Lenders Compliance Group of Companies
On June 7, 2017, the Office of the Comptroller of the Currency (OCC) published a Frequently Asked Questions (“FAQ”), meant to supplement its Bulletin 201329 (“ThirdParty Relationships: Risk Management Guidance,” October 30, 2013).
The FAQ, OCC Bulletin 2017-21, is entitled “Frequently Asked Questions to Supplement OCC Bulletin 201329” (“Supplement”).
This issuance is to be reviewed by Chief Executive Officers and Chief Risk Officers of All National Banks and Federal Savings Associations, Technology Service Providers, Department and Division Heads, all Examining Personnel, and other interested parties. Community Banks should note that the Supplement addresses questions from national banks and federal savings associations (collectively, “banks”) regarding guidance in OCC Bulletin 201329. The Supplement and OCC Bulletin 201329 are applicable to all banks.[i]
The Supplement provides the following information:
- defines third party relationships and provides guidance on conducting due diligence and ongoing monitoring of service providers;
- provides insight on how to adjust risk management practices specific to each relationship;
- discusses ways to structure third party risk management processes;
- discusses advantages and disadvantages to collaboration between multiple banks when managing third party relationships;
- outlines bank-specific requirements when using collaborative arrangements;
- provides information-sharing forums that offer resources to help banks monitor cyber threats;
- discusses how to determine whether a fintech relationships is a “critical activity” and covers risks associated with engaging a start-up fintech company;
- addresses ways in which banks and fintech companies can partner together to serve underbanked populations;
- covers criteria to consider when entering into a marketplace lending arrangement with a nonbank entity;
- clarifies whether OCC Bulletin 2013-29 applies when a bank engages a third party to provide mobile payments options to consumers;
- outlines the OCC’s compliance management requirements;
- discusses banks’ rights to access interagency technology service provider reports; and
- answers whether a bank can rely on the accuracy of a third party’s risk management report.
It is my considered view that nonbanks should carefully review the Supplement and, where possible, adopt its guidance, in addition to any other guidance provided by the Consumer Financial Protection Bureau (CFPB) or state banking departments.[ii]
We have placed this Synopsis along with the Supplement on the Vendors Compliance Group website.[iii]
This review of the Supplement will set forth the questions asked and summarize the answers provided. A detailed reading of the Supplement is suggested. This Synopsis is meant to provide an overview of the Supplement; however, I highly advise a thorough reading of the actual Supplement. For further guidance, I recommend that you contact a compliance professional who is familiar with the processes involved in review of service provider and third party vendor due diligence.
If you have questions, please contact us at:
OCC Bulletin 201329 defines a third party relationship as any business arrangement between the bank and another entity, by contract or otherwise.
Third party relationships include activities that involve:
- outsourced products and services
- use of outside consultants, networking arrangements, merchant payment processing services, and services provided by affiliates and subsidiaries;
- joint ventures; and
- other business arrangements in which a bank has an ongoing thirdparty relationship or may have responsibility for the associated records.
Of interest to the OCC is the relationship that a bank has with financial technology (Fintech) companies. These companies perform certain services or deliver products to a bank’s customer base.
=> If a Fintech company performs services or delivers products on behalf of a bank or banks, the relationship meets the definition of a thirdparty relationship and the OCC expects bank management to include the Fintech company in the bank’s third party risk management process.
One observation made by the OCC in the Supplement is that, although banks may want in-depth information, they may not receive all the information they seek on each critical thirdparty service provider, particularly from new companies. At Vendors Compliance Group, we come across this challenge all the time!
The fact is, when a bank does not receive all the information it seeks about third party service providers that support the bank’s critical activities, the OCC expects the bank’s board of directors and management to:
- develop appropriate alternative ways to analyze these critical thirdparty service providers;
- establish risk mitigating controls; be prepared to address interruptions in delivery (for example, use multiple payment systems, generators for power, and multiple telecommunications lines in and out of critical sites);
- make risk-based decisions that these critical third party service providers are the best service providers available to the bank despite the fact that the bank cannot acquire all the information it wants;
- retain appropriate documentation of all their efforts to obtain information and related decisions; and
- ensure that contracts meet the bank’s needs.
2) OCC Bulletin 201329 defines thirdparty relationships very broadly and reads like it can apply to lower risk relationships. How can a bank reduce its oversight costs for lower risk relationships?
Not all thirdparty relationships present the same level of risk. The same relationship may present varying levels of risk across banks. Bank management should determine the risks associated with each thirdparty relationship and then determine how to adjust risk management practices for each relationship.
=> Goal: Bank’s risk management practices for each relationship should be commensurate with the level of risk and complexity of the third party relationship. This risk assessment should be periodically updated throughout the relationship. It should not be a onetime assessment conducted at the beginning of the relationship.
This view is why Vendors Compliance Group conducts not only transactional, but also periodic reviews of certain service providers. Since we review service providers on behalf of banks (and nonbanks), we endeavor to meet the OCC’s expectations to perform due diligence and ongoing monitoring for all thirdparty relationships. We do not perform merely a compilation of documents. What distinguishes Vendors Compliance Group from nearly every other compliance review firm is we actually conduct due diligence. This cannot be overemphasized, as the OCC fully expects due diligence to be implemented.
The level of due diligence and ongoing monitoring, however, may differ for, and should be specific to, each third party relationship. The level of due diligence and ongoing monitoring should be consistent with the level of risk and complexity posed by each thirdparty relationship. For critical activities, the OCC expects that due diligence and ongoing monitoring will be robust, comprehensive, and appropriately documented. Additionally, for activities that bank management determines to be low risk, management should follow the bank’s board established policies and procedures for due diligence and ongoing monitoring.
There is no one way for banks to structure their third party risk management process!
OCC Bulletin 2013 29 noted that the OCC expects banks to adopt an effective thirdparty risk management process commensurate with the level of risk and complexity of their thirdparty relationships.
Some banks have dispersed accountability for their thirdparty risk management process among their business lines.
Other banks have centralized the management of the process under their compliance, information security, procurement, or risk management functions. No matter where accountability resides, each applicable business line can provide valuable input into the thirdparty risk management process, for example, by completing risk assessments, reviewing due diligence questionnaires and documents, and evaluating the controls over the thirdparty relationship. Personnel in control functions such as audit, risk management, and compliance programs should be involved in the management of thirdparty relationships.
=> Whatever way a bank goes about structuring its third party risk management process, the board is responsible for overseeing the development of an effective thirdparty risk management process commensurate with the level of risk and complexity of the thirdparty relationships. Periodic board reporting is essential to ensure that board responsibilities are fulfilled.
4) When multiple banks use the same third party service providers, can they collaborate to meet expectations for managing third party relationships specified in OCC Bulletin 201329?[iv]
If they are using the same service providers to secure or obtain like products or services, banks may collaborate to meet certain expectations, such as performing the due diligence, contract negotiation, and ongoing monitoring responsibilities described in OCC Bulletin 201329.[v]
- Like products and services may, however, present a different level of risk to each bank that uses those products or services, making collaboration a useful tool but insufficient to fully meet the bank’s responsibilities under OCC Bulletin 201329. Collaboration can leverage resources by distributing costs across multiple banks.
- Many banks that use like (i.e., similar) products and services from technology or other service providers may become members of user groups. Frequently, these user groups create the opportunity for banks, particularly community banks, to collaborate with their peers on innovative product ideas, enhancements to existing products or services, and customer service and relationship management issues with the service providers.
- Banks that use a customized product or service may not, however, be able to use collaboration to fully meet their due diligence, contract negotiation, or ongoing responsibilities.
- Banks may take advantage of various tools designed to help them evaluate the controls of third party service providers. In general, these types of tools offer:
=> standardized approaches to perform due diligence and ongoing monitoring of third party service providers by having the participating third parties complete common security, privacy, and business resiliency control assessment questionnaires; and,
=> after third parties complete the questionnaires, the results can be shared with numerous banks and other clients.
5) When collaborating to meet responsibilities for managing a relationship with a common third party service provider, what are some of the responsibilities that each bank still needs to undertake individually to meet the expectations in OCC Bulletin 201329?
Responsibilities include defining the requirements for planning and termination (i.e., plans to manage the thirdparty service provider relationship and development of contingency plans in response to termination of service), as well as:
- integrating the use of product and delivery channels into the bank’s strategic planning process and ensuring consistency with the bank’s internal controls, corporate governance, business plan, and risk appetite
- assessing the quantity of risk posed to the bank through the third party service provider and the ability of the bank to monitor and control the risk
- implementing information technology controls at the bank
- ongoing benchmarking of service provider performance against the contract or service level agreement
- evaluating the third party’s fee structure to determine if it creates incentives that encourage inappropriate risk taking
- monitoring the third party’s actions on behalf of the bank for compliance with applicable laws and regulations
- monitoring the third party’s disaster recovery and business continuity time frames for resuming activities and recovering data for consistency with the bank’s disaster recovery and business continuity plans.
6) What collaboration opportunities exist to address cyber threats to banks as well as to their thirdparty relationships?
Banks may use the Financial Services Information Sharing and Analysis Center (FSISAC), the U.S. Computer Emergency Readiness Team (USCERT), InfraGard, and other information sharing organizations to monitor cyber threats and vulnerabilities and to enhance their risk management and internal controls. Banks also may use the FSISAC to share information with other banks.
7) Is a fintech company arrangement considered a critical activity?
A bank’s relationship with a fintech company may or may not involve critical bank activities, depending on a number of factors. OCC Bulletin 201329 provides criteria that a bank’s board and management may use to determine what critical activities are. It is up to each bank’s board and management to identify the critical activities of the bank and the thirdparty relationships related to these critical activities. The board (or committees thereof) should approve the policies and procedures that address how critical activities are identified.
Under OCC Bulletin 201329, critical activities can include significant bank functions (i.e., payments, clearing, settlements, and custody), significant shared services (i.e., information technology), or other activities that
- could cause the bank to face significant risk if a third party fails to meet expectations. could have significant bank customer impact;
- require significant investment in resources to implement third party relationships and manage risks;
- could have major impact on bank operations if the bank has to find an alternative third party or if the outsourced activities have to be brought inhouse.
8) Can a bank engage with a startup fintech company with limited financial information?
OCC Bulletin 201329 states that banks should consider the financial condition of their third parties during the due diligence stage of the life cycle before the banks have selected or entered into contracts or relationships with third parties. In assessing the financial condition of a startup or less established fintech company, the bank may consider a company’s access to funds, its funding sources, earnings, net cash flow, expected growth, projected borrowing capacity, and other factors that may affect the third party’s overall financial stability.
=> Assessing changes to the financial condition of third parties is an expectation of the ongoing monitoring stage of the life cycle. Because it may be receiving limited financial information, the bank should have appropriate contingency plans in case the startup fintech company experiences a business interruption, fails, or declares bankruptcy and is unable to perform the agreed-upon activities or services.
9) How can a bank offer products or services to underbanked or underserved segments of the population through a third party relationship with a fintech company?
Banks may partner with fintech companies to offer savings, credit, financial planning, or payments, in an effort to increase consumer access. In such instances, the fintech company is considered to have a third party relationship with the bank that falls under the scope of OCC Bulletin 201329.
10) What should a bank consider when entering a marketplace lending arrangement with nonbank entities?
When engaging in marketplace lending activities, a bank’s board and management should:
- understand the relationships among the bank, the marketplace lender, and the borrowers;
- fully understand the legal, strategic, reputation, operational, and other risks that these arrangements pose; and
- evaluate the marketplace lender’s practices for compliance with applicable laws and regulations.
As with any third party relationship, management at banks involved with marketplace lenders should ensure the risk exposure is consistent with their boards’ strategic goals, risk appetite, and safety and soundness objectives. In addition, boards should adopt appropriate policies, inclusive of concentration limitations, before beginning business relationships with marketplace lenders.
Banks should have the appropriate personnel, processes, and systems so that they can effectively monitor and control the risks inherent within the marketplace lending relationship.
- Risks include:
· liquidity, and
· operational risks.
To address these risks, banks’ due diligence of marketplace lenders should include consulting with the banks’ appropriate business units, such as credit, compliance, finance, audit, operations, accounting, legal, and information technology. Contracts or other governing documents should lay out the terms of service level agreements and contractual obligations. Subsequent significant contractual changes should prompt reevaluation of bank policies, processes, and risk management practices.
11) Does OCC Bulletin 201329 apply when a bank engages a third party to provide bank customers the ability to make mobile payments using their bank accounts, including debit and credit cards?
Yes. When using third party service providers in mobile payment environments, banks are expected to act in a manner consistent with OCC Bulletin 201329. Banks often enter into business arrangements with third party service providers to provide software and licenses in mobile payment environments. These third party service providers also provide assistance to the banks and the banks’ customers.
Many bank customers expect to use transaction accounts and credit, debit, or prepaid cards issued by their banks in mobile payment environments. Because almost all banks issue debit cards and offer transaction accounts, banks frequently participate in mobile payment environments even if they do not issue credit cards. Banks should work with mobile payment providers to establish processes for authenticating enrollment of customers’ account information that the customers provide to the mobile payment providers.
12) May a community bank outsource the development, maintenance, monitoring, and compliance responsibilities of its compliance management system?
Banks may outsource some or all aspects of their compliance management systems to third parties, so long as banks monitor and ensure that third parties comply with current and subsequent changes to consumer laws and regulations. Some banks outsource maintenance or monitoring or use third parties to automate data collection and management processes (for example, to file compliance reports under the Bank Secrecy Act or for mortgage loan application processing or disclosures).
=> The OCC expects all banks to develop and maintain an effective compliance management system and provide fair access to financial services, ensure fair treatment of customers, and comply with consumer protection laws and regulations. Strong compliance management systems include appropriate policies, procedures, practices, training, internal controls, and audit systems to manage and monitor compliance processes as well as a commitment of appropriate compliance resources.
13) Can banks obtain access to interagency technology service providers’ (“TSP”) reports of examination?
TSP reports of examination are available only to banks that have contractual relationships with the TSPs at the time of the examination.[vi] Although a bank may not share a TSP report of examination or the contents therein with other banks, a bank that has not contracted with a particular TSP may seek information from other banks with information or experience with a particular TSP as well as information from the TSP to meet the bank’s due diligence responsibilities.
14) Can a bank rely on a third party’s Service Organization Control (SOC) report, prepared in accordance with the American Institute of Certified Public Accountants Statement on Standards for Attestation Engagements No. 18 (SSAE 18)?
In meeting its due diligence and ongoing monitoring responsibilities, a bank may review a third party’s SOC report prepared in accordance with SSAE 18 to evaluate the effectiveness of the third party’s risk management program, including policies, processes, and internal controls.[vii] If a third party uses subcontractors (also referred to as “fourth parties”), a bank may find the third party’s SSAE 18 report particularly useful, as SSAE 18 requires the auditor to determine and report on the effectiveness of controls the third party has implemented to monitor the controls of the subcontractor. In other words, the SSAE 18 report will address the question as to whether the third party has effective oversight of its subcontractors.
A bank should consider whether an SSAE 18 report contains sufficient information and is sufficient in scope to assess the third party’s risk environment or whether additional audit or review is required for the bank to properly assess the third party’s control environment.
[ii] Copies of CFPB – “Bulletin 2012-03 - Service Providers”, April 13, 2012, and CFPB – “Compliance Bulletin and Policy Guidance - 2016-02 - Services Providers,” October 26, 2016 (Federal Register), and NCUA – Supervisory Letter # 07-01, "Evaluating Third Party Relationships," October 2007, are available in the Presentations section of www.vendorscompliancegroup.com
[iv] Refer to OCC News Release 20151, “Collaboration Can Facilitate Community Banks Competitiveness, OCC Says,” January 13, 2015.
[v] Any collaborative activities among banks must comply with antitrust laws. Refer to the Federal Trade Commission and U.S. Department of Justice’s “Antitrust Guidelines for Collaborations Among Competitors.”
[vi] The OCC conducts examinations of services provided by significant TSPs based on authorities granted by the Bank Service Company Act, 12 USC 1867. These examinations typically are conducted in coordination with the Board of Governors of the Federal Reserve Board, Federal Deposit Insurance Corporation, and other banking agencies with similar authorities. The scope of examinations focus on the services provided and key technology and operational controls communicated in the FFIEC Information Technology Examination Handbook and other regulatory guidance.
[vii] As of May 2017, SSAE 18 replaced SSAE 16 for SOC 1 engagements.