by Regina Lowrie & Brideen Gallagher
“You can’t be serious! I’m just a small mortgage banker, and here’s yet another cost I have to absorb in order to do business. Why is this applicable to me?” This exasperation was a common theme heard a few days ago in discussing vendor management at a gathering of mortgage bankers.
Surprisingly, the answer is relatively simple. One just needs to look at the history behind the creation of the Consumer Financial Protection Bureau (CFPB) and the focus by government to implement regulations that protect the consumer. The myriad of additional regulations covering all forms of credit, real estate, and other financial and financial-related markets have been imposed to protect the consumer in the aftermath of the credit crisis. Title X of the Consumer Financial Protection Act of 2010 created the CFPB and authorized it to have broad direct supervision and enforcement authority over both lenders and supervised service providers. The CFPB, Federal Reserve Board (FRB), Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA) and even the GSEs (government-sponsored enterprises) have included vendor oversight (or third party risk assessment) as a requirement in an institution’s risk management framework. As a result, lenders are struggling with understanding their responsibilities for oversight of vendors who provide services to them.
Obviously, it is far easier and more efficient for regulators to hold the lender accountable to ensure the consumer is fairly treated than for regulators to endeavor to manage more than a million vendors. Thus, under the provisions of CFPB Bulletin 2012-03, it is the lender’s responsibility to oversee every vendor “in a manner that ensures compliance with the Federal consumer financial law, which is designed to protect the interests of consumers and avoid consumer harm.”
For lenders considering their approach to vendor management, it is helpful to start with defining the roles of senior management and the board of directors. Generally, the board is responsible to oversee development and adherence to business policy. The board and senior management must recognize that third-party vendor relationships present potential risks that need to be managed on an ongoing basis, beginning with a sound due diligence process at initial vendor selection and continuing with on-going reviews of all such relationships. Certainly, the level or extent of risk varies with each vendor relationship. Understanding and managing how the vendor may expose the lender to operational, privacy, and reputation risks are the most critical elements for lenders to address.
Elements of a Compliant Vendor Management ProgramFortunately, implementing and managing a vendor management program can be reasonably and expeditiously accomplished with end-to-end solutions currently available in the market. Based on CFPB requirements, a compliant program needs to include the following elements:
EnforcementCosts for non-compliance with vendor management requirements can be substantial. Some examples:
In addition to the financial risks, publication of these enforcement actions can create reputational risk for your organization. These are yet more reasons to make an investment in creating and implementing a robust vendor management program.
So what do I do next?Regulators are extremely focused on vendor management and will continue to issue enforcement orders against companies for identified violations. As we have discussed, lenders and companies of all sizes should have a well-established and documented Vendor Management or Third-Party Risk Assessment Program. It is important to note that a compliant, comprehensive program is significantly more complex than simply utilizing a vendor approval checklist. Based on our experience, a risk-based approach is often the most cost effective and streamlined solution. All vendors, no matter their size or risk rating, should be subject to your Vendor Management Program. And based on the ramifications of non-compliance, an ounce of prevention is much less costly than a pound of cure.
By Gary Acosta
Prospect Mortgage and Wells Fargo, and most recently, PHH, have announced decisions to abandon the practice of using marketing services agreements. These companies should only be the first wave: it is time for the practice of MSAs to end once and for all.
By eliminating MSAs, regulators can help reduce the cost of mortgage originations without causing further restrictions to credit availability. In other words, there is zero downside, particularly for consumers.
These arrangements have been common between lenders and referral sources, such as real estate brokers and builders, for years. In simple terms, an MSA is a contract whereby a lender or other service provider will compensate brokers and builders for marketing their services to clients' agents and sales professionals.
This could include advertising and "desk rentals," where the provider has a physical presence in the client's office. There has always been a fine line between legal MSA arrangements and the payment of referral fees or "kickbacks," which are illegal according to the Real Estate Settlement Procedures Act.
Where that line actually resides is a matter of interpretation of RESPA's guidelines, but common sense makes it clear that compensation paid directly to a referral source is a form of kickback no matter how we dress it up with more flattering terms.
Few argue that the practice of MSAs has any real consumer benefit. At best, they add unnecessary cost to the origination process, which, of course, is ultimately paid by the consumer.
At worst, they can lead to the nefarious practice of steering consumers to loan products that have excessive fees or harmful terms. The latter is more common in minority neighborhoods, where homebuyers are often more vulnerable to steering.
Anybody with practical knowledge in the business will tell you that the application of MSAs varies from company to company. There are companies that try and stay within the guidelines and there are plenty of companies that blatantly cross the line by paying excessive fees or by tying the compensation to production or profitability targets. While there have been some recent actions by the Consumer Financial Protection Bureau, enforcement of MSA violations have historically been few and far between.
Several reputable mortgage companies I have spoken with have uniformly told me that while they don't like the practice of MSAs, they do them because not participating would put their loan originators at a competitive disadvantage.
These companies also all agree that the practice of MSAs is rife with abuses and that companies that exploit the rules make it harder for the companies that try to do it within the spirit of the regulations.
The lenders I spoke with generally just want an even playing field with their competition, an environment that is driven by quality service and competitive pricing, and not by who is willing to pay the most in MSA fees.
This is not a small problem; the payment of kickbacks is one of the less-frequently discussed causes of the foreclosure crises.
Real estate agents and brokers are critical, trusted advisors to their clients, especially for minority and first-time buyers. At the same time, brokers are struggling more than ever to create profitable businesses.
Providing ancillary services for their clients such as mortgage originations, escrow services and title insurance can substantially add to the bottom line. Brokerages that are willing and able to make the necessary investments should be allowed to participate in these fees by providing legitimate services for which they deserve fair compensation.
Nobody in the real estate and mortgage industries wants to see more regulation. However, eliminating MSAs is the right thing to do and is one of the current industry practices that I truly believe few will miss.
Gary Acosta is the co-founder and CEO of the National Association of Hispanic Real Estate Professionals and currently serves on the consumer advisory board of the Consumer Financial Protection Bureau.
TMC - Chief Operating Officer
President/CEO - Pulte Financial Services