Servicers: know thy vendors, know thyself.

Author:Marsh, John

A THIRD-PARTY VENDOR to a financial institution welcomed an individual into his office one day. The individual was there to conduct a site visit on behalf of the institution. The vendor had been preparing for the visit for some time, and was ready to show the inspector that his company was compliant with all of the necessary rules and regulations.

"Would you mind doing the inspection? I've never been in one of these kinds of offices before," the inspector said to the owner, handing over a clipboard.

Financial institutions have spent years and millions of dollars beefing up their compliance and vendor-management operations in the wake of increased regulations and government oversight. But there are still many kinks in the armor.

In particular, the mortgage servicing industry was dealt several body blows recently when Steven Antonakes, deputy director of the Consumer Financial Protection Bureau (CFPB), took the stage at a hotel ballroom in Orlando, Florida, to address attendees at the Mortgage Bankers Association's (MBA's) National Mortgage Servicing Conference.

Antonakes pulled no punches when he gave his speech, even remarking that he wasn't expecting a standing ovation when he was done.

During his remarks, he said that he was "deeply disappointed by the lack of progress the mortgage servicing industry has made." What was more important for the servicing industry, though, was when he said that "the fundamental rules have changed forever."

There is a new paradigm for the servicing industry--one that includes even more regulatory compliance requirements, reputational exposure and risk-management tightrope walking. Not only do servicers need to have a more detailed understanding of everything that goes on under their own roofs, but they also must get to know their third-party service providers much better, too.

The relationship between service providers and mortgage servicers has gone from being neighborly to living under the same roof and sharing a bathroom.

Managing third-party relationships has to be done at the institutional level, but with so many different types of relationships and so many different layers of integration, standardizing the process can be extremely complex and difficult. This is especially true when working with vendors that do not perform a significant amount of work on behalf of the servicer.

The time and effort to approve a vendor may not be worth the expense. Knowing that the servicer could be held responsible for...

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