Obstacles into Opportunities: How RegTech Transforms Vendor Compliance in Financial Services

Jan 08,2020

By : Mark Kuivila

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Robust vendor networks are critical for success in the financial industries. Banks, credit unions, and other financial organizations increasingly outsource key functions to third parties—a development that has not gone unnoticed by regulators. The CFPB, FDIC, and OCC have all increased scrutiny over financial institutions’ third-party management practices and made clear that vendor oversight programs should be as robust as the networks they cover.

This change in regulatory posture has been a cause for concern among many in the finance world. In such a heavily regulated industry, how can we be sure what rules apply to which vendor and when? How can we stay up to date with the constantly changing regulatory landscape? With so many complex third-party relationships, how do we meet these high expectations without overspending or sacrificing efficiency?

Understandably, some businesses have struggled with these tensions, resorting to expensive consultants, miles-long checklists, and multi-tab spreadsheets. Many others, however, see these regulatory developments as an opportunity to bring long-overdue modernization to their third-party risk management programs. The struggle is real for some, but it doesn’t have to be for you.

Expert-system technology is here. By integrating smart, tech-based solutions from end-to-end in the third-party lifecycle, your organization can meet regulators’ high standards and realize concrete business benefits. Clearer sightlines, more confidence, and lower costs are only the beginning.

In this series, InFront Compliance will discuss vendor relationships that frequently appear in the financial industries and identify opportunities for technology integration. We will show you how an innovative approach to vendor compliance oversight can bring your organization efficiency and productivity advantages while reducing your costs and better mitigating risk.

Part I: Third-Party Mortgage Originators

Since the 2008 Financial Crisis, mortgages have become arguably the most scrutinized product in consumer finance. Federal agencies have established a complex, multi-faceted, and often esoteric framework for the mortgage origination process. Further complicating matters, lenders increasingly engage vendors to underwrite and issue mortgages on their behalf. Lenders expose themselves to tremendous risk when outsourcing such a highly regulated function, and these arrangements are ripe for potential compliance pitfalls.

Working with third-party originators is a reliable avenue for growth in the mortgage space. But, effectively managing these relationships is no simple task, particularly for small to midsized institutions. An organization with limited resources can find their staff overextended and their costs inflated when trying to manage a wide network of originators. Let’s talk about three important stages in the vendor lifecycle and see how integrating technology from end-to-end might remedy these problems.

Vendor Qualification and Procurement

Lenders are expected to carry out extensive due diligence before engaging an originator, a process that can drain substantial resources and person-hours with no guarantee of pay off. Consequently, efficiency at the vendor qualification stage is key. Imagine working on a deal for months only to discover significant deficiencies in the vendor’s compliance—your procurement officer’s worst nightmare!

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Efficiency at the vendor qualification stage is key.

By integrating expert-system technology into these early phases of the relationship, your team can not only asses, but can also easily compare potential originators based on compliance posture, and quickly identify those that meet your needs. For example, if your organization often issues high-cost mortgages as defined in TILA and Reg. Z, you would not want to engage an originator with no formal procedures for identifying those qualifying loans. Being able to identify this early in the vendor qualification process allows you to differentiate between potential vendors early and avoid wasting resources on a noncompliant originator.

These critical compliance insights ensure that your vendors have addressed the specific issues that are important for both the vendor and your organization’s own compliance efforts. This unique degree of confidence in your vendor selection from the outset translates into a streamlined procurement process that saves you time and money. Get to the deal quicker and start reaping the benefits!

Ongoing Monitoring

            Precontractual due diligence is only the first stage in the vendor lifecycle. Ongoing monitoring is an equally important aspect of a compliant third-party originator program. Easier said than done. Regulatory landscapes aren’t monolithic; they shift and adapt to emerging practices in the ever-evolving financial industries. On top of that, your third-party relationships don’t stay the same either. A vendor engaged for one purpose may take on new roles as the relationship matures.

Staying up to date with regulatory developments and recertifying vendors can be a full-time job in itself, and when resources are tight, this component of oversight can easily lag behind the others, creating risk for your organization due to staleness. These gaps can expose your organization to any number of unforeseen compliance issues and compromise the reliability of your compliance program.

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Free up person-hours for more revenue-focused activities.

Using robust vendor oversight technology allows your organization to outsource this important but time-consuming task of maintaining vendor compliance at a substantially lower price tag than hiring outside consultants or legal counsel. For organizations that track regulatory developments internally, integrated risk management tools free up employee person-hours for more revenue-focused activities. These productivity advantages reduce your overhead and permit your organization to capitalize on opportunities you may have missed otherwise.

Board Reporting and Audits

A common pain point we hear from compliance teams and in-house counsel is the lack of data-driven information for board reporting and audit purposes. Financial institutions are required to involve their highest levels of management in their compliance efforts, and most agencies carry out regular compliance audits. Fulfilling these requirements without useful data regarding vendor compliance is difficult at best and potentially impossible.

The consistency of end-to-end technology integration consolidates the fragmented world of oversight into one location, providing your board of directors with a holistic picture of your third-party compliance health. With this new data, your organization can track compliance across the entire third-party lifecycle and identify potential opportunities for growth in your vendor relationships. Plus, when audit time comes, you’re ready. You can easily demonstrate that you take vendor oversight seriously without wasting time, energy, and money collecting information from each department.

This is only the beginning of how expert-system technology can save you time, headache, and money in the third-party vendor oversight arena.