FDIC Cautions Banks on Purchasing Loans from “Nonbank Entities”

Drawbridge DangerThe FDIC has published an advisory on Effective Risk Management Practices for Purchased Loans and Purchased Loan Participations.  The document states that banks should use caution when purchasing loans or participating in shared credit facilities.  Noting that some institutions have experienced some success to achieve growth and earnings goals;

“…purchasing banks’ over-reliance on lead institutions has in some instances caused significant credit losses and contributed to bank failures, particularly for loans to out-of- territory borrowers and obligors involved in industries unfamiliar to the bank.”

In an article on JDSupra, attorneys from Pepper Hamilton state FDIC’sudpated requirements will “substantially increase the costs imposed on banks that wish to purchase marketplace loans”.  While this should have no impact on direct lending platforms this may make it more difficult for banks.

Pepper contrasts the FDIC’s actions’ to that of Treasury stating;

“Ironically, given the Treasury Department’s recent request for information, which supported marketplace lending and focused in part on how the federal government could be supportive of the innovations in marketplace lending, we now have a federal banking agency that is creating roadblocks to having banks participate in this dynamic and rapidly growing space.”

The advisory, embedded below, outlines recommended practices to ensure that loan and participation purchases are conducted in a “safe and sound manner”.

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