Increased scrutiny of third-party partnerships: First Fed Bank FDIC order

Increased scrutiny of third-party partnerships: First Fed Bank FDIC order

Introduction

First Fed Bank, based in Port Angeles, Washington, has recently come under increased scrutiny due to a consent order issued by the Federal Deposit Insurance Corporation (FDIC). This order requires First Fed Bank to enhance its compliance management related to third-party partnerships, specifically in the area of banking-as-a-service (BaaS) practices. The FDIC’s action against First Fed Bank highlights the growing attention from federal regulators on the risks associated with bank-fintech partnerships. In this article, we will explore the details of the FDIC order and its implications for First Fed Bank and the BaaS industry.

The FDIC Order and Allegations

First Fed Bank, a subsidiary of First Northwest Bancorp, has been hit with a consent order from the FDIC, alleging unsafe or unsound banking practices. The order primarily focuses on a specific fintech relationship that First Fed Bank established through a joint venture with Quin Ventures in 2021. While details regarding the alleged malpractice are limited, the bank disclosed that it had self-reported an issue to the FDIC in the previous year and terminated its partnership with Quin Ventures in 2022, providing remediation for all affected customers.

Actions and Response from First Fed Bank

In response to the FDIC order, First Fed Bank has expressed its commitment to strengthening compliance controls and has invested significant resources to address the matter. The bank has implemented substantial internal control improvements to prevent similar occurrences in the future. First Fed Bank maintains its full cooperation with the FDIC throughout this process and emphasizes its dedication to serving customers with integrity and excellence. The bank also states that it does not anticipate a material effect on its earnings and capital as a result of the consent order.

The Regulatory Landscape for Third-Party Partnerships

The increased scrutiny on third-party partnerships, specifically in the BaaS space, is part of a larger trend in the banking industry. Regulators have been closely examining the risks associated with these relationships, driven by evolving technology, the recent banking crisis, and economic uncertainty. The enforcement actions taken by regulatory bodies, such as the FDIC, serve as a guide for banks to ensure robust risk management and compliance standards in their banking-as-a-service operations.

Lessons from Cross River Bank’s Consent Order

Earlier this year, Cross River Bank, a prominent player in the BaaS space, faced a similar consent order from the FDIC. This order mandated compliance improvements to address alleged unsafe or unsound banking practices related to fair lending laws and fintech partnerships. The general counsel of Cross River Bank highlighted that the consent order should be seen as a blueprint for meeting the FDIC’s expectations. The bank emphasized its responsibility for loans made through its partners, including well-known fintech companies like Upstart, Affirm, and Upgrade.

Implications for the Industry

The increasing regulatory pressure on BaaS partnerships has prompted banks to reevaluate their relationships with fintech companies. Compliance and risk management have become critical factors for banks looking to provide banking-as-a-service. The FDIC order issued to First Fed Bank reinforces the message that regulators expect first-class compliance and risk management in the BaaS space. Banks must be diligent in ensuring that their partnerships meet regulatory standards to avoid potential enforcement actions.

Frequently Asked Questions (FAQs)

1. What is the FDIC order against First Fed Bank?

The FDIC has issued a consent order to First Fed Bank, alleging unsafe or unsound banking practices primarily related to a specific fintech partnership. The order requires the bank to enhance its compliance management in the banking-as-a-service space.

2. How has First Fed Bank responded to the FDIC order?

First Fed Bank has committed to strengthening compliance controls and has invested significant resources to address the issues raised in the consent order. The bank has implemented internal control improvements and maintains full cooperation with the FDIC.

3. Why are regulators scrutinizing third-party partnerships in the BaaS space?

Regulators are paying close attention to third-party partnerships in the banking-as-a-service space due to the evolving technology landscape, recent banking crisis, and economic uncertainty. The aim is to mitigate the risks associated with these relationships and ensure robust compliance and risk management standards.

4. How does the FDIC order against First Fed Bank impact the industry?

The FDIC order serves as a reminder for banks and fintech companies to prioritize compliance and risk management in their third-party partnerships. It highlights the expectations of regulators and the need for stringent controls in the BaaS space.

5. What lessons can be learned from Cross River Bank’s consent order?

Cross River Bank’s consent order provided insights into the FDIC’s expectations regarding compliance in the BaaS sector. Banks should take it as a blueprint for meeting regulatory standards and maintaining responsible lending practices, even through their partner fintech companies.

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