OCC Advises on Vendor Risk

Banks should remember that they carry risk from activities they engage in with third parties such as vendors, agents, dealers, brokers, and marketers, the Office of the Comptroller told banks recently.An OCC advisory letter said that over the past year and a half, a number of banks have suffered significant losses from failure to exercise due diligence and risk analysis in their dealings with third parties.

The OCC letter gives examples. In one, it says a number of banks have suffered reputation loss by issuing unsecured credit cards to sub-prime borrowers through vendors offering "credit repair" products. In some cases, the vendors required the borrowers to purchase educational products about debt management, which were immediately charged to the borrowers' credit cards.

The OCC letter also cited a bank rendered insolvent by construction loan losses caused when the bank engaged a third party to monitor loans for a residential development project without performing due diligence on that third party or checking on whether the company was performing the services contracted. The vendor did not exercise appropriate control over loan advances and eventually, the developer absconded, leaving the bank with a large loss.

OCC outlined for banks what an appropriate program for managing third parties might be. The OCC advisory letter is at www.occ.treas.gov/ftp/advisory/2000-9.txt.

Copyright © 2000 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 10, No. 11, 11/00