Lenders bulked up their vendor management and vetting programs in recent years, mindful of the fact that the Consumer Financial Protection Bureau will hold them accountable for the actions (or misdeeds) of their service providers.
Terms like “scorecard,” “NPI,” “clean desk policy” and “SOC 2, Type 2” have made their way out of the vendor management offices and into the boardroom. Vendor consolidation; site visits and exhaustive background and financial audits have all become the norm as mortgage lenders seek to minimize their potential liability.
However, while it’s clear that lenders are demanding much more from new service providers before sending that first order, how much are they really doing after the initial vetting process is finished?
What are they doing to manage and oversee those same providers weeks, months and years after first doing business with them? Is the service provider living up to the promises made at the time the relationship was initiated? How does the lender know? What kind of reporting is in place…and who is reviewing it for the lender?
Although mortgage lenders’ responsibility to manage service providers has grown exponentially, there is much more that the service providers, themselves, can do to help. It’s one thing for a potential business partner to show its best face when a potential lender client is meeting the team for the first time. But it’s quite another to hold up to scrutiny consistently.
It’s even more onerous, especially for the largest lenders, to try to track each and every service provider. Scorecards or third party vendor managers provide some assistance, but neither can tell the entire story, and the lender cannot risk putting its full faith in those fail-safes alone.
Then again, many lenders are already reeling from the burden of skyrocketing compliance costs. The cost to comprehensively manage a vendor network is prohibitive for some. Thus, an opportunity is arising for the very best service providers today. For the leading providers, transparency and self-reporting are becoming significant differentiators.
This is by no means a call for lenders to abdicate their duties to oversee and manage their networks and entrust their risk profiles entirely to self-reporting. Simply taking the partner at its word could be the pathway to a painful CFPB site visit. However, those providers which work in a transparent fashion, with a focus on continuous improvement and clear reporting, can be extremely attractive to the lender already stretched thin by ATR, TRID and countless other state and Federal requirements coming into existence in the past few years.
So what should a lender be looking for from the transparent service provider? It all starts with independent third-party certification. Lenders beware, however—there are numerous types of “certification” making the rounds in our industry today.
In fact, not all even require an objective third party. Some “self-certifications” amount to little more than a provider announcing it has met the credentials of the American Land Title Association’s Best Practices requirements. It’s admirable if it’s 100% accurate, but as a lender, will you be willing to risk thousands in fines (or worse) because of a misunderstanding as to what constitutes “compliant” on the part of the service provider?
Seek out providers certified by qualified and objective third parties. A better practice would be getting certified by a third party firm as ALTA Best Practices compliant. Additionally, the SOC 2, Type 2 designation, the gold standard in the mortgage industry today, means that an independent, trained and accredited CPA firm has audited and verified that the service provider has in place robust and sustainable financial and data controls to protect its lending (and consumer) clients. Also, be aware that the SOC 2, Type 2 certification is not continuous. Verify that the service provider is keeping its certification current (usually done on an annual basis).
There are other forms of credible third-party certification that can separate the best service providers from the others. National title underwriters, for example, audit their independent title agents annually. The best agents are usually comfortable making the results of those audits available to clients and prospects. Similarly, a number of lenders now require independent certification by means of a specialized third-party vetting firm.
Your agent or service provider shouldn’t be shy about providing these results as well. It has been our experience that the best service providers are usually quite happy to go above and beyond when it comes to providing potential or existing clients with access to objective reporting and auditing of those service providers.
If nothing else, credit the CFPB for making crystal clear the fact that the “C” in its name stands for “consumer.” Whether or not a service provider interacts directly with a lender’s clients or consumers of any kind, it is undisputedly in that provider’s best interest to demonstrate a full-on effort to protect the consumer. Always. For example, although lenders have been driven to install formal and robust consumer complaint systems, the requirement does not (directly) apply to title companies, closing agents or similar settlement services providers.
That said, the closing or the settlement is one of the most important points of direct contact with a consumer. Service providers without easily activated complaint mechanisms could easily put their lender clients at risk where a consumer is aggrieved or, even worse, mistakenly believes herself to have been aggrieved.
Make sure your service providers have a sturdy complaint resolution mechanism in place before the CFPB comes knocking. Better yet, get the entire picture—not just where the process broke down for a consumer. Consider offering a full performance review from the consumer after closing. The closing and settlement process can be challenging even under the most ideal circumstances. Your service provider can help you understand where the closing process can be improved for the consumer by reporting the results (good and bad) of systemic customer feedback.
The best service providers are also not afraid to share the details of their financial controls. They’re happy to explain what mechanisms or systems are in place to prevent misdeeds such as escrow fraud or defalcation. Is your service provider using escrow reconciliation technology? Some of the very best systems will even automatically generate a consumer refund when closing estimates and recording fees differ from the estimates. Others, automatically generate email or text triggers notifying your financial executives when loan payoff or proceeds checks are not cashed in an appropriate amount of time.
How frequently is your service provider’s escrow account reconciled? If it is not daily, it should be. Who has access to it in the first place? Is there an “extra pair of eyes” on the process in addition to your internal financial controls? Does the service provider allow “sunshine” into its accounting, such as providing constant access to reconciliation records for title underwriters? Does the funding lender have easy access to the post disbursement process — usually a black hole when it comes to status — at the transactional level 24/7? Third-party certification, especially specific SOC certifications, can help here, too. Is your service provider comfortable providing audited financials? Does the service provider hold itself accountable and make things right where errors do occur and are there systemic processes in place to ensure this?
If a service provider’s fail-safe against fraud or theft goes no further than the honor system or personal diligence, it would be wise to look elsewhere. Don’t just take your service provider’s word for it—make him or her prove it.
Finally, as you consider how to best manage service providers, consider how they can help you without completely disengaging you from the oversight process. Who provides the reporting and how often? How is it audited, and when? Who reviews it on the lender side? Some providers have gone so far as to offer a self-scorecarding program (as we have).
Amazingly, a good number of mortgage lenders have very simple scorecard systems or even none at all. We regularly find that a service provider offering up its own scorecard will go above and beyond what the lender requests. And while such a safeguard doesn’t immunize the lending client from the duty to oversee, exercising self-accountability in this fashion can make the harried lender’s life a little easier when it comes to vendor management.
Vendor management goes well beyond the vetting process. Remember, almost everyone looks good and says the right things during a job interview. You won’t find a lot of dirty cars on the lot at a car dealership. It may be difficult to make a good first impression in the mortgage industry, but the very best of the best maintain that promise long after the business is awarded.
It’s important to keep in mind that the vetting process for service providers, while crucial, is not the end. The best service providers (in addition to performance, of course) will distinguish themselves by making themselves as easy to manage and monitor as possible.