It did not take long after the Silicon Valley Bank failure for politicians in Washington to rush to the next available microphone and lament the “loosening of bank regulations”. Instinctively the finger pointing began, and in many quarters ended up in the direction of the prior administration’s policy to generally roll back stringent business regulations and allow free market decisions to govern various industries. Chief among the complainants (no pun intended) was Sen Elizabeth Warren, who emerged out of the 2008 crisis as an architect and advocate for the Wall Street Reform Act and the creation of the vaunted Consumer Financial Protection Bureau ( CFPB), which she briefly directed. Just yesterday in DC’s The Hill publication, Sen Warren was reported as blaming the the collapse of Silicon Valley Bank on Republicans in Congress, which in 2018 helped pass a law to ease bank regulations put in place following the 2008 financial crisis. “No one should be mistaken about what unfolded over the past few days in the U.S. banking system: These recent bank failures are the direct result of leaders in Washington weakening the financial rules,” Warren is quoted as saying. According to The Hill piece, Warren, who voted against the 2018 bank deregulation bill, said that the crises would have been avoided if the banks were required to hold more liquid assets because the bill exempted banks with less than $250 billion in assets from rigorous Fed stress tests. Warren and other Democrats say the old rules could have caught the issues at SVB sooner. Given that politicians generally “never let a crisis go to waste,” many now suspect that the banking industry is about to be slammed with heightened regulatory scrutiny, tighter operational rules, more audits and exams, and larger and very public fines, penalties and consent orders. What does this mean for independent mortgage bankers (IMBs)? It means that they have to get back to the compliance mindset they were frightened into adopting between 2008 and 2018, and before the bottoming out of interest rates led everyone to believe that easy money was here to stay and that self-regulation meant hiring more loan officers. Keep those risk management officers and compliance directors close by folks, we are all in for a bumpy ride on the regulatory

When the CFPB issued its Bulletin 2012-3 addressing third party service provider risk management, the industry largely responded with a blank stare.  Because most lenders had never developed risk management protocols and vetting processes for vendors, there was significant confusion about what they needed to do to satisfy regulators.

The Bulletin itself was somewhat vague and did not offer a specific list of tasks nor a roadmap or flow chart of detailed steps to ensure compliance and consumer confidence.  It did however indicate that ongoing monitoring was necessary, and that lenders were to “[t]ake prompt action to address fully any problems identified through the monitoring process, including terminating the relationship when appropriate.”

In the wake of the Bulletin the industry responded through private and public means, to provide appropriate tools to manage risk, including for example ALTA”s Best Practices initiative, and Secure Settlement’s third party vetting tool and nationwide risk database.  These efforts, and those by others, were designed to ensure minimum uniform standards of risk management and also provide critical data to allow a lender to assess whether or not a vendor posed a risk of harm prior to engaging in a business relationship.

What these efforts did not fully address was the continual evaluation of actual performance by vendors.  Beyond the licensing, insurance, internal controls, and background checks, there is more to the lender-vendor relationship and the impact the relationship might have on the consumer experience.  Is a licensed and insured vendor that has a solid business platform and clean business record competent at what they do?  Will the consumer experience be one that meets the reputation of the lender which has introduced the vendor into the lender-client relationship?  After all, someone can look great on paper but create a terrible consumer experience through their attitude, lack of experience, lack of professionalism, and overall incompetence.

Consequently lenders need to do more than just collect paperwork about vendors.  They need to actually measure their performance, both internally with operations and among their clients, to determine whether a vendor is doing their job competently.  This can easily be determined by periodic surveys of your staff and post-transaction surveys of your customers.  When poor performance is uncovered, a lender needs to address it with the vendor and determine whether the relationship should be adjusted or terminated.

However you choose to do it, performance evaluations are a critical component of vendor management and must be a part of your overall compliance toolbox.