Pub. 10 2019 Issue 2

Summer 2019 19 West Virginia Banker A bank exploring these opportunities must appreciate the significant strategic, operational, credit, compliance, and compliance risks associated with these types of collabora- tions. In addition to these broad categories of risk also comes model risk management, consumer protection concerns, BSA/AML/OFAC risks, consumer privacy concerns, and cy- bersecurity/data integrity risks. By at least 2005, bank/non-bank partnerships had garnered the attention of regulators. In an interagency interpretive statement, the prudential regulators joined together to caution “banking organizations when providing banking services to money services businesses operating in the United States.” 7 According to the regulators: 8 [T]he minimum due diligence expectations associated with opening and maintaining accounts…are: • Apply the banking organization's Customer Identifica- tion Program; • Confirm FinCEN registration, if required; • Confirm compliance with state or local licensing re- quirements, if applicable; • Confirm agent status, if applicable; and • Conduct a basic Bank Secrecy Act/Anti-Money Laun- dering risk assessment to determine the level of risk associated with the account and whether further due diligence is necessary. Beginning in 2016, regulators began to focus their attention on bank/non-bank lender relationships. In 2016, the FDIC issued proposed guidance on third-party lending relation- ships (proposed FIL-50-2016). 9 Though these changes were never enacted, it provides guidance to banks exploring these relationships and provides an appropriate framework for how to work through the relationship and determine whether the relationship is appropriate for the bank. The theme that runs through this guidance is, in particular, the need to focus on due diligence and ongoing oversight. Sim- ilarly, in 2017, the OCC issued “Supplemental Examination Procedures for Risk Management of Third-Party Relation- ships.” 10 All banks should view this guidance as forming a “checklist” of key considerations when entering into bank/ non-bank lending partnerships. Banks must appreciate that these types of relationships are extremely complex and require resources both within and outside the bank to adequately assess, quantify, and mitigate the risks associated with these types of FinTech partnerships. However, with the investment of time and resources can come significant financial rewards for community and region- al banks looking for opportunities to grow outside of branch acquisition or the “acquire or be acquired” cycle. These FinTech partnerships are a unique opportunity for banks to expand their customer base and product offerings without themselves taking all of the risk associated with offering the product. Through these models, the banks can use the FinTech to absorb a portion of the risk associated with expanding and offering new loans, payment systems, or technologies to its own customers. 11 As financial technology develops, bankers must realize that this is not competition, but an opportunity for signifi- cant growth for those banks willing to work in this space.  1 U.S. Dept. of Treasury, A FINANCIAL SYSTEM THAT CREATES ECONOMIC OPPORTUNITIES: NONBANK FINANCIALS, FINTECH, AND INNOVATION, July 2018, https://home.treasury.gov/sites/default/files/2018-08/A-Financial- System-that-Creates- Economic-Opportunities---Nonbank-Financials-Fin- tech-and-Innovation.pdf, p. 5. 2 Id. 3 Id. 4 Depending on the exact product, a FinTech seeking multi-state money transmitter or lending licenses can be faced with greater than $750,000 in application fees and bond requirements, one or more years of delay, and up to $1,000,000 in legal fees 5 BHCPR Peer Group Data, Dec. 31, 2017, Peer Groups 2 and 3. 6 FFIED, Uniform Bank Performance Reports, as of December 31, 2017. 7 FDIC, Interagency Interpretive Guidance on Providing Banking Services to Money Services Businesses Operating in the United States, FIL-32-2005, Apr. 26, 2005, https://www.fdic.gov/news/news/financial/2005/fil3205a.html. 8 Id. 9 Available at https://www.fdic.gov/news/news/financial/2016/fil16050a.pdf. 10 Available at https://www.occ.gov/news-issuances/bulletins/2017/ pub-third-party-exam-supplemental- procedures.pdf. 11 For a discussion of the risks of expanded product offerings by banks, see OCC, New, Modified, or Expanded Bank Products and Services, Bulletin 2017-43 (Oct. 20, 2017), https://www.occ.treas.gov/news- issuances/bulle- tins/2017/bulletin-2017-43.html . Elizabeth A. DeVos is an associate in Nelson Mullins Riley & Scarborough LLP’s Greenville, South Carolina office. She focuses his practice on banking and financial services regulatory and compliance matters. She regularly works with institutions of all sizes to assist with navigating the federal and state regulatory landscape. She can be reached at (864) 373- 2248 or by email at liz.devos@nelsonmullins.com. Dowse B. (“Brad”) Rustin chairs Nelson Mul- lins’ financial regulatory practice. He works with chartered- and non-chartered financial institutions, FinTech’s, money transmitters, and non-traditional lenders on issues of regulatory compliance. Brad regularly counsels financial institutions in regulatory matters, including strategic agree- ments, product development, customer disclosures, and oper- ational compliance. This work includes state and federal con- sumer protection laws, bank-FinTech partnerships, bank-model lending, fraud monitoring, anti-money laundering and Bank Secrecy Act compliance, state and federal regulation of money transmission, stored value strategies, ACH compliance, and traditional and non-traditional lending. He can be reached at (864) 373-2320 or by email at brad.rustin@nelsonmullins.com. Randall L. Saunders is a partner in Nelson Mullins Riley & Scarborough LLP’s West Virginia office. He focuses his practice on banking and financial services litigation, class action defense, regulatory compliance, tax lien resolution, real and personal property tax appeals, and real es- tate. He can be reached at (304) 526-3507 or by email a t randy. saunders@nelsonmullins.com.