Another Consent Order on Fintech and Third-Party Risk Management
Also: other FDIC enforcement actions, credit linked notes, Silvergate liquidation progress
First Northwest Bancorp (FNWB) is a publicly traded company and the parent of First Fed Bank, a $2.1 billion asset state nonmember bank based in Port Angeles, Washington.1
In April 2021, FNWB announced that it had entered into a joint venture agreement to establish Quin Ventures, Inc. Through this joint venture, FNWB and its co-venturer, POM Peace of Mind, Inc.,2 would develop Quin, which the parties described as “a digital financial wellness platform that will offer personal financial services to the general public.”
In addition, the parties entered into a separate agreement “under which Quin will promote the services offered through the digital financial wellness platform and [First Fed Bank] will provide banking services to the customers who utilize the platform.” Quin later expanded its offerings, for example by launching a Credit Builder product in Q2 2022.
In December 2022, the parties changed course. As described in a January 2023 press release by FNWB, POM desired to pursue “a new business model with another sponsor bank,” so Quin Ventures sold IP and certain other assets to Quil Ventures, a new entity in which FNWB has a much smaller ownership stake.
In December 2022, Quin Ventures, Inc. (“Quin”) sold certain assets, including intellectual property, to Quil Ventures, Inc. (“Quil”). Quil was created by the other 50% owners of Quin, in partnership with a third-party financing source, to pursue a new business model with another sponsor bank. As part of the transaction, First Northwest received a 5% ownership stake in Quil valued at $225,000. First Northwest retains a 50% ownership in Quin and will also receive a portion of Quil’s monthly subscription fee income, the value of which is reflected as a commitment receivable under "Other Assets."
Quil Ventures now has a website that offers to its users financial peace of mind — ordinarily “priceless, but it’s under $30 a month with Quil.” Products advertised on the home page of the website include layoff insurance, life insurance, and financial counseling. The partner bank involved (if any) is not clear.
The above history, drawn from FNWB’s securities filings, is a little light on details about what specifically Quin Ventures tried to do and why the parties decided to move away from the JV not even two years after they had established it.
A new regulatory filing by FNWB today is suggestive of (at least some of) what may have been going on behind the scenes.
Consent Order
This afternoon FNWB shortly before the SEC’s filing system closed for the weekend released an 8-K disclosing that, earlier this week, First Fed Bank and the FDIC entered into a consent order.
The consent order says in its first paragraph that the FDIC determined that “in connection with [First Fed Bank’s] relationship with Quin Ventures,” the bank engaged in:
unsafe or unsound banking practices;
UDAP violations;
violations of the Truth in Lending Act;
violations of the Real Estate Settlement Procedures Act;
violations of the Electronic Fund Transfer Act; and
violations of Section 18(a)(4) of the FDI Act (i.e., the law that prohibits making false or misleading representations about deposit insurance coverage (or the extent of deposit insurance coverage) and misuse of the FDIC’s logo).
The consent order does not recite the facts underlying all of these findings, although it does explain that the UDAP violations relate to “making implied claims that credit products with non-optional debt cancellation features were unemployment insurance, approving consumers who did not qualify for the debt cancellation feature, and misrepresenting the fees and benefits for those products.”
Required Actions
In addition to the sort of generic undertakings you might expect in this sort of consent order — relating to things like board and management oversight, consumer compliance programs, training programs, audit, appropriate staffing levels, and so on — the consent order includes notable provisions about new products, new partnerships, and other third-party relationships.
New Products and New Third Parties
Under the consent order, First Fed Bank must within 30 days submit to the FDIC a list identifying (a) all credit or deposit products being offered by or through the bank (“Bank Products”) and (b) any entity other than First Fed Bank that is offering Bank Products (a “Third Party”).
Any Bank Product not on the list (or any Bank Product offered or to be offered by a Third Party not identified on the list as currently offering that Bank Product) is a “New Bank Product,” and any Third Party not included on the list is a “New Third Party.”
You can see where this is going.
Before First Fed Bank will be permitted to “(i) execute a binding commitment or agreement with a New Third Party; (ii) allow a New Third Party to offer a Bank Product through, or in conjunction with the Bank; and/or (iii) offer a New Bank Product, either directly or indirectly” it must obtain a written non-objection from the FDIC.
To receive that non-objection, First Fed Bank must, “at a minimum” and among other things, conduct an “initial thorough and well-documented review and assessment of the risks associated” with the New Bank Product or New Third Party, as applicable. First Fed Bank must also in its request for non-objection describe in appropriate detail “the procedures, processes, and/or other actions the Bank will take to ensure compliance with Consumer Protection Laws and satisfactorily mitigate any risks identified” in that risk assessment.
As this redline shows, these provisions of the consent order are quite similar to certain provisions in the FDIC’s consent order with Cross River Bank earlier this year (but note that the CRB order was by its terms limited to credit products).
Oversight of Third-Party Relationships
The consent order also includes a series of other requirements intended to enhance First Fed Bank’s oversight of third-party relationships. These provisions require the bank to implement policies and procedures that, at a minimum, establish:
a comprehensive process for (a) risk assessment and due diligence in selecting third parties; (b) structuring, review and approval of third party contracts and (c) ongoing oversight and management of the relationship;3
a process for the bank to review and approve all marketing and solicitation materials, as well as any other materials, provided to consumers generated in connection with administration and servicing of third-party agreements;
appropriate recordkeeping;
monitoring of marketing and solicitation programs;
processes around managing regulatory inquiries, customer complaints, and legal actions;
review of third-party service provider policies and procedures to determine those policies and procedures comply with consumer protection laws; and
procedures for “appropriate corrective and preventive action” when noncompliance by a third party is identified.
In addition, First Fed Bank must perform semi-annual due diligence “to ensure that third parties have in place an adequate training program to ensure that their employees comply with Consumer Protection Laws.”
Further still, the bank’s compliance officer must semi-annually submit a report to the bank’s board and senior management assessing “whether third parties are complying with Consumer Protection Laws.”
Company Statement
At the end of the 8-K it released today summarizing the consent order, FNWB said:
The Company’s Board of Directors and executive leadership are committed to compliance and have invested significant resources into resolving the matter. After self-reporting to the FDIC in 2022, the Bank added resources to its compliance and control functions and the Bank is continuing to allocate resources to enhance its compliance management system and controls. This proactive approach allows the Company to more effectively manage both the prior and ongoing costs of stronger compliance and control measures.
The Company does not anticipate that compliance with this Order will have a material effect on earnings or capital. The Company and the Bank are fully committed to addressing the Order’s requirements within the specified timeframes, and the Company believes that the Bank has made significant progress in addressing the requirements to date.
Other News
Before the First Fed Bank consent order news came out this afternoon, today’s post was meant to just be a short round up of other, not necessarily significant, bank regulatory developments from this holiday week. Here’s an abbreviated version of that round up.
TAB Bank UDAP Fine; Other October 2023 Enforcement Actions
The First Fed Bank consent order became public today because FNWB chose to disclose it. Otherwise, FDIC consent orders are generally released with a delay, and indeed earlier today the FDIC released a batch of October 2023 FDIC enforcement actions.
Per one of the enforcement actions made public by the FDIC today, TAB Bank, a Utah ILC that saw its CRA rating downgraded earlier this year after FDIC examiners identified an unspecified UDAP violation, has agreed to pay a civil money penalty of $315,000 in relation to certain UDAP violations. (Not explicitly clear from the consent order whether these are the same ones as referenced in the CRA findings.)
The FDIC in the enforcement action released today describes the conduct at issue as “charging consumers who paid the full loan balance in the first 90 days of the loan a rebate processing fee up to $40 calculated as a function of accrued interest, even though the Bank’s marketing promoted ‘no interest’ and a ‘full interest rebate’ if they repaid the loan in full during this 90- day promotional period.”
Apart from the TAB Bank settlement, also notable among the enforcement actions the FDIC released today:4
Paramount Bank in Hazelwood, Missouri was fined $85,000 in relation to what the FDIC described as violations of the Home Mortgage Disclosure Act and Regulation C stemming from the bank “reporting inaccurate data about its mortgage transactions for 2020 and 2021.”
TrustTexas Bank, SSB, entered into a consent order intended to address the bank’s “unsafe or unsound banking practices relating to interest rate risk exposure, deterioration in capital protection and earnings, and deficiencies in management and oversight by” the bank’s board of directors.
Herring Bank in Amarillo, Texas entered into a consent order with the FDIC and Texas Department of Banking. Earlier this year, the bank’s parent company was the target of an enforcement action brought by the Federal Reserve Board and Texas Department of Banking, which noted in its recitals various problems at the bank. This most recent FDIC consent order takes issue with various IT deficiencies at the bank, as well as “weaknesses with corporate bond accounting software.”
Credit-Linked Notes
The Federal Reserve Board has released a legal interpretation in which U.S. Bancorp was given approval to treat certain credit-linked notes as a synthetic securitization for purposes of the capital rules. The position adopted by the Board in the letter, including the conditions attached to it, is substantially similar to relief provided to Morgan Stanley earlier this year.
Silvergate Bank Liquidation
Silvergate Capital Corporation in a press release Wednesday afternoon announced that, other than de minimis amounts totaling less than $10,000, Silvergate Bank has fully repaid all of its deposit liabilities, in line with the bank’s previously announced plan to voluntarily liquidate.
SPAC Acquisition (Eventually?) of a Wyoming Bank
Quantum Fintech Acquisition Corporation, a SPAC, announced in an 8-K today that it and AtlasClear have extended to December 8, 2023 the outside date for their previously announced business combination. (An acquisition of Wilson Davis & Co., a clearing broker, is also part of the transaction.)
This is relevant to this blog because, after that transaction closes, the parties intend pursuant to a separate agreement for AtlasClear to seek regulatory approval to acquire Community Bancorp, a Wyoming bank holding company and the parent of Farmers State Bank, Pine Bluffs, Wyoming. A more complete description of the intended series of transactions is available here.
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For reasons that will become clear, this post focuses on FNWB’s relationship with Quin/Quil Ventures, but note that the company also holds minority interests in several limited partnerships that “invest in fintech-related businesses with a focus on developing digital solutions to applicable to the banking industry.” The company also has controlling (for BHC Act purposes anyways) interests in other entities. From the company’s latest 10-Q:
First Northwest's limited partnership investments include Canapi Ventures Fund, LP; BankTech Ventures, LP; and JAM FINTOP Blockchain, LP. These limited partnerships invest in fintech-related businesses with a focus on developing digital solutions applicable to the banking industry. In 2022, First Northwest acquired a 33% interest in MWG, a boutique investment bank and consulting firm focused on providing entrepreneurs with resources to help them succeed. Also in 2022, the Company acquired a 25% equity interest as a general partner in Meriwether Group Capital, LLC ("MWGC"), which provides financial advice for borrowers and capital for the Meriwether Group Capital Hero Fund LP ("Hero Fund"). The Hero Fund is a private commercial lender focused on lower-middle market businesses, primarily in the Pacific Northwest. First Northwest also has a limited partnership investment in the Hero Fund. MWG also holds a 20% general partner interest in MWGC.
None of these investments or relationships are explicitly mentioned in the consent order made public today.
Later SEC filings disclose that FNWB and POM shared equal 50% ownership in Quin Ventures.
Here the bank is directed to “consider the principles” in the interagency TPRM guidance from earlier this year, as well as other FDIC guidance on that topic.
Also included in today’s release was a consent order with Royal Business Bank, but that isn’t mentioned in the text above because the bank’s parent company RBB Bancorp already disclosed this in an 8-K back in October.