Pepper Hamilton Financial Services Alert: The New Normal: Third-Party Vendors Under the Microscope

As the financial services industry continues to strive for efficiency, financial institutions, both deposit and non-deposit taking, are increasingly relying on third parties to perform banking or product functions that are either new to the industry or had traditionally been performed by the institutions themselves.

This increased reliance on vendors is driven in many cases by legitimate business reasons, most notably cost considerations as vendors are able to provide economies of scale, expertise or additional products that the institutions often could not otherwise achieve or develop on their own. Along with the benefits of vendor relationships, however, comes an enhanced responsibility to monitor these relationships to ensure that vendors comply with both federal and state consumer financial laws.

Most importantly, the use of vendors does not shield financial institutions from responsibility for vendors’ actions. To the contrary, financial institutions are solely responsible to regulators for vendors’ actions to the same extent as if the actions were taken by the institutions themselves.

This article reviews applicable regulatory guidance on how financial institutions must manage their vendor relationships and highlights the recent vendor-related enforcement actions taken by the Consumer Financial Protection Bureau (CFPB) and other federal regulators in 2012.

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By: Richard P. Eckman | eckmanr@pepperlaw.com
Andrew R. Mavraganis | mavraganisa@pepperlaw.com 

More Resources on the Dodd-Frank Act
For additional information, please visit Pepper’s Financial Services Reform Resource Center.