Enhanced Regulatory Expectations for Purchased Loans and Participations: FDIC Advisory Establishes New Expectations Related to Board Oversight and BSA/AML Compliance Risk Management for Purchased Loans and Participations

Sullivan & Cromwell LLP - November 24, 2015

On November 6, 2015, the FDIC issued an Advisory on Effective Risk Management Practices for Purchased Loans and Purchased Loan Participations (the “2015 Advisory”), which establishes “supervisory expectations” for state non-member banks in purchasing loans and loan participations. The 2015 Advisory is based upon principles established in outstanding guidance, but rescinds and replaces the FDIC’s September 12, 2012 Advisory on Effective Credit Risk Management Practices for Purchased Loan Participations (the “2012 Advisory”). The 2015 Advisory was presumably issued, at least in substantial part, in response to the reported sharp increase in bank loan purchases from so-called “FinTech” and other non-bank lenders and appears to respond to certain of the related safety and soundness concerns that have been expressed.  Although the 2015 Advisory applies by its terms only to state non-member banks, it should be relevant for other banks as well.
Both the 2012 and 2015 Advisories are aimed at avoiding the potentially significant credit losses that can result from a purchasing bank’s undue reliance on a selling institution, as occurred in the lead-up to the 2008 financial crisis, but the 2015 Advisory is considerably more expansive than the 2012 Advisory and imposes substantial new obligations on state nonmember banks. Among other things, the 2015 Advisory establishes explicit expectations related to board oversight, Bank Secrecy Act/anti-money laundering (“BSA/AML”) compliance, and third-party risk management.