2020 Request For Info Standard Setting 3064 Za18 C 024 Pdf C57a11de1cc60fec
Archived source: 2020 Request For Info Standard Setting 3064 Za18 C 024 Pdf C57a11de1cc60fec. Captured from www.fdic.gov.
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September 22, 2020
Robert E. Feldman
Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429
By electronic submission to Comments@fdic.gov
Re: Request for Information on Standard Setting and Voluntary Certification for
Models and Third-Party Providers of Technology and Other Services; RIN
3064–ZA18
Dear Sirs and Madams:
The Online Lenders Alliance (OLA) welcomes the opportunity to respond to the request for
information (RFI) issued by the Federal Deposit Insurance Corporation (FDIC) to solicit
comments and information on a voluntary certification model for third-party providers of
technology.
OLA applauds the FDIC for issuing the RFI as part of its commitment to supporting innovation
and recognizing the potential that bank/third-party vendor arrangements can play in offering new
products and services. We believe that there are many opportunities for FDIC-supervised banks
to leverage innovative technologies in a safe and sound manner that will support the expansion
of financial services across the United States.
I. About OLA and its Members
OLA represents the growing industry of innovative companies that develop and deploy financial
technology, including proprietary and innovative underwriting methods, big data analytics, and non-
traditional delivery channels, to offer online consumer loans and related products and services.
OLA’s members include online lenders, vendors and service providers to lenders, consumer
reporting agencies, payment processors, and online marketing firms.
Fintech companies have pioneered innovative online techniques for advertising and marketing,
preventing and managing fraud risk, underwriting and managing credit risk, servicing loans, and
conducting collection activities in a manner that is fair and transparent to consumers seeking to
obtain a loan over the Internet. Online loans are unsecured personal loans ranging from $300 to
$10,000 with terms that vary from two weeks to three years. Lines of credit are also offered by our
lenders and are the most popular amongst consumers. Online lenders provide benefits to consumers,
particularly those in underserved communities, with fast, safe, and convenient choices that simply are
not available through traditional lending markets.
Many OLA members provide technology services to FDIC-supervised banks to facilitate the
banks’ extension of credit – generally unsecured, small-dollar loans in amounts less than $5,000
– to consumers. Many of these consumers are non-prime individuals (those with credit scores
below 680). By using fintech companies such as OLA members financial institutions are in a
better position to serve the needs of their customers. This letter provides information regarding
bank-fintech third party vendor arrangements and the benefits that a voluntary certification
program could provide in supporting these efforts.
II. Bank-Fintech Third Party Vendor Agreements Produce Substantial Benefits to
Consumers
Banks increasingly are working with fintech companies and relying on fintech companies’
services to deliver financial products and services using innovative technologies. These
arrangements enable banks to deliver products and services to a broader customer base with
greater efficiency and less risk to consumers and the banks themselves.
The benefits to consumers are substantial. Fintech companies offer customers simple and
convenient features, including easy-to-use web and mobile interfaces to apply for credit and
make payments.
Financial services innovation has been stimulated through banks working with fintech
companies. Banks that collaborate with fintech companies are able to develop innovative
technologies that better address the needs of customers. As just one example, many fintech
companies provide banks with technological tools to improve their data and data management
techniques in credit underwriting, as well as their marketing, sourcing, and ability to fulfil
consumer’s credit demands. 1 Fintech companies also leverage artificial intelligence and machine
learning, using their proprietary algorithms to help banks evaluate, offer and service loans to
those consumers.
The Center for Financial Services Innovation, in a comment letter to the FDIC, characterized
these relationships as a “win-win-win” for all involved, especially consumers. The bank wins
because it can serve a broader and deeper segment of the consumer market than it otherwise
could. 2 The fintech company wins by creating an opportunity to facilitate the offering of
products to consumers at rates that are economical and permissible, given the bank’s
involvement as the lender. Consumers win because they get access to high-quality credit that
1
See U.S. Dep’t of Treasury, A Financial System That Creates Economic Opportunities, Nonbank
Institutions, Fintech, and Innovation, Report to President Donald J. Trump, Executive Order 13772 on Core
Principles for Regulating the United States Financial System [hereinafter “Treasury Fintech Report”], July 2018, at
86, available at: https://home.treasury.gov/sites/default/files/2018-07/A-Financial-System-that-Creates-Economic-
Opportunities---Nonbank-Financi....pdf.
2
Bank-fintech partnerships also allow “smaller and more rural banks to broaden the set of products and
services they can offer to consumers and small businesses in their communities.” Center for Financial Services
Innovation, Comment Letter on FIL-50-2016 Proposed Guidance for Third-Party Lending (Oct. 27, 2016), available
at: https://cfsinnovation.org/research/cfsi-comment-letter-on-proposed-guidance-for-third-party-lending/.
2
they otherwise would not. All of this equates to greater competition among providers and lower
costs of credit, resulting in more options and access to credit for consumers. 3
III. Banks Working with Fintech Companies Will be Key to Facilitating Small-Dollar
Lending
Many banks lack the technical expertise to market, underwrite, originate, service, and collect
small-dollar loans. They bridge these gaps by working with a fintech company. Fintech
companies have spent years developing innovative technology and analytics for these specific
credit processes. A bank that works with a fintech company is able to use these technologies to
reach consumers who otherwise may not be able to access credit, including borrowers who live
in so-called “banking deserts” with few or no brick-and-mortar bank branches. 4 In addition, a
borrower of lesser credit quality, whether a thin credit history or no credit history, can benefit
from the greater use of non-traditional credit information employed by fintech companies to
underwrite small-dollar credit.
It often is not economically viable for large U.S. banking organizations to engage directly in
small-dollar lending. Recent attempts by banks to enter into the small-dollar lending market
historically served by innovative marketplace lenders have been largely unsuccessful.
For example, in 2008 the FDIC launched its Small-Dollar Loan Pilot Program, which was a case
study designed to illustrate how banks can profitably offer affordable small-dollar loans. The
program’s low participation rates only highlighted the banking industry’s challenges with this
market. Loans were capped at $1,000, and origination and other upfront fees plus interest
charges were capped at a 36 percent APR. A year into the program, the FDIC increased the
maximum loan amount to $2,500 following requests from the participating banks. During the
two-year pilot program, 18,163 of the 34,400 loans made were under the original cap of $1,000,
and the average loan amount was roughly $700. 5 The program proved to be largely unprofitable
for banks, as most used the program to drive consumers into fee-based checking accounts where
they could be subject to overdraft and insufficient funds fees. The program also demonstrated
that a 36 percent APR cap on small-dollar loans was unworkable for most banks.
3
The FDIC, in proposed examination guidance for third-party lending programs, echoed these sentiments:
“Third-party lending arrangements may provide institutions with the ability to supplement, enhance, or expedite
lending services for their customers. Engaging in third-party lending arrangements may also enable institutions to
lower costs of delivering credit products and to achieve strategic or profitability goals.” FDIC, Examination
Guidance for Third-Party Lending, July 29, 2016, available at:
https://www.fdic.gov/news/news/financial/2016/fil16050a.pdf.
4
See Julapa Jagtiani and Catharine Lemieux, Working Paper No. 17-17, Fintech Lending: Financial
Inclusion, Risk Pricing, and Alternative Information, Federal Reserve Bank of Philadelphia, July 6, 2017, at 34-37,
available at: https://www.philadelphiafed.org/-/media/research-and-data/publications/working-papers/2017/wp17-
17.pdf.
5
FDIC Quarterly, A Template for Success: The FDIC’s Small-Dollar Loan Pilot Program, 2010, Vol. 4, No.
2, available at: https://www.fdic.gov/bank/analytical/quarterly/2010-vol4-2/fdic-quarterly-vol4no2-smalldollar.pdf.
3
Accordingly, the bank-fintech model is often the most readily available way to reach consumers
in need of small-dollar loans. The FDIC should be commended for issuing its “Interagency
Guidance for Responsible Small-Dollar Loans” 6 Coupled with a certification for third-party
technology providers, banks will benefit from the technical expertise fintech companies provide,
as well as from funding from the fintech company to share the banks’ credit risk. This will
encourage banks that work with fintech companies to deploy their own capital to make loans that
they otherwise would not have made, thereby expanding the bank’s customer base and providing
broader access to credit for consumers.
In sum, bank-fintech third party agreements facilitate the delivery of safe, lower cost,
compliance-focused, and more convenient financial products and services to consumers and are
subject to substantial regulatory oversight. These characteristics make bank-fintech third party
vendor agreements an ideal vehicle for the extension of prudent small-dollar credit.
IV. Bank/Fintech Vendor Agreements are Subject to Robust Regulation and Oversight
Bank-fintech third party vendor agreements are subject to extensive oversight by federal and
state banking agencies. The FDIC has published detailed guidance for banks to follow in
managing these relationships and for agency supervisory staff to follow in exercising oversight
of the relationships. This guidance states that a loan issued by a bank that benefits from the
technology of a fintech vendor is subject to the same high level of scrutiny and regulation as any
other loan. This oversight protects consumers and the financial system. In addition, many fintech
companies are subject to federal and state lending and consumer protection regulations,
including the Truth in Lending Act and Equal Credit Opportunity Act. Many fintech companies
are also subject to the Electronic Funds Transfer Act, the Fair Credit Reporting Act, the Fair
Debt Collection Practices Act, and the Bank Secrecy Act, among other laws.
V. A Voluntary Certification for Models and Third-Party Providers of Technology
Could Help Support the Growth of New Products and Services
OLA believes that a voluntary certification program will foster innovation among traditional
financial institutions by removing unnecessary regulatory impediments that banks must
overcome when developing and deploying new technologies.
A voluntary certification program could reduce the regulatory and operational uncertainty that
may prevent financial institutions from deploying new technologies or entering into vendor
agreements with technology firms. The COVID pandemic has forced banks to adjust to a new
environment that relies on greater use of technology. A certification program could serve as an
6
Interagency Guidance for Responsible Small-Dollar Loans, May 2020 https://www.fdic.gov/news/financial-
institution-letters/2020/fil20058.html
4
additional catalyst for more innovation to allow banks, particularly smaller community banks, to
better serve their customers. These efforts could be particularly useful when applied to specific
activities, such as credit underwriting and risk management, by certifying or assessing certain
aspects of these models.
Offering one certification accepted universally would reduce the time and resources that banks
must spend developing individual agreements. In the past these agreements have taken some
OLA members as much as a year to 18 months to develop. A voluntary certification would
reduce a major barrier to bank/third-party fintech agreements that require the vetting and
oversight necessary to meet current compliance standards. Certifying or assessing certain aspects
of a third-party provider’s operations or establishing conditions for approval could greatly assist
with the initial due diligence and ongoing monitoring elements undertaken by banks.
In particular, this initiative would help level the playing field for community banks with small
budgets and few personnel to devote to technological innovation, thus enabling them to compete
with larger financial institutions. Smaller banks face high start-up costs and barriers when
developing new technologies. These costs could be mitigated by use of service providers who
meet certain standards or achieve certification. These standards and certifications would not
replace existing guidance; rather, they would provide a streamlined procedure for vendor
management and due diligence.
In conjunction with the development of a certification program, OLA believes that an additional
effort the FDIC should consider is streamlining the monitoring of third-party agreements that
banks are required undertake on an ongoing basis. The FDIC should review the agency’s
supervisory and examination efforts to facilitate a financial institution’s use of a certified model
or a certified third-party providing technology service in their ongoing monitoring activities.
In conclusion, the OLA supports these efforts and looks forward to providing additional input
once the FDIC has developed a proposed voluntary certification program. This initiative, in
conjunction with ongoing efforts to support bank/fintech third-party agreements, will enable
consumers to obtain much-needed credit.
We appreciate the opportunity to provide input on this important regulatory initiative. If you
have questions or need additional information, please feel free to contact me at
mjackson@oladc.org.
Respectfully submitted,
Mary Jackson
President and CEO
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