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72 As a mortgage banker, originator or servicer, you may be thinking, "can the Consumer Financial Protection Bureau (CFPB) interfere with my supplier and service provider relationships?" If you're asking that question, it is useful to learn more about the CFPB's vendor oversight expectations. Based on its Bulletin 2012-03, the CFPB expects that every financial institution will manage its service providers "to protect the interests of consumers and avoid consumer harm." e CFPB's measuring stick, so to speak, is calibrated based on federal consumer financial laws and regulations. No regulatory authority prohibits the use of third-party providers. Such providers enable financial institutions ("FIs") to leverage expertise and capabilities that otherwise would be unavailable. However, every examiner and auditor expects an FI – bank, non-bank or credit union – to retain responsibility for the treatment of its customers. is holds true for directly- contracted providers (e.g., default servicers), and even third parties engaged by a contracted entity (e.g., a property valuation expert hired by a service provider contracted by a bank). Hiring third parties never absolves an institution of its primary responsibilities to consumers. Why does all of this matter in default servicing? If you are a third-party service provider, you are subject to CFPB oversight if the bureau supervises your client. If you engage a third-party service provider as a CFPB-supervised entity, the lack of absolution described above applies to you. Given this presence of the CFPB in your world, what are its expectations for any institution that engages a third-party servicer? e expectations fall info five categories: 1. Compliance Due Diligence 2. Assessment of Service Provider Oversight and Training 3. Contract Terms 4. Controls & Monitoring 5. Prompt Action to Address Issues DUE DILIGENCE Compliance due diligence means that an FI must assess each third party provider's understanding of, and capability of complying with, federal consumer financial law. In assessing a service provider, a large mortgage FI should first determine whether the servicer already has clients with a similar number of loans, transactions and general workload. Given that expanded Regulation X requirements for mortgage servicing have been fully known for over two years, no FI wants to bring thousands of loans to a small servicer, nor be a service provider's "beta test" for knowledge of the Equal Credit Opportunity Act, Truth In Lending Act, Real Estate Settlement Procedures Act, or Servicemembers Civil Relief Act. If a default servicer has deep collections experience with credit card accounts, but no mortgage background, it would be unwise to give them immediate responsibility for a large volume of past-due mortgages. A gauge of any servicer's compliance capability is its compliance staff. Is there a single compliance officer, a full compliance team, or a smaller team augmented by third-party compliance resources? Are compliance staff members available to meet with people from the FI prior to contract signing? Can the servicer provide a compliance department organization chart and reasonably detailed list of each person's responsibilities? Complete, affirmative responses to such questions are positives. One warning sign of a servicer's inability I N D U S T R Y I N S I G H T / G E N E C O L L E T T The Proactive Approach to Keeping Up with the CFPB THE FIVE PILLARS OF RISK MANAGEMENT

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