Watchdogs Say Third-Party Servicers Need More Scrutiny, But NCUA Says It Can’t Do It

Two federal watchdog agencies are raising red flags about the need for financial regulators to monitor third-party servicers—a power that the NCUA lacks.

In separate reports, the Financial Stability Oversight Council and the Government Accountability Office are warning that additional oversight of third-party servicers—particularly fintech companies—is needed to guard against abuses.

However, the NCUA is the only banking agency that does not have that power; Congress would have to pass legislation giving the agency the power to do that.

Responding to the GAO report on the fintech industry, NCUA Executive Director Mark Treichel said that unlike other banking regulators, the NCUA does not have the power to increase scrutiny of third-party vendors.

“Lack of authority over third-party servicers does limit the extent to which the NCUA can evaluate and supervise the risks to credit unions posed by fintech companies,” he said.

NCUA officials have pushed Congress to grant the NCUA that power. However, credit union trade groups have said that allowing the agency to provide such oversight would unnecessarily increase the regulatory burden that credit unions face.

In its annual report, FSOC renews a recommendation it has made in past years.

“The Council recommends that Congress pass legislation that ensures that the federal banking agencies, FHFA, and NCUA have adequate examination and enforcement powers to oversee third-party service providers,” FSOC said in its annual report.

The GAO took a broader look at the fintech industry, particularly how fintech firms use alternative data in making credit decisions.

The GAO said that federal regulators should set guidelines for how fintech companies use alternative credit data, saying that the lack of such standards may result in violations of fair credit laws and other abuses, the Government Accountability Office said Wednesday.

“Using alternative data in credit decisions presents potential benefits (such as the expansion of credit) and risks (such as the potential for disparate impact and other fair lending issues),” the GAO said, in a report issued Wednesday.

While federal agencies, such as the CFPB have collected information on the use of alternative data, the agencies have not told lenders how that information should be used, the GAO added.

“For example, BCFP’s fair lending examination procedures and the banking regulators’ third-party guidance on risk do not clearly communicate the agencies’ views on the appropriate use of alternative data,” the GAO said.

Such guidance would provide fintech lenders with greater certainty about their compliance with fair lending and other consumer protection laws, the report states.

Fintech companies also told the GAO that the myriad of state laws governing their companies and the changing leadership and priorities of the CFPB create uncertainty for many companies.