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The Office of the Comptroller of the Currency states explicitly in an October 2013 bulletin guidance for risk management that it "expects more comprehensive and rigorous oversight and management of third-party relationships that ... could cause a bank to face significant risk if the third party fails to meet expectations." The Federal Reserve, CFPB and HUD have issued similar directives.
Clearly, oversight of third-party service providers is a primary area of concern for regulators and one they will be closely scrutinizing. This makes vetting field managers’ vendor management practices a new requirement even though it is not specifically stated; this is the core of the field managers’ business. This vetting is essential, since a broad range of practices are now being utilized to manage contracts and inspectors.
Field managers—and their mortgage servicer clients—will be held accountable for the actions of all contractors and inspectors, good or bad, as evidenced by new regulations and litigation. These actions range from hoping to achieve different results with outdated management practices to creative solutions that may or may not be ideal for protecting the client’s interests.
Properly monitoring the vendor management practices of field managers not only encourages collaboration between all parties to promote optimal Vendor Management Best Practices (VMBP), but also fosters a level of quality and professionalism from contractor and inspector networks that will meet continually evolving regulatory requirements.
New best practices must include a thorough audit of four key areas: recruitment, training, compensation, and quality assurance. These four areas have the most influence on the professionalism, quality, and level of care of all services performed, which will ensure compliance with regulator’s elevated expectations and minimize servicer risk.
1. Recruitment – First, field managers should ensure that all contractors and inspectors are recruited through reputable mortgage field service associations, such as the National Association of Mortgage Field Services (NAMFS). Industry networks offer an experienced talent pool of professional vendors who have a thorough understanding of the regulations and the impact their actions have on compliance. Most other recruitment methods will result in a substandard vendor network.
2. Training – Third-party certification, such as NAMFS Academy Certification, standardizes training and provides a method for auditing the skills and diligence expected of those who have been certified. In-house training programs put in place by field managers should be directed at company-specific policies and procedures and not at teaching inexperienced individuals who are essentially "contractors and inspectors" in name only how to perform services.
3. Compensation – In any industry, quality of services rendered is directly correlated to compensation. Any change in compensation will have the greatest positive or negative impact on quality. This has been painfully obvious in the mortgage field service industry over the past few years. Historically, mortgage field service quality was at its highest when contractor and inspector invoice payouts were all in the 75 percent range.
Although volume discounts by large-volume servicers is a valid approach, an unfortunate consequence has been an extreme adaptation of this model, causing cut-rate pricing for contractors and inspectors. It is becoming commonplace for contractors and inspectors to be paid only 25 percent of the invoiced amount on already reduced volume-priced services.
On top of that, the work may also be further subcontracted. These multiple levels of fee reductions compound the negative impact on quality because it has eliminated both the financial means and financial incentive for contractors and inspectors to perform exceptionally. Additionally, fee reductions are a major contributor to the high turnover rate and poor levels of care seen over the past several years, and why efforts to increase quality have had minimal impact.
4. Quality Assurance – Conducting an independent survey of each field service manager’s vendor network is the only true way of knowing if the vendor management practices the field management companies report to be in place are in fact being followed to protect servicer interests. Field managers should not be involved at all in the survey, and both current and past contractors and inspectors must be surveyed to identify areas of needed improvement.
Trends identified during these surveys can quickly reveal vendor management practices that would expose servicer organizations to easily avoidable substantial risk, such as detrimental recruitment, training, and compensation practices.
Servicers accountability risks will be mitigated by implementing more extensive vendor management audits that ensure VMBP implemented throughout field managers operation by promoting responsible business decisions. Any company that is in the processes of implementing these very practices will gladly welcome such audits to differentiate their organization by quality of services and level of care and not just by pricing models.
Such audits foster dialogue that will attain greater understanding and better results industry-wide in the area of vendor management as regulations evolve, providing much needed credibility to the default management process. This type of proactive audit approach will also help avoid tougher and more costly future regulations and guidelines.
