Vendor Management Policies - What's Really Involved?

Click here to download a copy of the vendor management approval process

checklist.  Comment below or in the blog and learn how to get an up-to-date policy

for your company that gets maintained for free.

Free Vendor Management Checklist

We make the assumption that our business partners all comply with the rules and regulations of our common business.  If they don't, we have been used to the idea that we can simply say "Not my fault!"  Unfortunately, while the idea of "plausible deniability" seems comforting,  the industry no longer allows us to blame someone else for ignorance.  We now need to manage our vendors.

Participate in the Vendor Management Survey here 

The CFPB's mandate for Vendor Management is over 1 

year old .  How do you comply?

Don't Fall Prey to Regulatory Paranoia

In the same way that some compliance firms use the fear of CFPB audit as a marketing prompt, Vendor Management occupies that same space in mortgage industry participants' chest of fears.

This is the News Flash that wasn't:  CFPB requires financial entities to oversee their vendors for compliance. "We need to have vendor management policies and procedures?  That is such a compliance burden!"  Wait a second.  Don't we already do this?  The answer, for firms who have already initiated standard mortgage industry operating procedures, is yes.  Vendor management has long been a function in the branch operations process.  We have always approved appraisers, title/escrow companies, couriers, PMI companies and credit bureaus, to name a few.  For those of us who are in wholesale, we have always approved our brokers and correspondents.  Since we do this anyway, it is important to examine whether we are doing it correctly.

I Have Covered the Basics - Who Am I Missing?

This depends greatly on your business model.  Who is customer facing?  Who presents an information security risk?

The easiest way of ensuring you have captured all of your vendors is to go through your accounts payable register and your office correspondence.  Is there anyone there who looks at your customer's information?  Do they have access to your office?  Do they ever interface with your customers?  At a minimum

• Title Companies/Escrow/Settlement
• Appraisers
• Credit Bureaus
• Mortgage Insurance Company
• Courier/Delivery
• Mortgage Brokers
• Mortgage Wholesalers
• Lead Generation
• Office Cleaning
• Temporary Staffing
• Accountant/Bookeeping
• Web/Network Hosting
• Document Destruction
• Records Management
• Consultants
• SOFTWARE (SaaS)
• Sub-Servicer

What Am I Checking Them For?

Again, depending on the provider and the scope of its business you will address different elements.  Customer facing vendors have to comply with the same laws we do, while all vendors should have basic elements in place:

Background and Reputation

You should consider the background and reputation of ALL providers regardless of the level or type of service it provides.  At a minimum, check the internet, BBB, and the agency disbarred lists including FinCen, FNMA, FHLMC, and LDP as well as others you regularly check.  Individuals should have a background check of the court records in their jurisdiction.  The provider should be prepared to allow you request enough information to make a meaningful search.  Consider the difficulty of conducting a check without the name and address information of the principals.
  

THEIR Compliance Program

Consumer Facing/Access - Tier 1 or 2 depending on the type of information vendor has access to:

Even though LOS/Credit SaaS vendors are not consumer facing, they have access to the customer's information, so should provide this information as to customer identifying information.  

• Truth-in-Lending Act
• Real Estate Settlement Procedures Act
• Flood/Disaster Protection
• Right to Financial Privacy Act
• Credit Practices Rule
• Fair Housing Act
• Equal Credit Opportunity Act
• FACT Act
• SAFE Act
• Appraiser Independence

Non-Consumer Facing - Low Risk Tier 3

• Information Security 
• Criminal Background Checks

Do I have to hire someone to manager my vendors?

Vendor management simply means the process of monitoring things that are being done on our behalf.  You do not have to hire someone.  In fact, if you do hire someone you have to vet that contractor as well!  In addition, much of the work done to manage this information is borne by the client since the company has the access to the customer information.

Order our Vendor Management Policy and Procedure and receive free access to updates as you provide feedback!

Companies Offering Vendor Management Services

Fortrex Technologies - David Bedard
Vendor Audit - Lenders Compliance Group
Appraiser Management - Global DMS, Melissa Key

Really? That's all you've got??

"Could use some insight here with what makes one Mortgage Broker better than the next....

Had a client ask me today what I thought differentiates one mortgage broker from the next and, honestly, I didn't have an answer other than the boiler plate response of "integrity, honesty, etc.". Was just curious if I could get some feedback in this group so I could give her good advice. Thanks. D"

I'd be worried about a business that doesn't have a competitive value proposition. If you can't answer the question "Why should I do business with you?" you are in trouble. 

Saying "I give excellent service" is what we call a "claim" - you're saying it, but there is no way to prove it. It's like trying to define "quality". Saying "we have integrity and honesty" is also a claim.  In these cases an unproven claim is worse than nothing at all, because it reinforces the opposite impression in the buyer's mind.  They think "you're bringing it up, so it must be a problem."  So when you say "I'm honest" they think "He's a liar."  When you say "We have excellent service" they think "I'll never get to closing."  Stick with statements that are factual and that you can prove.

Ask me the question! My crib sheet:

As a broker - compared to other brokers - I help you:

1.) make better decisions by evaluating your options completely using my "pre-qualification system", which means you can borrow with confidence 
2.) make sure you get to closing on time by using my "complete application system" which ensures all documentation that could possibly be required is obtained upfront. This also means that you get a better rate, because the lenders know my files are complete, they approve my loans more quickly and offer me better pricing. 3.) get extra value by leveraging my "referral network system" business relationships to choose better vendors offering better prices 

That's for starters!

If you are a true broker, though, you should really leverage your value proposition by searching for financing sources outside of those offered by traditional warehouse/correspondent relationships. If all you offer is agency product, you are at a competitive disadvantage and will compete only on price. As a broker-owner my 2nd biggest job (behind business development) is finding brokered product that no one else has. For instance:

1.) A local bank that offers a special product (I am always surprised to find banks offering high ltv, and low rates, without PMI as well as other niches which they don't advertise - they are their own best kept secrets) 
2.) local life or casualty insurance companies looking for mortgage investments, 
3.) industrial loan associations,
4.) private lenders 

You generally have to work with borrower paid comp on these, but THIS IS THE BROKER BUSINESS MODEL - assembling a suite of products that one lender couldn't possibly assemble.

Finally, national lenders can't be as flexible in building a business around the local needs as a broker can. For instance: 

1.) you are near a military base: "We are the experts in providing financing for servicemembers"
2.) your market has a lot of 1st time buyers/renters: "We are the experts in FHA/HomePossible programs." 
3.) you market has an industrial component: "we have hundreds of programs for self-employed business owners." 

Obviously, these are simply examples, but you should think this through as it applies to you. It should roll off your tongue without having to think about it. 

Imagine going to a bank and asking for a loan for your business; why should I lend you money. It's the same thing with a customer, referral source, business partner: Why should I do business with you?

A Wave of Compliance Manager Duties Crashing Down On You?

Compliance Manager - Mission Impossible?

Of all of the groups benefiting from the wave of regulation, one has created the hottest job in the industry today -  the "Compliance Manager."  If you wear the "Compliance Hat" you know that this is just the industry looking for another panacea - a silver bullet to manage the seemingly overwhelming task of keeping up with the rules and regs tsunami.  If you are a company owner or manager, you WANT a silver bullet (if not to just shoot yourself with!)

Reading the job descriptions in association with the Compliance Manager job posting, you would think the job is kind of amorphous; alot of "and other duties as may be assigned in order to comply with regulations..", or "and other regulatory requirements..." To me that is an anathema to the position.  We want to be as specific as possible about the job duties.  We need to specify WHAT that individual needs to do AND when.

A Simple and Practical Approach

What are the duties of the Compliance Manager?  This rubric attempts to manage the responsibilities in a finite way. Click here to add comments and suggestions to the sheet. 

We have seen a substantial growth in "Compliance Management Software", too.  This is a reaction to that same search for panacea.  Even with automation of data management, audit and reporting there still must be someone to parse the data and verify its timing and accuracy.

Since it's the human process that makes the program effective, we have upgraded our compliance manager position description to include these elements.  This also ties in with all of the requirements of the CFPB audit guidance, so that if you are anticipating a CFPB examination ensuring you have implemented.  If you are a subscriber to the updates you can get them on our Document Management Website.

REMINDER: Phase 2 of HUD Adjusted Net Worth Requirement Goes Into Effect 5/20/13

If you cannot comply:

If at any time the net worth or liquid asset requirements fall below the required minimum, the lender or mortgagee must notify the Lender Approval and Re-certification Division within 30 days, and provide a Corrective Action Plan describing steps taken to correct the net worth or liquid asset deficiency.  Lenders and mortgagees non-compliant with net worth or liquidity asset requirement must notify HUD by sending an e-mail to recert@hud.gov. The e-mail should contain a letter signed by a corporate officer describing the corrective action that has been taken to correct the net worth or liquid asset deficiency.  The e-mail should also contain a copy of the lender or mortgagee’s un-audited financial statements for the most recent quarter certified by management.  The letter should be addressed to:

Director, Lender Approval and Recertification Division

451 7^th St SW, Room B133/P3214

Washington, D.C. 20410

Failure to comply is grounds for an administrative action by the Mortgagee Review Board.  

Phase Two of the net worth requirement was published in Mortgagee Letter 2010-20 dated June 11, 2010.  The requirement is provided below:

·         Participation in Single Family Programs. The final rule provides that, irrespective of size, all applicants for approval and lenders and mortgagees with FHA approval as of or after May 20, 2010, that wish to participate in FHA single family programs must possess a minimum net worth of not less than $1,000,000 plus an additional net worth of one percent of the total volume in excess of $25 million of FHA single family insured mortgages originated, underwritten, purchased, or serviced during the prior fiscal year, up to a maximum required net worth of $2.5 million.  Not less than 20 percent of a mortgagee’s required net worth must be liquid assets consisting of cash or its equivalent acceptable to the Secretary.

·         Participation in Multifamily Programs with Engagement in Mortgage Servicing. The final rule provides that, irrespective of size, all applicants for approval and lenders and mortgagees with FHA approval as of or after May 20, 2010, that wish to participate in FHA multifamily programs, and that engage in mortgage servicing, must possess a minimum net worth of not less than $1,000,000 plus an additional net worth of one percent of the total volume in excess of $25 million of FHA multifamily insured mortgages originated, underwritten, purchased, or serviced during the prior fiscal year, up to a maximum required net worth of $2.5 million. Not less than 20 percent of a mortgagee’s required net worth must be liquid assets consisting of cash or its equivalent acceptable to the Secretary.

·         Participation in Multifamily Programs without Engagement in Mortgage Servicing. The final rule provides that all applicants for approval and lenders and mortgagees with FHA approval as of or after May 20, 2010, that wish to participate in FHA multifamily programs, and that do not engage in mortgage servicing, must possess a minimum net worth of not less than $1,000,000 plus an additional net worth of one half of one percent of the total volume in excess of $25 million of FHA multifamily insured mortgages originated, underwritten, or purchased during the prior fiscal year, up to a maximum required net worth of $2.5 million. Not less than 20 percent of a mortgagee’s required net worth must be liquid assets consisting of cash or its equivalent acceptable to the Secretary.

In Textbook First Case, CFPB Shows its Willingness to Prosecute Even Small RESPA Anti-Kickback Violations

Click on this image or this link to read the entire 

consent order detailing the kickback scheme 

employed in Texas

In pursuing, investigating and prosecuting a case involving a relatively small builder in Texas, the Consumer Financial Protection Bureau (CFPB) finally puts some teeth into one of the most pervasive corruption schemes in real estate.  Kickbacks, where one party pays a fee for the referral of business, purportedly occur with high regularity according to ad-hoc interviews I have conducted with mortgage industry participants.  If you believe that the small size of your company or number of transactions makes you too small small of a fish to appear of the radar of the CFPB, perhaps you should think again.

This mechanism of policing is reminiscent of the "Broken Windows"1 policies of many urban police departments when attempting to corral the escalation of crime.  In this case the CFPB is cracking down on smaller schemes to stop the pervasive use of shams to avoid the law.

When I was breaking into the mortgage business as a loan originator I was regularly offered business conditioned upon matching the referral fee my competitors paid.  Fortunately for me, I worked on a very thin margin and the amounts that these individuals demanded often exceeded what I would receive as compensation. But this illustrates the moral and legal problem with the Kickback Scheme:  You have to increase your fees to cover the cost of the payment.  Who pays for the referral fee?  Though indirectly, the borrower pays, through a higher rate or fees charged to offset the higher commission needed to pay the referral.

Anyone who has taken a continuing education course in mortgage lending knows that the creation of affiliated business referral business, while legal, must provide a legitimate service and add value to a transaction.  HUD developed a ten point test to determine if an affiliated business was legitimate or a "sham"; an artifice designed to serve as a mechanism for kickbacks.

When you read the findings in this case it would be clear, even to a novice, that the Texas builder's mortgage subsidiary was a sham.  It had no employees, did not advertise, did not maintain a separate office and the only business it ever conducted consisted of the referrals the builder made.

The saddest part of stories like this is that, in addition to paying a higher price, these borrowers and real estate professionals were deprived of the real value of the loan officer's services.  When I conduct CE or PE licensing, business development or new loan originator training classes I always talk about the value the loan originator adds to the business of his or her referral sources:

1. A good loan officer is a pipeline manager: By qualifying prospects, I save my real estate/builder referral source's time by identifying borrowers who can go purchase now so he or she can focus on a qualified customer.  This is his or her current business.  Many loan originators stop here.  More importantly, I can work with those customers who are not capable of acting right now and make sure they get the counseling and help they need to achieve their goals in the future.  This is their pipeline of future business.  
2. A good loan officer helps you close more business: Not just getting to closing, but getting the customer to commit to a transaction as part of the sales process.  Often, the major impediment to a customer writing a contract is fear of the unknown.  By providing loan options counseling and exposing all of the costs the customer has less fear of the unknown, allowing him or her to write an offer with confidence.  
3. A good loan officer is a business development resource: For all of the business loan originators develop through referral sources, between 40 and 80% of a loan officer's referrals are self generated from his or her own networks and book of business.  We refer our for sale by owner customers and first time buyers to our agents. We refer. A single real estate transaction referral is worth far more monetarily than an 1/2 point kickback, it is much more sustainable relationship as it is built on trust, and it doesn't cost the customer a thing.  

Thinking back to my early days as a loan officer and the kickbacks solicited from me, I noticed a certain character to the individuals and businesses engaged in these practices.  They represented the margins and lower echelons of real estate and often seemed to struggle for survival.  On further reflection I am even happier that I did not participate in this practice because if these players were that desperate for 1/2 a point what else would they do (like perpetrate fraud) to earn money?  It's important to evaluate your business partners beyond one transaction.  Failing to do so might land you in jail.

1  The Broken Windows theory was introduced in a 1982 article by social scientists James Q. Wilson and George L. Kelling. The theory states that maintaining and monitoring urban environments in a well-ordered condition may stop further vandalism and escalation into more serious crime.