Banking during the COVID-19 pandemic has been an exercise in nimbleness and flexibility. Financial institutions have persevered to adapt their everyday functions to the world of social distancing—in many cases launch new programs in record time.
That’s especially true for FIs involved in small business and mortgage lending. From the Paycheck Protection Program (PPP) to mortgage forbearance, FIs have scrambled to adjust to new rules and help customers obtain much-needed funding.
Vendors Need to Keep Pace with Change
While some FIs go it alone, many rely on third-party vendors to provide these lending services. Those FIs need their vendors to be able to keep pace, adapting quickly to regulatory changes and the needs of the FI. It’s a departure from the typical blueprint for change where regulation comes slowly with plenty of advance notice and changes to lending programs are carefully evaluated over a period of time.
Just consider the Coronavirus Aid, Relief, and Economic Security Act (more commonly known as the CARES Act) which Congress passed in March. In one of the lesser-known provisions, the CARES Act altered Reg V and dispute responses. The law gives lenders 45 days to research dispute responses instead of the usual 30.
When lenders research disputes, they typically consult vendor lists of reported disputes. It’s important these vendors adjust their systems, if needed, to ensure dispute information is available for 45 days. If dispute information disappears off the system after just 30 days, FIs won’t have access to correct data and could end up with a compliance violation.
Meanwhile, third-party underwriters and loan processing systems need the flexibility to add new, compliant products like PPP or specialty loan products related to mortgage lending. Appraisers and title companies may also need to make adjustments.
Contracts & SLAs as a Risk Management Control
How does a FI guarantee that its vendors will keep pace with new regulations and provide updates to support emergency initiatives?
The answer lies in the vendor agreement.
Vendor agreements, including the service-level agreement, should clearly define roles, expectations, and timeframes.
For example: What does it mean to be compliant with laws and regulations? Don’t just say you expect the vendor to be compliant. Define what it means to be compliant and specify how that is measured. Is there an expected timeframe for compliance? Are there provisions for fast adoption in situations with a short turn around? If non-compliance isn’t an option for your institution, it can’t be an option for your vendor either.
The same goes for system changes. Your FI might never have envisioned a situation where a new program had to quickly launch or substantial changes had to be made in a short timeframe. In future contracts, it should be addressed.
Crisis management is hard enough without cajoling a vendor into supporting your efforts. Make sure your contract and SLA is designed to ensure prompt compliance with regulatory changes and the ability to make quick adjustments if necessary.
To learn more about the regulatory challenges presented by COVID-19, join us for our webinar Fair Lending & COVID-19: Strategies for Maintaining Fair Lending Compliance on Wednesday, May 13, at 2 p.m. CT.