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Hello, this is Samantha Shares. This episode covers the Statement of C F P B Director Rohit Chopra, Member, F D I C Board of Directors, on Stopping Fintech Deposit Meltdowns

The following is an audio version of that statement.    This podcast is educational and is not legal advice.  We are sponsored by Credit Union Exam Solutions Incorporated, whose team has over two hundred and Forty years of National Credit Union  Administration experience.  We assist our clients with N C U A so they save time and money.  If you are worried about a recent, upcoming or in process N C U A examination, reach out to learn how they can assist at Mark Treichel DOT COM.  Also check out our other podcast called With Flying Colors where we provide tips on how to achieve success with N C U A.

And now the statement.

 Statement of C F P B Director Rohit Chopra, Member, F D I C Board of Directors, on Stopping Fintech Deposit Meltdowns

Over the past decade, we have seen a significant incursion into consumer deposit taking and payments activities by companies that aren’t banks or credit unions. These firms want the public benefits of being a bank or credit union, without the public obligations.

This trend poses significant risks. We have developed a legal framework for banks over the past century designed to ensure people’s deposits are safe and that they have constant access to their funds. Deposit insurance and the special F D I C resolution process protect people if the bank fails and they retain quick access to their cash. When nonbanks engage in deposit taking, whether directly or in partnership with a bank, all these protections may not apply.

Today, the F D I C Board of Directors is proposing a rule that would strengthen requirements for banks that partner with nonbanks in offering deposit-style products.

This year, Synapse, a middleman between nonbanks offering deposit-style products to end users and their partner banks, filed for bankruptcy. The firm appears to have failed to properly track customer account balances and may have engaged in other shady practices. As a result, tens of thousands of customers have had their funds frozen for months. The banks have been unable to reconcile all the records necessary to get end users their funds back. This has led to severe harm, especially for people who were using the nonbank account as a primary checking or savings account.

If one of the bank partners had failed, instead of Synapse, the horrible account balance tracking may have prevented the F D I C from making quick deposit insurance determinations and returning funds promptly to end users. When consumers do not have access to their funds, it can undermine confidence in the financial system and ruin lives.

The proposed rule would require banks to maintain records identifying the ultimate end users, their balances, and other information for custodial accounts with transaction-style features. Banks would still be permitted to maintain these records through a third party as long as certain protections are in place, including daily reconciliations to make sure the numbers at the customer-level add up. Banks would also have to maintain constant access to the records, including in the event of the nonbank’s bankruptcy or other disruption. This framework would expedite an F D I C insurance determination if the bank fails and prevent the type of chaos we’re seeing with the Synapse bankruptcy if the nonbank fails.

To be clear, this rule would not address all the risks posed by banking with a nonbank. Even if all the records are appropriately maintained, there still may be some delay in getting end users their money back as the nonbank’s bankruptcy proceeding plays out.

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