency released exam procedures to supplement OCC Bulletin 2013-29, “Third-Party Relationships: Risk Management Guidance,” from October 2013. The biggest lesson learned: For the first time ever, the OCC made it crystal clear that it considers marketplace lenders third-party vendors.
What does the OCC classification mean? Just as with third-party vendors, banks are just as responsible for the activities of contracted marketplace vendors, including lending and underwriting, as they are their own. That can cover a lot of territory.
Marketplace lender is a broad term. The OCC generally defines them as “companies engaged in Internet-based lending businesses (other than payday lending).”
These loans can include small business, consumer, student and real estate loans. Funding comes in a variety of forms including “equity capital, commercial lines of credit, sale of whole loans to institutional investors, securitizations, and pass-through note programs.”
Like any other vendor, marketplace lenders can pose a variety of risks to an institution. They can even be critical vendors.
The OCC calls out two specific risks in the procedures: operational risk and credit risk.
Operational risk. The OCC asks banks to “determine the quantity of operational risk.” It begins by asking if the bank has contracted with a marketplace lender to perform “operational functions, including processing, underwriting, closing, funding, delivering, and servicing of loans.” The OCC wants to know if banks “have sufficient support systems, controls, and personnel to adequately support the volume of planned loan origination, servicing, or collections activities.”
Credit risk: If a marketplace lender is originating or purchasing loans, the OCC wants banks to be aware if the lenders are using “underwriting methods that are new, nontraditional, or different from the bank’s underwriting standards,” if they are “subject to any recourse or participation arrangements as part of originating marketplace loans,” and “what remedies are available to the bank if a third party does not meet the terms of the contract.”
The OCC also specifically addresses marketplace lending and risk management, asking banks to “determine if the bank buys bonds, whole loans, or notes from third-party lenders (e.g., marketplace lenders).”
The OCC isn’t the only agency eyeing the relationship between banks and marketplace lenders. The FDIC proposed guidance for third-party lending last summer. Meanwhile marketplace lending continues to grow, reaching $29 billion in consumer loan originations in 2015, up from just $5 billion in 2013, according to the OCC.
Make sure your financial institution is applying the same risk and vendor management programs to marketplace lenders as it is for all third-party vendors. Marketplace lenders present just as much potential risk as any third-party vendor. Treat them accordingly.