Mortgage

Vendor diversification: extra essential than ever

The advent of COVID-19 in our economy has forced mortgage lenders to scrutinize efficiencies and determine how to ensure uninterrupted, high quality service delivery.

As the recent pandemic has shown, a company's own service delivery can be at risk if the sole provider has a downgrade in their service level, does not have an adequate disaster recovery plan, or is not agile enough to manage unforeseen events. Now is a good time for financial institutions, including banks, as well as mortgage lenders and service providers, to review their supplier selection strategies to protect themselves against further supply chain disruption risk.

In manufacturing, it's not uncommon for companies to review their sourcing strategies and decide whether to work with multiple vendors or just a single source. This approach is also often used in the service sector. In a section of the Dodd-Frank legislation, regulators were asked to examine the supplier management practices of financial institutions, including the way they oversaw their third-party providers.

These reviews revealed critical weaknesses in the monitoring and surveillance of these providers. While one finding was that financial institutions are adopting multiple providers in the standard space, they have not necessarily considered this strategy for other services and products such as tax tracking and flood detection services. But they should.

The regulators, including the Office of Currency Auditor, Federal Deposit Insurance Corp. and the Consumer Financial Protection Bureau, have made it clear that the board of directors and management of an institution are ultimately responsible for managing the activities carried out through relationships with third parties and for identifying and controlling the risks arising from such interactions.

It is the responsibility of management to ensure that the activity is conducted in a safe and sound manner and in accordance with applicable laws. Failure to manage risk – operational, reputational, transactional and compliance risk – can expose an institution to regulatory action, financial loss, litigation and reputational damage, and even affect the institution's ability to build new relationships or serve existing clients.

To control these risks, regulators suggest that financial institutions should include in their risk management plan an initial due diligence, as well as a regular review and assessment of their service providers' resumption and contingency plans. The guidelines also aim to ensure that there is adequate oversight to determine whether risks and the quality of services are being controlled.

Despite the various risks, many companies still focus on the benefits of a single provider model in some business areas. All you need to do is build and maintain a relationship with a vendor as it may be easier and / or easier to streamline and integrate systems.

There may also be an opportunity to maximize volume for attractive prices from one provider. However, putting all your eggs in one basket and relying on a single source and supplier can create huge risks for your business and your customers.

A smooth flow of services disrupted due to capacity constraints, financial complications, mergers and acquisitions, quality issues, or national disasters can have a profound impact on a business. When there are two or more providers, a company can better handle disruptions such as storms or other business interruptions. A single provider also runs the risk of the parties' balance of relationships deteriorating over time, which can lead to reduced standards of service.

A multivendor model offers opportunities to leverage the competitiveness between providers. This could translate into better service levels and better volume fluctuation management when you have a choice of vendors to help you tailor order activity. This model also gives financial institutions better access to diversified pools of industry experience, innovation, and new technologies and products. In short, with multiple providers you can reduce your dependency on one provider and balance your risk.

Having multiple vendors can help redistribute risk, reducing the overall risk to the business. In this way, the financial institution can ensure that it can transfer activities to another third party with no downtime or impact on its customers in response to contract failure or termination, or with service interruptions or deteriorations.

It is important to be proactive; Now may be the time to evaluate your supplier sourcing strategy and decide whether it makes sense for your company to have alternative suppliers for your tax tracking and flood investigation services.

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