Fintech
FDIC Orders Thread Bank to Step Up BaaS Oversight
Quick dive:
- A Federal Deposit Insurance Corp. consent order issued to Rogersville, Tennessee-based Thread Bank specifically calls out the lender’s banking-as-a-service business, with the regulator ordering Thread Bank to ensure its third-party risk management program addresses the level of risk and complexity of fintech partners in the bank’s BaaS program.
- The ordinance, dated May 21st and made public on Fridayalso requires the bank to implement a documented risk assessment of fintech partners. The bank’s board of directors must approve risk tolerance thresholds for individual fintech partners “based on a company-wide financial analysis of each fintech partner’s financial projections under expected and adverse scenarios.” the ordinance provides for it.
- The bank is “dedicated to meeting all obligations,” Thread Bank CEO Chris Black said in a statement, “and we have already made substantial investments to improve our policies, processes, procedures and controls over the past three years, all in partnership with the FDIC and the Tennessee Department of Financial Institutions.”
Dive Information:
The 10-page consent order states that Thread Bank’s BaaS and Loan-as-a-Service program policies and procedures address third-party partner and customer approval requirements, due diligence processes, growth and stress, continuous monitoring of compliance with anti-money laundering/countering the financing of terrorism regulations and measures to dismantle the business lines of third parties, “including FinTech partners”.
Thread Bank must implement documented customer due diligence and suspicious activity monitoring processes for its BaaS program and ensure that information systems associated with its fintech partners offer timely and accurate information, according to the consent order.
The credit institution must also ensure that AML/CFT personnel are adequately trained to identify suspicious activity, that such activity is reported in accordance with regulatory deadlines, and that third-party partners comply with the requirements of the bank’s AML/CFT program.
Additionally, Thread Bank is required to ensure that beneficial ownership information is documented and maintained. This is an issue in the spotlight in the context of the bankruptcy proceedings of fintech middleware company Synapse: customers are in debt From 65 to 96 million dollars more how much is held for them in partner bank accounts, according to the company’s failed trustee, former FDIC Chair Jelena McWilliams. But Synapse and Evolve Bank & Trust, one of Synapse’s partner banks, disagree over which company holds the funds.
Thread Bank must also develop an exit plan that outlines how it will monitor fintech relationships—including third-, fourth-, and fifth-party providers—for any disruptions. The bank must also detail response steps; outline staffing requirements; define customer notification of disruptions and how the bank will respond; and detail how regulators and external stakeholders will be notified.
“We will continue to invest in our teams and services to ensure we meet the needs and provide strong protection for our customers and partners as we move forward,” Black said in the statement.
This is the latest enforcement action against a bank engaged in BaaS, which has attracted increased regulatory scrutiny in recent months. Evolve, Blue Ridge Bank, Piermont Bank, Sutton Bank AND Lineage Bank Everyone has been facing enforcement action over BaaS programs lately, as regulators scramble to manage the size and scope of funders’ third-party partnerships.
However, the order “is much broader than BaaS,” requiring updates to the bank’s strategic plan, enterprise risk management and BSA/AML, noted Margaret Tahyar, head of the financial institutions group at law firm Davis Polk.
Thread Bank was also ordered to improve its liquidity management policy, set formal targets and define strategies to strengthen the bank’s earnings as part of a profit plan.
It’s not the first time the lender, formerly known as Civis Bank, has faced regulatory pressure. In 2015, the bank was hit by a FDIC Consent Orderrequiring it to develop a plan to improve profits and increase its capital ratios.
Renamed Thread Bank in 2022, it partnered with middleware company Unitand supports about 35 fintech programs, according to Weekly financial fintech. A spokesperson for Thread Bank declined to comment on the bank’s fintech partnerships.
“Regulators draft a broad order like this when they want to send a stern message, typically of a lack of confidence in the board and management,” Tahyar said in an email. “It seems like they want a total change in the business model.”