Fed Reminds Banks they Are Responsible for Third-Party Service Providers

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The Federal Reserve Board Thursday released guidance reminding financial institutions it supervises to exercise appropriate risk management and oversight when using external service providers. The Fed becomes the latest agency to point out that banks can be held responsible for actions taken by vendors, including ARM firms.

The guidance describes factors financial institutions should consider when choosing a service provider and how service providers should be overseen. The Fed defines a service provider as any organization or entity that enters into a contractual relationship with a financial institution to provide business functions or activities, such as accounting, auditing, loan review, compliance, and risk management.

The guidance does not discourage financial institutions from outsourcing activities to service providers, but says firms should be aware of the potential risks. If service provider relationships are not managed effectively, they may expose financial institutions to risks that can result in reputational problems, financial loss, or regulatory actions, according to the guidance.

The Fed also stated that the use of service providers does not relieve a bank’s board of directors or senior managers of responsibility for the activities performed by service providers. Financial institutions are responsible for ensuring that all activities conducted by service providers comply with applicable laws and regulations and are consistent with safe and sound banking practices.

The guidance is applicable to state-chartered banks that are members of the Federal Reserve System, bank and savings and loan holding companies and their nonbank subsidiaries, and U.S. operations of foreign banking organizations.

The CFPB recently was more blunt in warnings to banks about debt collection vendors. After noting in 2012 that banks have a responsibility to monitor their collection partners, the agency in July said that banks themselves have to adhere to many of the rules in the FDCPA.

The Office of the Comptroller of the Currency also recently said that it expects a bank to practice effective risk management regardless of whether the bank performs a business activity internally or through a third party. In that bulletin, The OCC specifically referenced its July 2013 statement on debt sales and collection relationships for banks seeking ARM guidance.

 

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Posted in Collection Laws and Regulations, Credit Grantors, Debt Collection, Featured Post .

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  • avatar Raymond says:

    While written policies and procedures exist in the debt collection and debt buying industries, and the CFPB has already published its scope of auditing, the challenge in the future landscape of each is not only liability but the ability of the CFPB and OCC to hold individuals accountable for financial institutions, debt collection agencies and firms, and debt buyers. The main focus, in my opinion, for debt collection and debt buying is to improve and/or change the role of the compliance officer by having an independence from operations. There will be more focus upon personal responsibility and accountability coming from additional regulators, including state attorney generals. Last, but not least, and just as important is the regulatory intervention with financial institutions AND management responsibilities and accountabilities of its third party relationships. While there has been media coverage that seems to suggest that debt collection agencies and/or debt buyers are seeing something new as to compliance requirements or due diligence reviews, the major change will be coming from financial clients that now face personal liability, regardless of how much personal liability insurance is carried by either. Contracts and/or service agreements will have to move from data driven to more narrative language.

    While media emphasis is presently on compliance and anticipated visits from CFPB and other regulators, the industry may want to focus on those who will drive the business for better or for worse…Financial institutions and other credit grantors.

  • avatar Sisko says:

    It sounds to me like the CFPB can’t figure out which collection agencies are the good guys and which ones are they bad guys, so instead they’ll have the banks do their job for them under threat of lawsuit. I suspect the large and reputable debt collectors might enjoy these regulations, although this continues to escalate the cost of compliance which will price the little guys out of the market.

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