The Federal Deposit and Insurance Corporation (FDIC) Winter report includes a discussion on the marketplace lending sector. More specifically, the portion authored by Angela Herrboldt, Senior Examination Specialist Division of Risk Management Supervision, reviews risk and the importance of bankers and examiners understanding this fast growing category of internet finance. Herrboldt defines marketplace lending (MPL) as any pairing of borrowers with lenders that occurs online thus encompassing a rather broad definition. Banks, the report explains, have entered into various arrangements with MPL platforms – and thus must incorporate relevant risk management strategies.
Herrboldt states;
“…banks should perform a thorough pre-analysis and risk assessment on each marketplace lending company with which it transacts business, whether acting as an institutional investor or as a strategic partner.”
The exact list of risks associated with MPL platforms includes:
- Third-party Risk: assessing the marketplace lending provider and completing necessary due-diligence, including platform verification in regards to adhering to state and federal laws.
- Compliance Risk: banks are accountable for complying tiwht consumer protection and fair lending laws.
- Transaction Risk: Customer service problems or the failure of a platform to fulfill its duties in product delivery.
- Servicing Risk: Isolvency of platform or collateral credit risk.
- Liquidity Risk: Limited secondary markets for the securities
Herrboldt is of the opinion that bank management should determine whether the related risks align with the institution’s business strategy. She closes by stating;
“…institutions should ascertain the degree of risk involved, remembering they cannot abrogate responsibility for complying with applicable rules and regulations.”
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