PERSON OF THE WEEK: Jim Vaca is vice president of vendor management operations at Altisource, a provider of software and services to the mortgage servicing industry. MortgageOrb recently interviewed Vaca to get his take on how mortgage servicers should approach vendor management in light of new regulations requiring stricter third-party oversight.
Q: In your opinion, what are some of the major challenges in establishing and maintaining a successful servicer-vendor management program?
Vaca: Although there are countless elements involved in driving successful vendor management, key aspects include being adequately staffed to handle the volume, leveraging technology to gain efficiency, and staying educated on evolving regulations.
Vendor management should not be a part-time job. There is an incredible amount of daily work required to establish and maintain a vendor management program. Technology can, and should, be utilized to gain efficiency by enabling compliance robots to automatically gather data from outside sources and facilitate vendor self-service capabilities. Vendorly is a good example of a platform that not only provides an efficient way to utilize technology to bring operational efficiency but also has the ability to outsource vendor due diligence and vendor audit functions that servicers traditionally have managed using internal staff.
Regulations are often complex and frequently change and servicers are held to a high standard of compliance so it is increasingly important to have processes in place to remain aware of – and to understand – regulations. There should be strong cross-functional collaboration within a company’s risk, compliance and legal departments, all operating under a documented governance structure. Although this is yet another non-core or administrative function, the amount of risk a good program mitigates is well worth the investment.
Q: Are there any components of a vendor management program that can be outsourced? What are the benefits and risks of doing so?
Vaca: There are many benefits of a combined in-sourced/outsourced approach to vendor management. The reality is that vendor management is not a core skill set of most financial services companies – nor should it be. That said, it is not something that can be completely outsourced. Mortgage servicers should have at least one person responsible for ensuring proper internal controls are being executed as well as to be a main point of contact for outsourced service providers.
The outsourced provider can handle vendor due diligence, document collection, financial stability analysis and even on-site audits. The key to success in this model is leveraging a shared technology so that a servicer’s vendor manager can readily monitor vendor compliance to internal standards. This model achieves the following three key benefits:
- It allows internal vendor managers to focus on more strategic activities such as vendor concentration risks or performance concerns;
- It brings immediate scale and efficiency to the servicer. Large teams don’t need to be maintained, or reduced, based on fluctuations of the number of vendors used; and
- By using what is becoming known as a shared-assessment approach, the outsourced provider is much more likely to see early warning signs of vendor risks when looking across multiple clients.
All things considered, outsourcing should not be taken lightly. If a mortgage servicer decides to outsource any part of its vendor management program, it should ensure that its outsourced providers have adequate experience in vendor oversight, proper information security protocols, a robust in-house technology platform and a high-touch service delivery model.
Q: What are some key elements to keep in mind for servicers when they are selecting vendors? Are there any best practices servicers can use for this process?
Vaca: Performing the proper due diligence prior to selecting a vendor will likely benefit both the servicer and the vendor in the long run. This includes a competitive bidding process, clear contracts with the requisite terms and conditions, and business certification checks.
An upfront way to mitigate the risk of a vendor issue is by having a strong request for proposal (RFP) sourcing process. Not only does the RFP drive down costs by encouraging competition, it also makes the business aware of other viable vendor options should they need to revisit the final vendor selection. The RFP process is an excellent way to educate your business on the various approaches other vendors are taking to fulfill business needs.
Once an RFP has been completed, the contracting process can be very telling. Not only will it help baseline the scope of work to be completed, but noting where vendors push back on certain terms and conditions can reveal any weaknesses or concerns a servicer should further probe.
Lastly, performing thorough certification, including at least annual refreshes, on a selected vendor ensures they’ll not only be able to meet contract obligations but that they are properly licensed, have a clean history and have the financial and operations in place to not pose undue risk to a servicer’s reputation or operations.
Q: What are some best practices early in a servicer-vendor relationship that can pave the way for successful communications and operations, moving forward?
Vaca: Building solid relationships is crucial to success. It is important for servicers and vendors to work together – whether to ensure compliance with new regulations or simplify the mortgage process for a homeowner. It begins with a solid RFP process followed by contracting and then relationship management.
During the RFP process, the end-user department should clearly state its expectations for service providers. Part of the selection process should include a broad team from the servicer meeting with one, or several, potential service providers to ensure all requirements are understood. Once a service provider has been selected, a well-documented statement of work should memorialize deliverables, service-level performance metrics, termination conditions and penalties for nonperformance.
Servicers should also ensure that vendors understand all expectations of the relationship and that both the business function and service providers have a “neutral” party, such as a vendor management department, to turn to should any concerns begin to surface. Implementing formal quarterly reviews is a great place to start. Ultimately, the more time spent upfront hashing out details around expectations and requirements will ensure a smooth transition into the work being done.
Q: Compliance is top of mind for regulators, particularly with updates and changes to legislation that have occurred in the mortgage industry in recent years. What steps can servicers take to make sure their vendors stay up-to-date on new regulations and remain compliant?
Vaca: Given the rapid evolution of regulatory updates, it’s important for mortgage servicers to employ qualified internal resources so they don’t solely rely on vendors in order to remain compliant. Some type of applicable law and regulation matrix should be built and maintained – and then supplemented by feedback from vendors. Fully outsourcing compliance is not a sound strategy; ultimately, it is impossible to deflect the responsibility to abide by the laws and regulations.
In addition to having an internal department that helps companies to stay abreast of changes in the regulatory landscape, servicers and vendors can stay educated on the latest regulations by attending conferences such as the MBA Legal Issues and Regulatory Compliance Conference. Such conferences not only educate but also offer exposure to the ways that peers are solving compliance issues. There’s always more than one way to meet the spirit and written language of new regulations. Engaging in discussions with peers is a viable path to more easily solve for new requirements.
Q: The mortgage industry is constantly developing technologies to streamline processes. What technology trends are you seeing and what kinds of technologies are available right now to improve vendor management and oversight?
Vaca: The scrutiny of vendor oversight practices is a leading issue impacting new technology solutions across the industry as mortgage and community bankers, as well as servicers, build multifaceted vendor oversight programs. Technology platforms like Vendorly can help strengthen customers’ compliance management framework and increase their operational efficiencies. In some cases, these types of technologies offer outsourced managed vendor oversight services – including due diligence, document management, annual assessments, information security assessments, financial condition reviews and on-site audits – helping to streamline processes that must remain in line with the latest regulatory guidelines.
A recent shift is the move to shared due diligence and self-service, where vendors can access systems directly to comply with various oversight requirements, which are then shared across clients of the technology. This not only brings efficiency to the client that needs the oversight but also allows the vendor to be much more efficient by meeting multiple client requirements with a single, consolidated response.
It cannot be ignored that increased oversight requirements have become burdensome to both clients and vendors and technology can, and should, help reduce that. The goal is fewer, but more meaningful, responses.
Q: What are your thoughts on companies that provide shared due diligence databases of vendor information? What are some questions that a servicer should keep in mind if they leverage such a database?
Vaca: Partnering with companies that provide shared due diligence databases of vendor information can be beneficial from an efficiency perspective. That said, one specific thing for servicers to keep in mind is to understand and validate the current controls and compliance processes these companies have in place. Misunderstandings around processes and best practices may ultimately burden vendors and put servicers’ businesses in a difficult position. It is important that the due diligence on the vendor while shared should also be able to be customized to specific requirements.
The major takeaway is that servicers must understand that while vendors and outsourced vendor oversight solutions are a helpful line of defense and an integral part of a sound compliance management program, they should continue to have strong internal compliance and risk resources to maintain ownership and accountability.
Q: What do you see as one of the major risk areas in the default management space for servicers?
Vaca: Frequently changing regulations and balancing a proper risk appetite framework are major pain points across the industry. Staying educated on the latest regulations and also ensuring that both servicers and vendors remain compliant while moving through the mortgage process is vital to the health and continued function of businesses.
There are a variety of ways to manage risk though, and a lot of this comes down to communication and transparency. The use of vendors sometimes brings the assumption that hiring a vendor to perform data or compliance tasks means that servicers do not need to stay abreast of these activities. Although using vendors allows the proper focus to be placed on several aspects of the core business, it is key for servicers to understand the work that vendors are doing and to ensure that they are taking steps to learn and apply compliance and performance monitoring practices that protect against reputational, operational and transactional risks.