Managing Synctera Line of Credit

Please see product description here. 

At a high level, how does it work?

The “roles and responsibilities” section details the operational and process flows for LOC. But at a high level, the flow is as follows:

• T-1:  Borrower applies for the LOC.
• T+0:  FinTech evaluates the credit worthiness of the borrower and sets the credit limit. 
• T+0:  FinTech, on behalf of the Bank,  extends LOC to the Borrower.
• T+1: Borrower draws on the LOC.  Bank sends funds to the Borrower’s account.
• T+2/T+3: Bank sells all (or most) of the draw to the FinTech.  Bank receives funds from the FinTech as consideration for the sale.
• T+30: FinTech, w/Synctera’s platform, services the LOC and sends the account statement to the borrower
• T+45: Borrower pays the monthly LOC statement..
• T+46: Synctera applies the payment as fees, principal, and interest, as applicable, to the Borrower’s account.

Roles and responsibilities

This section explains the roles and responsibilities of banks, their FinTech partners, and Synctera.

Marketing and customer acquisition

The FinTech will be responsible for marketing the product and acquiring customers. They are responsible for positioning their offering,  promoting and marketing their product as well as providing customer service. 

Marketing materials related to LOCs will be pre-approved by you, and will adhere to UDAAP and other regulatory requirements.  Synctera Cases will be utilized to highlight issues and manage exceptions.

Origination

Application for credit

The application form will contain the necessary fields needed for the KYC process, as well as other fields needed for regulatory compliance (e.g. data required to comply with the Patriot Act). The consumer application process will also address the necessary disclosures (E-sign, Privacy, MLA, SCRA, etc.) as well as share application T&Cs with the applicant. 

The FinTech will ensure that the necessary disclosures are shared with the applicant and that explicit acknowledgment of such disclosures is gathered, with a timestamp.  

You will get to review and approve application T&Cs, and the disclosure language. You will also have access to the application-level data via the Synctera dashboard.

KYC  

Synctera will perform KYC/KYB on the end consumer. The parameters of identity verification can be discussed and fine-tuned during FinTech onboarding. Synctera capabilities and tools (Synctera Cases) will be leveraged to manage the workflow including exception management. 

Credit decisioning models

The FinTech’s credit policy and the decisioning algorithms are subject to review and approval by you. The FinTech will build or license credit decisioning algorithms. Any and all material changes to the credit policy and decisioning algorithms will require your approval prior to implementation.  

Adverse action notice

If the applicant is not approved for credit, the FinTech will send an adverse action notice, within the prescribed time, to the applicant. You will have approval rights on the notice’s template and verbiage, ensuring compliance with Reg. Z (TILA).

For the purpose of quality control and audit, Synctera will record the time and date of the notice along with action reason codes. You will have rights to review, approve and audit the adverse action notices - their timings, contents, etc.

Consumer accepting of terms of credit

In adherence with Reg. Z (TILA), the FinTech will gather explicit or implicit acceptance of the terms of credit from the end consumer. Synctera will record the time and date of such acceptance.

Activating Lines of Credit

Synctera maintains the ledgers for individual LOCs. A LOC may be linked to an individual demand deposit account (DDA) or maybe a stand-alone facility.  

Synctera will manage the individual accounts and maintain the ledger: enforce credit limits, authorize transactions, calculate interest, implement fees, book payments of principal and interest etc.

Managing credit risk and capital allocation

Once credit has been extended to the borrower, you are the lender of record. This increases your credit risk. To mitigate the credit risk, the FinTech will buy all (or most) of the draws (credit receivables) – on a daily basis – at par value. 

Synctera, as the ledger and as the keeper of books and records, will provide daily reports on the credit receivables repurchased by the FinTech.

To facilitate the repurchase one of the two following methodologies can be used.  

Option 1: Repurchase account

Held at your bank, the FinTech will maintain a “Repurchase Account.” Funds in this account will be used for facilitating the purchase of receivables from your bank.   

The required minimum balance is a multiple (e.g. 2x) of a seven-day moving average of LOC draws. Only the bank has the ability to withdraw funds from this account, and will do so on a daily basis, as it funds the borrower and sells the credit receivables back to the FinTech. 

The minimum required balance can be finalized in discussions with the FinTech.

Option 2: Funding account

Held at your bank, the FinTech will maintain a “Funding Account.”  The required minimum balance is equal to a percentage of the unutilized portion of the LOC issued. Along with mitigating the risk of the FinTech’s inability to repurchase the credit receivables, this option also reduces capital allocation for unutilized lines.

The bank draws from this account, on a daily basis, as it funds the borrower and sells the credit receivables back to the FinTech. 

As new LOC accounts are set up, the FinTech will be adding funds to this account. Furthermore, as Lines of Credit are repaid, the principal is deposited in the funding account.

If the balance goes below the required threshold, you may choose to not open new LoC accounts, until the balance has been brought up to the stipulated levels

Servicing

Interest Rate: Setting and Calculating Interest

Synctera platform will be used for setting and updating interest rates on the LOC.  Controls, in accordance with the Credit Policy, Reg. Z, SCRA, and MLA, can be put in place for the maximum interest rate, frequency of changes to the interest rate, and capping of interest charges.

Account Statements

Data for billing statements will be provided by Synctera to the FinTech. Since the FinTech owns the relationship with the borrower, they will send the statements to the borrower.  The content of the billing statements will adhere to regulatory requirements including FCBA and Reg. Z (TILA).

You will have rights to review, approve and audit the account statements - their timings, contents, disclosures, etc.

Payment processing

On behalf of you and the FinTech, Synctera will process payments of principal, interest, and fees. The payment will be applied in adherence to Reg. Z (TILA) regulations.

Distribution of principal, fees, and interest 

In case the Bank holds on to a portion of the LOC, as the servicer, Synctera will distribute the principal, fees and interest between you and the FinTech. In the initial stages, the distribution will be based on pro-rata ownership. In subsequent phases, a senior/subordination structure may be introduced.

Dispute management

Synctera, through its vendor partner, will process disputes as raised by the borrower. The dispute management process and procedure will adhere to regulatory requirements, including Reg. E (EFT) and FCBA.  Certain FinTech may choose to bring this function in-house after they build the required capability.

You will have rights to review, approve and audit the dispute management process.

Collections

Synctera, through a licensed vendor partner, will offer both first-party and third-party collection capabilities to the FinTech. The licensed vendor will ensure adherence to Regulation F (FDPCA) and other applicable regulations. You will have rights to review, approve and audit the collections process.

Reporting

As the servicer, Synctera will provide a robust set of reports for evaluating portfolio performance including application acceptance rates, delinquency rates, first payment default rates, etc.

Customer service

The FinTech or a Synctera vendor/partner will provide customer service. You will have rights to review, approve and audit the collections process.