(Interview taken at LEND360 on October 6th 2016)
Professional Bank Services (PBS) is a Louisville, KY based financial institution consulting company founded in 1978. It has been employee-owned since 2003. The company prides itself on being a small business with fewer than 100 employees. As one of the world’s largest financial consulting firms, they provide compliance advice for a range of clients from small community banks to multi-billion dollar international financial institutions. In addition, PBS has assisted, trained, reviewed, and audied online lenders since 2013.
PBS’s unique business model as a small employee-owned hands-on company has proved especially advantageous to them with their start-up online lending clients. Not only do they fully understand how small financial institutions operate, but they have also mastered facilitating regulatory compliance for banks and MPLs over the past 38 year.s
“Boots on the Ground” Consulting and Education
PBS considers itself a “boots on the ground” consulting firm. Each day, employees are on location reviewing, advising, and educating banks and online lending businesses. PBS calls its approach to compliance facilitation a “personal” one.
PBS also believes its hands-on method of working with clients enables it to better understand the needs and requirements of each individual MPL and partnering bank. One of PBS’s greatest assets is its team of professionals actively working in the field every day.
PBS offers a wide range of services from in-house compliance training and internal auditing to director education and management consulting. PBS’s Education Department does almost 1000 seminars across the country each year. It caters its program to each client whether a traditional bank (75% of PBS’s clientele) or MPL.
What makes PBS so unique is that, unlike many other consulting firms, the company does not charge retainers. Rather, they have developed a business plan based on phases that are paid for as the work is completed. An informational packet published for potential clients at the 2016 LendIt conference not only describes PBS’s different phases of education and consulting for online lenders, but it also lists the typical pricing for each phase “spanning the first 12-18 months depending on resultant volume.”
The Road to Compliance for MPLs through Bank Partnerships
Retired US Army officer and FDIC veteran Martin Mitchell serves as managing director at PBS. With over 18 years of experience in the industry, Mitchell can is an expert in the field and is often asked to speak about his knowledge of lending compliance at conferences across the US, including the April 2016 LendIt USA. In an article produced by PBS, titled “MPLs: The Unregulated Fallacy,” Mitchell attempts to decipher key terms from the CFPB Title 12 CFR 1090.101 in order to help explain if CFPB regulations apply to and how they affect MPLs.
By reading Mitchell’s article, let alone the actual 12 CFR 1090, it is obvious how complicated it is for MPLs to find out if they are subject to the regulations or not, and how they are required to comply. Mitchell writes that one of the easier routes for online lenders to take for compliance is to partner with a fully compliant bank.
Speaking as a Managing Director for PBS, Mitchell says, “For several years we’ve advocated our MPL clients are best served if they operate and are monitored to the same regulatory requirements of their bank partner.” It is time to recognize that is is a misconception that online lending operates outside (or with fewer) federal regulations. Comprehensive regulation of MPL is inevitable. If an online lender partners with a bank, both entities may work together to fully comply with federal regulations.
The FDIC Perspective and MPL Compliance
Mitchell, who claims a “long history with the FDIC,” calls the MPL space “very exciting,” but he thinks the future of MPL lies in full FDIC compliance. There obviously has been a lot of talk recently about what several analysts call “Rent-a-Charter” deals and how new FDIC guidelines could negatively affect these MPL and bank partnerships, but Mitchell still believes that MPL are “far better served partnering with a solid bank.” According to an August WSJ article, the proposed “FDIC guidelines would reduce a regulatory advantage for online startups.” Mitchell argues that while significant changes in MPL regulations may still be a few years out, the way for online lenders to gain the trust of the public and federal regulators is to adhere to FDIC regulations from the start. Mitchell writes, “We all know this is a regulated business. The best course of action is to stop skirting reality, embrace that fact, and demonstrate the capabilities of these great lenders to operate in a fully compliant manner to all who doubt.”
The Future of MPL and Bank Partnerships: Cross River Bank Announces $28 million growth-equity investment
In the week before the presidential election, the biggest news in the MPL industry was that the small New Jersey bank/online lender Cross River Bank announced they had completed a $28 million growth-equity investment by Silicon Valley VCs including Battery Ventures, Andreessen Horowitz, and Ribbit Capital. CRB is considered to be a “highly regulated financial entity” and FDIC member, so many analysts found it unconventional if not shocking that VC’s would choose to invest in the bank.
While FinTech companies have spent years trying to disrupt the traditional hold banks have on lending, many feel, including Mitchell, that the way forward for these start-ups is a partnership with banks. As Telis Demos recently reported in a WSJ article, prior to President-elect Donald Trump’s win, many FinTech firms felt that partnering with small banks like CRB would “help them take on hobbled financial supermarkets,” but Trump’s presidency could mean a change in dynamics between MPLs and banks. Possible changes to Dodd-Frank and lighter regulations under the new regime raise many questions for the future of online lenders and banks, but it would seem some sort of partnership between the two would be mutually beneficial.