The Consumer Financial Protection Bureau (CFPB) has broad regulatory authority of the financial services industry and reminded everyone of the fact that they also could exercise direct supervisory authority over third parties as well. Reference details here for more information regarding Compliance Bulletin and Policy Guidance; 2016-02, Service Providers.
CFPB Vendor Risk Guidance
That alone should be a clarion call to financial institutions to ensure they have robust oversight over their third parties. While the CFPB's guidance is not as prescriptive as that of the primary regulators, they have issued large enforcement actions through a statute called UDAAP, or Unfair, Deceptive or Abusive Acts or Practices. Throughout the guidance, the CFPB stresses the need for risk-appropriate due diligence and thorough oversight of the third party service providers.
Interestingly, the CFPB is not nearly as detailed in terms of other fundamentals of third party risk management. While they state clearly that the activity should be risk based, they give little insight as to how to appropriately assess that risk. Along with that, they also are not as step-by-step in contractual expectations as, say, the OCC guidance is.
The CFPB has, however, really used the loosely defined "Abusive" standard in UDAAP to wield broad control over both financial institutions and service providers, particularly those that market products that give rise to significant consumer complaints (e.g., credit repair, identity theft, fee-laden add on products).
Meeting CFPB Standards
Financial institutions should heed the enforcement actions' explicit warning and ensure they are conducting risk-based and deep vendor due diligence, along with having clear standards and practices for ongoing monitoring. To see a list of some stark examples of the CFPB's actions, please visit Payment Law Advisor.
All in all, thorough vendor risk management should start with the CFPB guidance but then be bolstered by the more prescriptive guidance of your institution's prudential regulator.
It’s important to do initial due diligence prior to signing a contract and then ongoing due diligence during the course of the relationship. Download our infographic to learn how to conduct proper vendor due diligence.