Monday, July 22, 2024
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Thread Bank Receives Fintech-Focused Consent Order

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  • Threads Bank received an FDIC consent order for unsafe banking practices and IT deficiencies.
  • Banks need to improve board oversight, risk management and AML/CFT compliance.
  • Thread Bank was a popular back-end bank as a banking-as-a-service for over 20 different FinTech partners.

Thread Bank, a financial institution based in Rogersville, Tennessee, Consent orders issued By the Federal Deposit Insurance Corporation (FDIC).

The measure mandates comprehensive reforms of banking operations, with particular focus on information technology (IT) practices, anti-money laundering (AML) measures, and an overall risk management framework.

Thread Bank is Largest Banking-as-a-Service Partnerbehind Evolve (which has been plagued by problems) and Blue Ridge Bank.

Popular FinTech apps offered by Thread Bank include Relay, Baselane, and Cleo.

FDIC Issues

The consent order, which will become effective May 21, 2024, states: Thread Bank Immediate corrective action must be taken.

These include increased board oversight, updated strategic plans, improved enterprise risk management, and improved policies and procedures to comply with regulatory standards. Additionally, banks must strengthen their AML and Combating the Financing of Terrorism (CFT) programs to ensure compliance with federal law.

It also focuses on oversight of banking-as-a-service and lending-as-a-service activities.

Key requirements

The main requirements of a consent order are:

  1. Board of Directors Oversight: The board must ensure that all actions taken to comply with the order are recorded in the minutes of its meetings. It must also ensure that the bank has the appropriate policies, personnel and systems in place to comply with the provisions of the order.
  2. Strategic planning: Within 120 days, the board must update the bank’s strategic plan to address the inspection findings and recommendations, which must include financial objectives, profit strategy, liquidity management, and support for the AML/CFT program.
  3. Enterprise Risk Management: Banks will need to update their risk management frameworks to address the examination findings, including setting risk tolerance thresholds for fintech partners based on financial analysis under various scenarios.
  4. AML/CFT Compliance: Banks must assess their AML/CFT resources and appoint qualified personnel to monitor compliance. They must develop a written plan within 120 days and submit it to the FDIC for review and comment. The plan must ensure that internal controls are sufficient to maintain compliance with AML/CFT laws.
  5. Monitoring Fintech Partnerships: The order requires banks to update their third-party risk management programs to address the complexities of FinTech partnerships, including implementing documented risk assessments, customer due diligence processes, and monitoring for suspicious activity.
  6. Policies and Procedures: Banks should review and update all policies and procedures to reflect their current objectives and risk tolerance. They should establish an internal control system to track policy changes and evaluate compliance.

Regulatory implications

The FDIC’s consent order highlights the increased regulatory scrutiny faced by banks that engage in fintech partnerships. Thread Bank, known for its partnerships with a variety of fintech companies, will have to focus on oversight of its fintech partnerships and improve its regulatory compliance.

The regulatory action highlights the increased scrutiny facing banks involved with FinTechs, given the issues with Yotta and Synapse, and more recently the Evolve Bank case. All banks providing banking and lending services must be “aware” that they have equal responsibility for their FinTech partners’ customers and their funds.

Don’t miss these other stories:

Evolve Bank & Trust hit by ransomware attack
Steps to switch banks
Fintech crisis leaves millions of Americans unable to access their funds

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