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- Thread Bank receives a consent order from the FDIC due to unsafe banking practices and IT deficiencies.
- The bank needs to improve board oversight, risk management and compliance with anti-money laundering and counter-terrorist financing regulations.
- Thread Bank has been a preferred banking-as-a-service backend bank for over 20 different FinTech partners.
Thread Bank, a financial institution based in Rogersville, Tennessee, has received a consent order from the Federal Deposit Insurance Corporation (FDIC).
This measure requires comprehensive reforms of the Bank's operations, with particular emphasis on information technology (IT) practices, anti-money laundering (AML) measures and the overall risk management framework.
Thread Bank is one of the largest partner banks in the banking-as-a-service space after Evolve (which is in trouble) and Blue Ridge Bank.
Popular FinTech apps powered by Thread Bank include Relay, Baselane, Cleo, and others.
FDIC problems
The settlement decision, which will take effect on May 21, 2024, describes several areas where Thread Bank must take immediate corrective action.
These include improving board oversight, updating strategic plans, refining the company's risk management, and improving policies and procedures to comply with regulatory standards. In addition, the bank must strengthen its anti-money laundering and countering the financing of terrorism (CFT) program to ensure strict compliance with federal laws.
In addition, the company places great emphasis on monitoring its banking-as-a-service and lending-as-a-service offerings.
Key requirements
Here are the key requirements for the consent order:
- Supervision of the Board of Directors: The Board must ensure that all actions taken to implement the Order are documented in the minutes of the meetings. It must also verify that the bank has the necessary policies, staff and systems in place to comply with the provisions of the Order.
- Strategic plan: Within 120 days, the board must update the bank's strategic plan to reflect the findings and recommendations of the review. This plan should include financial objectives, profit strategies, liquidity management, and support for the AML/CFT program.
- Risk management: The bank must update its risk management framework to reflect the results of the review, including setting risk tolerance thresholds for fintech partners based on financial analysis under different scenarios.
- Compliance with anti-money laundering and terrorist financing regulations: The bank must evaluate its AML/CFT capabilities and designate a qualified person to oversee compliance. A written plan must be developed within 120 days and submitted to the FDIC for review and comment. The plan should ensure that internal controls are sufficient to ensure compliance with AML/CFT laws.
- Supervision of fintech partnerships: The order requires the bank's third-party risk management program to be updated to reflect the complexity of its FinTech partnerships, including implementing documented risk assessments, customer due diligence processes and monitoring suspicious activity.
- Policies and procedures: The bank must review and update all policies and procedures to reflect current objectives and risk tolerances. An internal control system must be established to track policy changes and evaluate compliance.
Regulatory impact
The FDIC's consent order underscores the increasing regulatory scrutiny facing banks with FinTech partnerships. Thread Bank, known for its collaborations with various FinTech companies, must now improve its compliance with regulations, with a strong focus on monitoring its FinTech partnerships.
This regulatory action underscores the increasing scrutiny that banks dealing with FinTechs are facing, given the issues with Yotta and Synapse, as well as the recent incidents with Evolve Bank. All banks offering banking and lending-as-a-service should be aware that they are just as responsible for the customers and their funds of their FinTech partners.
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