The Federal Deposit Insurance Corporation (FDIC) recently called attention to the need for conventional financial institutions to identify, assess, and control the risks involved in third-party arrangements with a growing breed of financial technology (FinTech) companies known as marketplace lenders. Banks face various risks in relation to this relatively new market, as the FDIC wrote in its Winter 2015 Supervisory Insights issue.

With more borrowers seeking loans online, the potential revenue stream from third-party arrangements with marketplace lenders can be attractive to bankers. However, each marketplace lending company’s risk level varies significantly, depending on the business model or credit product. Among these are unsecured consumer loans, debt consolidation loans, small business loans, and merchant cash advances.

Banks should conduct extensive due diligence and remain cognizant of the market’s lack of performance history through a complete economic cycle. The FDIC stressed that banks may ultimately be accountable in certain situations where their counterparts fail to comply with applicable federal laws and regulations.

Steps to Take

Treliant recommends that financial institutions take the following actions when working with marketplace lenders.

Identify Risks

Understand and assess the various risks involved with marketplace lending, which will vary significantly depending on each lender’s business strategy and credit product. Financial institutions should especially focus on the credit risk inherent with the various products that are, for the most part, in different rate environments than traditional bank lending products.

Due Diligence

Prior to working with a marketplace lender, financial institutions should conduct extensive due diligence. As part of the due diligence process, banks should ensure that their potential marketplace lending counterparts have sufficient controls in place to address the main risk areas below.

  • Compliance Risk: Banks should assess potential counterparts’ compliance programs to ensure that they include all necessary elements of an effective program, such as training, monitoring and testing, complaint management, risk assessments, and vendor management. If possible (depending on the company’s age), banks should validate compliance with all applicable state and federal regulations by conducting transactional testing of business practices.
  • Transaction Risk: Banks should consider transaction risk inherent in companies with large volumes of transactions. Financial institutions should assess the controls and programs in place to handle problems arising from customer service errors, technology failures, and data security breaches.
  • Servicing Risk: While marketplace lending companies service the loans, the banks they work with remain accountable for the risks and possible errors that could arise from servicing. Within the overall servicing functions, specific heightened risks include:
    • Credit Reporting: Marketplace lenders do not process applications in the same manner as banks, with some choosing to perform soft credit bureau inquiries as opposed to the hard inquiries typically used by banks. How credit reports are accessed and reviewed at the time of application and throughout the life of the loan is critical to fully understand risk. Additionally, banks should have a greater understanding of the process marketplace lenders use to report
      accurate information about borrowers to the consumer credit reporting agencies.
    • Collections Risk: Within the servicing function, there are numerous risks to both banks and marketplace lenders related to collection activity, including the sale of debt to third-party collectors. Banks should consider an enhanced level of due diligence related not only to the collection practices used by the marketplace lender, but by any third-party debt collectors that may be purchasing loans in which the bank has held a participating interest.


When working with marketplace lenders, banks should implement a continuous oversight program to assess and control the risks above. Banks should conduct periodic monitoring and testing according to the determined risk levels. Additionally, banks should conduct an annual compliance audit of the companies to ensure that risks are adequately controlled and that regulatory violations are not occurring.