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Financial institutions have to be careful because ther are accontable for their service providers' actions. Image: Fotolia.
Financial institutions have to be careful because ther are accontable for their service providers' actions. Image: Fotolia.

Maintaining Compliant Third Party Vendor Relationships

MAR 21, 2013 4:12pm ET
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The Consumer Financial Protection Bureau held its first Consumer Advisory Board Meeting on Feb. 20 in which Richard Cordray, CFPB director, addressed the bureau’s critical concerns and areas of efforts on how to improve the way consumer financial markets operate for the American people.

Cordray reiterated in his statement a bulletin the CFPB issued in April 2012 regarding holding financial institutions accountable for its service providers’ actions. For any reason a financial institution chooses to contract with a third party vendor, the CFPB hopes to ensure consumers they are protected from irresponsible service providers, and that these providers are aware and in compliance with consumer protection law.

Third-party relationships have advantages for the financial institution, vendor and its consumers. However, when considering contracting with a third-party vendor, financial institutions must have processes implemented to ensure an all-around compliant relationship that benefits all parties and adheres to CFPB guidelines. These best practices are crucial to a healthy, transparent and compliant relationship.

Financial institutions must do their research when choosing to contract with a vendor. Identifying the type of relationship the bank wishes to contract with the vendor will set the stage as to how the two will operate day-to-day. The reputation, experience, effectiveness, security and products are all factors financial institutions must consider when establishing a vendor relationship. Different size vendors are able to offer different capabilities that might or might not fit a financial institution’s business goals or meet customer demands or standards.

For example, in the need for compliant mortgage documents, constant regulatory change requires vendors to remain ahead of the curve and update systems at a moment’s notice. Lenders rely on their third-party partner to ensure that all documents are accurate and complaint. Financial institutions’ vendors must consistently track updates and then deploy, or designate, a team to revise templates and forms in order to meet their contract and the CFPB’s standards. The establishment of a transparent relationship in which both parties know what each side’s objectives and strategies are will ensure compliance and satisfied customers.

However, third-party relationships do not come without risk. Updates and details simply fall through the cracks and can damage the relationship, compromise compliance and cost money. Constructing a remediation action plan, and having it ready for deployment at any given minute in the event of a crisis or compromised situation, will address the issue from both sides and keep the bank’s and vendor’s strategies and takeaways in mind. Separate, yet cohesive crisis communication plans to address how the issue arose, how each party will initiate efforts to resolve it and how they will overcome it, will make for a stronger relationship that is capable of overcoming unforeseen problems.

Constant lines of communication between a financial institution and its third party vendors is the only dependable way to guarantee objectives are met, regulatory changes are addressed and associates are aware of updates and strategy shifts. Vendors should notify the financial institution associates directly associated with maintaining the relationship of all regulatory changes and document revisions to ensure compliance. Individual changes are frequent, time consuming and require adherence by a set deadline. Monitoring and assessing the status of the relationship, as well as guaranteeing both parties are in line with governing bodies’ standards will compose a fluid relationship.

Oversight should be clearly documented—discretion and integrity are easy to achieve when there are ample records of communication and changes documented in each party’s relationship management system. However, when discretion and integrity are threatened, documentation of the relationship and clear lines of communication will come into play, especially if a regulatory agency is called in to examine the relationship and what led to potential violations.

Relationship management between a financial institution and its vendors is vital to ensure compliance and guarantee consumer safety. Industry and regulatory shifts result in constant updates that must be adhered to or else both parties could face strict penalties and fines. The CFPB is committed to protecting consumers from banks and their vendors and recommends all financial institutions put into effect risk mitigation efforts between the two parties to guarantee compliance and avoid violations.

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