On July 29, 2016 the Federal Deposit Insurance Corporation (FDIC) issued a Financial Institution Letter seeking comments on proposed changes to 2008 guidance for third-party lending. Since the FDIC’s role in regulation is to insure customer deposits against bank failures, its 2008 guidance spoke to third-party dangers that could cause banks to fail and what measures and due diligence might need to be in place to prevent losses due to these relationships. It was primarily directed at outsourcing providers.
The financial industry buzz sees these additional rules as geared to banks with alternative, marketplace, or online lending arrangements. On the surface that seems prudent and necessary given recent industry events, such as the Lending Club debacle. But in reading through the proposed changes, there may be another intended-or-not-consequence—the destruction of banks’ and credit unions’ indirect delivery channel for the only really successful post-recession consumer credit product: auto finance loans. These loans in financial institution (FI) portfolios carry balances just north of US$1 trillion and maintain a low rate of delinquency.
And you really don’t have to look any further than the summary paragraph in the 2016 proposed guidance for the first clue of its direction and/or inspiration. In the very first sentence there is reference to not only safety and soundness but also “consumer compliance” measurements. Consumer compliance had hardly a mention in all the 2008 rules. This signals danger for an FI invested in auto finance: a focus that comes all too close to the Consumer Financial Protection Bureau’s ceaseless initiatives to force banks to regulate the more than 40,000 new- and used-car dealers that are part of the indirect auto finance delivery and distribution ecosystem.
The new FDIC requirements are heavily weighted toward the complete investigation of any third parties’ financial performance as well as ongoing monitoring requirements and will place serious constraints on lenders’ resources. It is incumbent on indirect auto FI lenders to very carefully examine this new guidance and be mindful of a very tight timeline for comments. The original comment date of September 12, 2016 has been extended to October 27, 2016—and right now there are no comments on the FDIC site. This should be an immediate call to action for indirect auto lenders, auto dealers, and the groups that work closely with them (American Bankers Association, National Auto Dealers Association, and the like). Investigate with your legal and compliance group the potential effects of this new guidance on your FI and business line. Let your comments be heard, and if appropriate, take a clear position with the FDIC that indirect auto finance be exempt from the requirements.