Feds call for greater due diligence

In the wake of an increase in the Federal Deposit Insurance Corp.'s scrutiny of banks and payment providers that serve online lenders, decisions made by the agency’s field personnel were publicly challenged recently by representatives of the trades in question. Following this outcry, the FDIC issued a Financial Institution Letter (FIL13043) explaining the basis of its actions and formal position on the matter.

The FDIC letter assured banks, online lenders and third-party payment processors that it is the FDIC’s practice to treat all parties fairly and consistently, but counseled banking institutions and payment companies to be extra vigilant in underwriting and managing these accounts. The letter warned of higher-risk merchants who may target financial institutions that are less aware, and urged such institutions and their payment processors to become familiar with the FDIC policy.

Additionally, the FDIC wrote, "Those that are operating with the appropriate systems and controls will not be criticized for providing payment processing services to businesses operating in compliance with applicable law."

Industry experts weigh in

In a statement responding to the FDIC’s guidance and warnings, Lisa McGreevy, President and Chief Executive Officer of the Online Lenders Alliance, stated, "We pledge to work with the banks and bank regulators to ensure that all necessary compliance programs will be undertaken."

Payments industry advocates also acknowledged the potential impact of the recent FDIC actions on ISOs, merchant service providers (MSPs), processors and acquiring banks serving online lending merchants. In support of the industry, the Third Party Payment Processing Association issued a statement highlighting the industry’s rigid compliance standards and the importance of cross-institutional collaboration. "It is critical that banks, processors, ISOs and MSPs work together to ensure they are all establishing and maintaining standards of excellence in their due diligence," stated Marsha Jones, Director of the TPPPA.

Ken Musante, President of Eureka Payments LLC, told The Green Sheet he believes this FDIC step is indicative of greater government scrutiny on banks and processors. He said that considering the agency's recent interest in the online lending industry, it is "shortsighted for banks to try to resist this tide, because they jeopardize the rest of their business, their reputation and their continued ability to operate independently if they try to support these types of lending operations, regardless of whether they have an arms' length distance from them."

Reflecting further on the pressure government is placing on the acquiring sector to ensure rigid compliance and due diligence, Musante said, "I think one of the reasons we are seeing alternative funding methods, like the rise in merchant cash advances – which technically are not loans – is, in part, due to the need for individuals and businesses to seek alternative funding mechanisms."

Editor's Note:

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