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Rising Tide of Operational Risk Demands Due Diligence in Vendor Selection

Matthew P. Previn, Andrew P. Pennacchia

Considering the potential liability associated with outsourcing by the mortgage banking and mortgage servicing industries, as witnessed by widely publicized high-dollar settlements in government enforcement actions, recent comments of federal financial regulators, and guidance by the Consumer Financial Protection Bureau, servicers cannot be cavalier about the choice of their vendors, or select them with a check-the-box approach to due diligence. Instead, banks and mortgage servicers must ensure that their vendors perform critical mortgage servicing functions in a manner that is consistent with their legal and regulatory obligations and service level standards. Unfortunately, much that has been written on vendor selection focuses on intangible principles associated with risk reduction, with much less practical guidance available on “best practices” for identifying and selecting vendors. This article attempts to fill that gap, and focuses on practical criteria relevant to conducting appropriate due diligence on potential vendors.

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