Breaking: Lineage Hit With FDIC Consent Order
Breaking: Lineage Hit With FDIC Consent Order
Lineage, Partner to Synapse, Synctera, Is Moving To Wind Down Banking-as-a-Service Relationships, Sources Say
Hey all, Jason here.
I know, I know — it’s Friday, what am I doing in your inbox?
Given the news that Lineage Bank has entered into a consent order with the FDIC, I wanted to dash off a quick update before the weekend. You’ll still see the regularly scheduled newsletter in your inbox on Sunday morning.
If you enjoy reading this newsletter each Sunday and find value in it, please consider supporting me (and finhealth non-profits!) by signing up for a paid subscription. It wouldn’t be possible to do what I do without the support of readers like you!Lineage Bank Hit With FDIC Consent Order Over BaaS, Fintech Oversight Failures
Last August, I said that Lineage Bank is the exact kind of situation regulators were likely to be worried about. Now, Lineage, which partners with banking-as-a-service platforms Synapse and Synctera, has entered into a consent order (PDF) with the FDIC, which was released publicly today.
The bank, which had been the smallest in Tennessee until its acquisition at the beginning of 2021, saw its assets balloon from a paltry $27.25 million at the end of 2020 to just over $290 million at the end of 2023 — a whopping 964% increase in just three years, at a time when banks in Lineage’s peer group were growing assets by about 10% per year.
The key to driving that growth? Deposits sourced through its BaaS relationships with Synapse and Synctera.
But that rapid growth and Lineage’s questionable oversight of its BaaS partners appear to have led to mounting regulatory scrutiny — and internal disagreements about the bank’s strategy.
As first reported by Fintech Business Weekly, activist shareholders mounted what was ultimately a successful effort to oust the entire board of the holding company and the bank’s senior management, including the father-and-son duo that spearheaded the strategy, Richard and Kevin Herrington.
Now, Lineage has been forced to update previously filed call reports, primarily to correct the amount of deposits considered to be “brokered.” In previously filed versions of its reports, Lineage claimed just $1,000 in brokered deposits for Q4’22 through Q3’23.
In the revised version of those reports, Lineage now classifies between $96 million and $124 million of its deposits for the period as brokered — reaching nearly 57% of the bank’s deposit base in Q4’22 and about half of its deposit base at the end of 2023, the most recent data available.
Having a large share of deposits that are considered “brokered” isn’t in and of itself a problem, but the misclassification could indicate problems with controls and management oversight. And whether or not deposits are deemed brokered can impact a bank’s deposit insurance assessment and other regulatory metrics.
A local news report yesterday described $181 million of the bank’s deposits as “local,” suggesting around $82 million of Lineage’s deposits, or about 31% of its deposit base, may come from BaaS partners.
Now, the new board is seeking to steady the ship, with multiple sources with first-hand knowledge of the matter saying Lineage is moving to wind down its BaaS programs, possibly as soon as next month, pending the FDIC’s approval of its plan to do so.
That approval is necessary, because Lineage, helmed by new chairman Jeffrey Hausman and interim president Carl Haynes, has entered into a consent order with the FDIC, which stems from its banking-as-a-service activities.
Consent Order Stems From Third-Party Risk Management Failures, Fintech Programs
The consent order stems from unsafe and unsound banking practices relating to its third-party management of its fintech programs, including those with middleware providers Synapse and Synctera.
The wide-ranging order includes the following provisions, among others:
Lineage’s board must increase its oversight of the bank’s affairs, including all business lines and strategic activities
Ensure that each member of the board “possess the qualifications, experience, authority, accountability, and resources commensurate with his or her duties and responsibilities at the Bank and the complexity of Bank operations”
By March 31st of each year the order is in effect, document an independent evaluation of each member of the bank’s management team
Develop and implement an internal audit plan to include evaluation of risk controls for high risk areas, “including, but not limited to on boarding deposits obtained through third parties, processing payments obtained through third parties, and sweeping deposits”
Prohibits Lineage from entering into any new line of business or expanding an existing line of business that would result in 10% growth in total assets or liabilities without prior written consent
Requires the board to update the bank’s strategic plan, including “the associated risks, such as strategic, credit, operational, transaction, market, compliance, legal, regulatory, reputation, counterparty, third-party, concentration, and any other identifiable risk for any existing and any proposed products or services”
Requires the board to develop a plan for “how the Bank will administer an effective and orderly termination with significant third-party FinTech partners”
Requires the bank to submit a specific plan to the FDIC for third-party fintech partners seeking to terminate or end an existing contract
Requires the board to hire a third-party “to perform an evaluation of the management structure, depth, and capacity of Bank staff responsible for the oversight and risk management of the Bank’s Banking-as-a-Service business line (BaaS Program)”
The bank must undertake an assessment “to determine the adequacy of existing reserve account balances held by the Bank to cover all liabilities, contingent or otherwise, associated with or related to in any way the FinTech relationships”
The bank must develop and implement a written program to assess and manage risks posed by third-party fintechs; the plan shall be provided to the FDIC for review and comment — including both “direct” and “third-party” programs (eg, via a middleware platform like Synapse or Synctera)
The third-party risk management program shall include policies for how Lineage selects and approves fintech partners, policies and criteria supporting effective oversight of its fintech partners, policies that require fintechs’ information security programs to be effective, an audit plan, analysis of the bank’s ability to perform the functions being outsourced, policies and criteria for an annual assessment of staffing adequacy, among other requirements
The bank shall engage a qualified third-party to assess its existing fintech relationships, including the types of products and services offered, the types and volumes of activities, the financial condition of each fintech partner, any changes in key personnel at each fintech partner, consumer complaints received by each fintech partner, any operational or transactional concerns, including suspicious activity, at each partner, an evaluation of the bank’s concentration risk posed by each partner, and an evaluation of AML/CFT controls of each partner, among other requirements
The board shall receive monthly reports regarding the level of activity of all fintech partners’ activity by segment, including “FBO” accounts and ACH activity
The board shall develop and formalize a “Formal Onboarding Process,” including due diligence for each proposed fintech partner
The bank shall “ensure the due diligence process is expanded for originators in the Bank’s third-party sender ACH business line”
The board shall assess the necessary resources to oversee AML/CFT functions, and designate a qualified individual responsible for coordinating day-to-day monitoring
The board shall engage an independent third-party to conduct a lookback of all activity from September 1, 2022 to the effective date of the order
The bank shall formulate a plan to manage and reduce funding concentrations, including but not limited to liquidity risks posed by fintech partnerships
The bank shall update its contingency funding plan and liquidity stress testing process
The bank is prohibited from “growth in new deposits, including intraday, with new FinTech Partners until the Bank has a well-defined Third-Party Risk Management Program”
The bank shall submit a written capital plan to increase Tier 1 capital, including a plan to stabilize and control balance sheet growth, provide capital resiliency, and consider counterparty and third-party risks to capital
The bank shall achieve and maintain a Tier 1 Leverage Capital ratio equal to or greater than 12.5% and a Total Risk-Based Capital ratio equal to or great than 16%
The bank is prohibited from declaring or paying any dividend, without prior written approval
The bank shall formulate a written profit plan
The bank shall address and correct any violations noted in its Report of Examination
The bank shall send a copy of the order or otherwise furnish a description of it to its shareholders
Impact To Synapse, Synctera, Their Fintech Clients & End Users Not Yet Clear
The impact of the consent order and BaaS wind down on middleware platforms Synapse and Synctera couldn’t immediately be discerned.
Lineage provides ACH and wire processing to Synapse programs, many of which have migrated to a cash management structure that leverages Synapse’s own broker-dealer entity.
Asked about the potential impact, Synapse CEO Sankaet Pathak responded via email yesterday indicating no wind down plan had been shared with Synapse, and he doubted that, if Lineage is exiting BaaS, that “it’s going to happen anytime soon.”
Pathak claimed if Lineage were to cease providing payment processing for Synapse, that the company would “move processing to other partners,” with no disruption for customers. Synapse continues to partner with AMG National Trust and American Bank, according to its website.
For its part, Synctera partners with Lineage to offer full-scope deposit account programs, not just payment processing — meaning Synctera generally is facilitating end users opening accounts at Lineage.
Middleware and fintech client contracts with partner banks for such programs typically have wind down timeframes of six months or longer, to allow for programs to transition end user accounts to new bank partners — assuming they can find a new bank to work with.
Representatives for Lineage Bank did not respond to multiple requests for comment.
A representative for Synctera did not respond to a request for comment prior to publication, but subsequently provided this statement: “We’ve stood by our partner Lineage during their recent leadership transition. While it’s unfortunate to see them leaving the FinTech space, we’re thankful for their ongoing assistance and support in transitioning our shared FinTechs to new banks within the Synctera community. Regarding today’s FDIC notice, we can’t comment on programs not on our platform.”
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