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   ARTICLE   |   From Scotsman Guide Residential Edition   |   April 2014

Pay Attention to Third-Party Relationships

To ensure compliance, mortgage companies must carefully select their industry partners

This past October, the Office of the Comptroller of the Currency (OCC) issued a bulletin that provided specific and detailed guidance for the oversight of third-party relationships. As many originators already know, the OCC is responsible for overseeing all national banks and federal savings associations, so guidance from the office is generally seen as good practice for all.

In this particular bulletin, the OCC defined third-party relationships as “any business arrangement between a bank and another entity, by contract or otherwise.” The definition is intentionally broad, but the OCC does provide additional guidance with respect to the level of oversight given the nature of a relationship, saying, “A bank should adopt risk management processes commensurate with the level of risk and complexity of its third-party relationships.”

The office does not, however, provide for a bandwidth of the various levels of relationships apart from highlighting those that involve “critical activities,” which are defined as significant bank functions, shared services or other activities that could — among other conditions — have significant impacts on the customer or cause a bank to face a major risk if its third-party relationships fail to meet expectations.

It seems that the primary concern conveyed by the bulletin is that financial institutions — including mortgage banks — don’t vet third-party relationships with a level of scrutiny and oversight commensurate with the nature of the relationship. In an effort to reinforce that concern, the OCC cites generalized examples of banks and thrifts failing to properly assess the risks inherent in these relationships, or failing to perform adequate due diligence and monitoring of third-party relationships.

For mortgage originators wondering if their relationships with appraisal-management companies (AMCs) pertain to the OCC’s bulletin, the answer is an unequivocal “yes.” By definition, mortgage organizations that engage AMCs to manage their appraisal and valuation services are engaging in third-party relationships with those companies. This should raise an important question in light of the bulletin, namely: Is the AMC relationship considered a “critical activity”?

Obviously, the answer to that question lies in the collective assessment of a company’s board of directors or senior management, but in general, this kind of relationship would be considered a critical activity. In many instances, the management of valuation services is definitely a “significant bank function,” and the relationship could therefore pose serious risks if the AMC fails to meet expectations or provides service that negatively impacts a bank’s customers.

Depending on the level of integration between the bank and its AMC, there could be a major impact on the bank’s operations if the organization has to find an alternate third-party vendor or develop the function in-house, two other conditions that the OCC has associated with “significant” bank functions.

With all of this in mind, mortgage organizations should take it as a given that this particular bulletin addresses their AMC relationships, which in most cases would be considered critical activities. Banks and brokerages should thus take careful note of the OCC’s guidance for best practices. More specifically, companies that engage AMCs to outsource their valuation services would be well advised to do all of the following:

  • Make sure that they have proper due-diligence policies and procedures in place for the selection of appropriate AMCs;
  • Verify that they have contractual agreements commensurate with the level of risk associated with their AMCs’ activities;
  • Have appropriate policies and procedures in place for continuous monitoring of their relationships;
  • Develop contingency plans in place for transitioning these activities to another AMC or an in-house division if and when the relationships dissolve;
  • Ensure adequate and appropriate documentation and reporting of activities associated with their third-party relationships; and
  • Perform periodic independent reviews of the activities and risks associated with their third-party relationships.

Mortgage companies that outsource their appraisal-management functions should engage with AMCs that exhibit a number of qualities. For instance, look for AMCs that are seasoned in negotiating relationships with groups that report to the OCC and are adept at assisting banks and thrifts in appropriate contract negotiations. Likewise, partner with AMCs that offer thorough documentation of their policies and procedures — including all aspects of their information security, contingency plans, risk management, regulatory compliance, etc. — and also be sure that your partner company has robust reporting capabilities.

The days of “mom and pop” AMCs are quickly coming to a close, as the resources required to comply with state and federal regulations are becoming increasingly cost-prohibitive for smaller AMCs. The challenge for mortgage brokerages and banks is to locate and engage AMCs that have the resources to ensure compliance with regulatory groups while maintaining service levels that recall a time when mortgage companies truly received individualized attention from their third-party vendors. 



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