The mortgage servicing industry has been in the spotlight for the past few years with the exposure of robo-signing and the overall lack of regulation. Until recently, mortgage services were only audited by the Government Sponsored Enterprises (GSE), such as Fannie Mae and Freddie Mac, or by state agencies where the servicer is licensed. These audits typically focused just on the servicer's operations and did not extend to the vendor level. With the Attorney General's settlement in February 2012 and the Consumer Financial Protection Bureau (CFPB)'s on-going changes, servicers are now accountable for their vendors' performance, especially around foreclosure actions.
Prior to 2009, a Vendor Management Office was a luxury to have and looked good for investors and rating agencies. Now, mortgage servicers must show that they are managing vendor relationships and holding vendors accountable to the ever-changing regulation and compliance guidelines.
What Is the Vendor Management Office (VMO)?
The VMO consists of a team that assists the company with vendor selection, contract negotiations, handling the contract terms and time sensitive materials, and monitoring vendor performance, risks and on-site reviews.
A mortgage servicer can easily have more than 250 vendors once you consider the various services utilized:
- Asset Managers
- Broker Price Opinion (BPO)
- Escrow Services
- Eviction Firms
- Investor Reporting
- Lien Alert
- Lien Release Services
- Property Management
- Property Preservation
- Tax Monitoring
- Title Curative
- Title Search
- Trustee Title Services
- Trustee Vendor
The above list doesn't even include the IT vendors that support the systems, phones, and dialers or any vendors that handle customer service, third party collections, facility, finance or human resources.
A VMO will encounter the following 5 challenges when dealing with so many vendors:
- Management of multiple vendors/lines of business
- Management of contracts & their expirations
- Document management
- Vendor audits
- Investor & regulatory audits
Challenge #1: Management of Multiple Vendors/Lines of Business
Complexity of Mortgage Servicing
There is often a lack of transparency with vendor utilization and it is easy for each line of business (LOB) to silo their own vendors. A VMO can help create efficiency and transparency across LOBs with better vendor utilization.
Example: A mortgage servicer orders property inspections from two different departments (late stage collections department and the property preservation department) for the same property — each for a different purpose and using a different vendor. A VMO can help spot any redundancies, thus resulting in a lower cost of property inspections by using one vendor.
A mortgage servicer relies on multiple vendors to perform services on behalf of their company. If a borrower defaults on a loan, even more vendors may be utilized to get the borrower out of default, preserve the property or provide other options for the borrower and investor.
A VMO needs to be able to have multiple ways of displaying the vendor lineup, such as by type of service, by business owner and by department.
If the mortgage servicer does not have a vendor that supplies an attorney network, this could lead to a huge risk for the servicer as the servicer becomes solely responsible for any errors the attorney makes. The servicer should either find a vendor that will back their attorney network or the servicer should build their own attorney network. Either way, the servicer should know which firms represent its company.
Furthermore, if the servicer services Freddie Mac loans they will need to verify that the attorney firm is not on Freddie's Exclusionary List.
If you are a nationwide servicer your attorney network can be 50% of your vendor line up, which would be a large list to manage in a spreadsheet.
Challenge #2: Management of Contracts & Their Expirations
Whether contracts auto-renew yearly or terms have to be renegotiated annually, the servicer will want to use the renewal time as a guide on when to start their annual review of the vendor. Most contracts have a termination clause of 30 or 90 days notice prior to the expiration of the contract. A best practice is to have a performance review with the supporting line of business 90 to 120 days prior to the notification notice. This way the servicer can review the performance of the vendor and determine if they want to renew the agreement, champion/challenge the vendor or search for a new company to provide the service.
A vital component of vendor management is to know all contract expiration dates. This is a task in itself as you have to manage multiple types of contracts for one vendor. There is usually a Master Service Agreement (MSA) along with a Statement of Work (SOW). Some vendors may be the parent company of multiple affiliate companies that will perform services for the mortgage servicer. If that is the case it is best to have an MSA with the parent company that has affiliate language in the MSA and then have SOW's for each affiliate that provides services. The affiliate SOW's should always reference back to the MSA. There is a potential to have multiple expiration dates for services.
To limit risk exposure, the VMO must ensure all active services performed by the vendor are included in a contract and the contract has not yet expired.
Challenge #3: Document Management
Certificates of Insurance (COI)
The mortgage servicer should obtain a COI from each vendor to ensure that the contractually agreed upon insurance coverage is in place. The VMO will need to manage the expirations of the policies and ensure they have the latest COI to avoid any risks in the vendor not having sufficient coverage.
Vendor Performance Due Diligence and Risk Reviews
Tracking vendor performance is key to any successful relationship with vendor. Reviewing trends and anomalies has to be documented, communicated and tracked with the vendor. Having the ability to access and track the reviews can be used in leverage to renegotiate the contract terms or to use as a benchmark to champion/challenge potential vendors.
It is imperative to have a central repository to store all contracts, performance and risk reviews, COI's, financial reviews and any other vendor-related documents. All documents need to be backed up for Disaster Recovery (DR) purposes and must adhere to company and regulatory guidelines.
The banking and finance industry has been notorious for storing hard copies of documents. The Internet evolution has made it easier to store soft copies of documents now in a cloud. One thing I have personally included in my agreements is to have the clause, "Facsimile, electronic or copies of signatures are deemed to be equivalent to original signatures for purposes of this Agreement", then you will not have to worry about obtaining an original hard copy with signatures.
My "best practices" recommendation is store soft copies in a SSAE 16 certified location and use the company's internal shared drive as a backup.
Challenge #4: Vendor Audits
A best practice is to randomly audit vendor invoices and to have controls in place through an Accounts Payable (AP) system that will create a manual approval for any invoice that doesn't match the contractually negotiated price.
The VMO should either control invoice submission from vendors or at least be engaged with vendor invoices to ensure compliance against negotiated contract rates. Especially if getting reimbursements from the GSE's, the servicer will have to ensure the vendor is invoicing the proper fee amount for the loan as stated by the specific GSE.
No matter what AP system a mortgage servicer has, the VMO will want to audit the thresholds set in the AP system for pricing. If the servicer doesn't have an AP system that is able to link to a vendor management system, then random manual audits are a must. Audits should always be performed by a non-biased party such as vendor management.
Vendor Risk Reviews
Vendor risk reviews for mortgage servicers over the past few years have expanded to: how vendors handle consumer protection; fair, consistent and ethical practices; and vendor stability.
In addition to the national, state & local regulations, the mortgage servicer should also identify their own risk criteria.
- Does the vendor have a DR plan?
- Does the vendor need to be SSAE 16 compliant?
- Does the vendor have a pandemic plan?
Because the risks inherent in each vendor will differ, the mortgage servicer should utilize multiple risk assessments based on the type of vendor and ability to create your own scoring model for the type of service the vendor will provide.
The mortgage servicer must also set a frequency for the risk reviews and determine what to do if the vendor is considered a high risk. Do you terminate the vendor, put the vendor on an action plan or reevaluate your risk assessment score?
Performance and Contractual Compliance
To determine if the vendor is performing as expected, you should meet with the business that utilizes the vendor, review the vendor scorecards and validate that the data is accurate. At a minimum, annual performance reviews need to be conducted, especially if the vendor has a relatively high risk rating.
Onsite reviews are a necessity not only to build relationships but also to see how clean the shop is. When performing the onsite review, bring your risk review to validate that the vendor's responses are in line with what you observe. If possible, take your quality team and business owner so they can view the site as well.
Vendor stability should be determined after you have:
- Completed the risk review
- Performed financial and IT audits
- Viewed Hoovers and/or Dunn & Bradstreet reports (if applicable)
- Reviewed any vendor incidents that occurred
Challenge #5: Investor and Regulatory Audits
If you have ever been audited by an agency and lacked a formal vendor management system, you know that it can be very difficult to pull all the data together to satisfy the audit requirements.
A poor audit could have considerable consequences. Depending on who the auditor represents, the mortgage servicer may lose their license to collect in a certain state if it is a state auditor. Other types of audits could reduce your servicer ratings such as Fitch, S&P or Moody's. Currently, a negative GSE audit would have the biggest impact — the servicer could be prohibited from servicing their loans.
The VMO will need to manage a list of active vendors and what type of services the vendor performs. Auditors will also want to ensure IT security has been met with the vendors that handle the mortgage servicer's non-public information. Usually this is satisfied with a current SSAE 16 (formerly SAS 70) report. The auditor may also need to have a gap or bridge letter for any gap in dates between the reports. Auditors may also ask to review contracts, policy and procedures, vendor on-site reviews and risk questions.
How Can Vendor Management Software Help?
As you can see, a VMO has its hands full, especially when dealing with a large number of vendors and the accompanying need for documentation.
Ideally, vendor management software should:
- Help you identify your vendors quickly
- Notify you ahead of time of contract expirations & upcoming reviews (performance, diligence, risk)
- Access and report on past reviews to see any historical trends
- Store insurance policy & contract documents in a secure location
- Display each vendor's risk level & allow for review scheduling based on the risk rating
- Provide multiple review templates to account for the varying types of services provided by vendors
- Track vendor incidents
- Provide an easy way to access & report on information that the auditors will be asking for
Paul Boone is an experienced VMO manager. Connect with Paul on LinkedIn.