Even today, most mortgage lenders and other financial services companies contract with third party firms to provide a portion of their business operations. Like other industries, financial service companies believe that outside vendors can perform the more specialized tasks at a lower cost. Many of the outsourced tasks require vendors to interact with consumers. The CFPB has indicated that financial institutions shoulder responsibility for inappropriate actions by third-party contractors along with the violators.
The question of accountability comes into play when vendors stand accused of business practices that violate consumer laws. On April 13, 2012, the Consumer Finance Protection Bureau (CFPB) or “the Bureau” issued a bulletin that clarifies the issue of accountability when contractors, in the course of proving product or services, violate regulations and consumers rights. Richard Cordray, the CFPB director, states that consumers have a “disadvantage” when dealing with third-party vendors chosen by financial institutions.
Scandal Highlights Risks of Outsourcing
The robo-signing scandal revealed in late fall of 2010, which involved the employees and contractors of several mortgage lenders, underline the potential legal and financial consequences of poorly trained and supervised third-party vendors. Violations uncovered from the robo-signing fallout include forged signatures, inappropriate use of notary seals by notaries and unqualified workers and other infractions to foreclose on delinquent homeowners.
The scandal eventually led to a $26 billion mortgage settlement, reached in February 2012, between the five largest mortgage servicers and the government negotiating team. As Furthermore, banks and non-depository institutions have a direct responsibility to supervise vendors’ activities conducted on behalf of an institution.
CFPB Recommendations for Firms
The Consumer Finance Protection Bureau encourages financial institutions to put procedures in place to reduce unnecessary financial and legal risks of outsourcing business tasks.
The CFPB recommends the following steps:
- Perform a background check and other due diligence to make sure vendors understand applicable consumer finance regulations, including the Equal Credit Opportunity Act and Home Mortgage Disclosure Act. Ensure vendors have the resources necessary to meet the requirements of the law.
- Request copies of the vendor policies, procedure, controls and training materials to review the effectiveness and ensure proper supervision of employees or contractors dealing with consumers or responsible for compliance with regulations.
- Add provisions to the contract that outline expectations regarding compliance and the penalties or consequence of violations.
- Develop and implement internal controls and evaluations to ascertain the degree to which the vendor complies with regulations
- Take immediate action to handle issues discovered during the monitoring and review process.
Financial institutions rely on third-party contractors to market, develop products, and deliver customer service. Under the regulatory oversight of the CFPB, failure to supervise vendors who violate the law with unfair, deceptive or abusive practices toward consumers, may saddle financial service institutions with the costly consequences.