Legal Counsel Review of Vendor Contracts

Hi all,

Do any of you have policies/procedures in place that require legal counsel (either in house legal or outside counsel) review of new vendor contracts? If so, do you have a threshold for the value of contact that must be reviewed by legal? We are looking at possibly adjusting our legal review threshold and would be interested to hear what others are doing. Thank you!

A bank officer that did not have legal counsel review a legal contract before signing it on behalf of the bank would IMO be in dereliction of their duty.

Every single contract we execute must be reviewed by legal. There are no exceptions. We have terminated SVPs (This is a high level position at my shop) for signing contracts without legal approval.

I cannot stress how bad of an idea it is to bind a bank to contractual terms without a qualified attorney first reviewing the contract.

our Vendor Management and Legal departments review all contracts, new and renewals, no exception. Now, for a low dollar renewal, their review is far less than if we were changing core processors, but they still sign off.

Our process is pretty much identical to Happy's statement. Our legal team reviews all contracts regardless of amounts.

What is the size of your institutions that have legal review all contracts? I've worked in multiple institutions less than $1 billion, and don't remember legal ever reviewing a contract, except potentially the core provider contract.

There is the old saying that applies here: "Size does not matter".

While I agree with Randy, I'll play....

We are $5B

I agree, and not saying that legal shouldn't review contracts for banks of all sizes. I'm just wondering what happens in real life. Because most banks of smaller sizes don't have in house attorneys, and only review significant contracts.

My shop is over $10B but I started my career at a community bank with $150M in assets and our outside counsel looked at every contract.

current is $35b, but also worked in smaller than $1b...wise old CEO once said "we may not afford to have legal counsel review every contract, but even worse, we can't not afford for them to do so." so every bank i have worked for has reviewed contracts, either with internal legal counsel or external.

Interesting. that does not match my experience even at banks of $650M, but thank you very much for sharing. I'm wondering do you have a definition of "contract"? For example, we just had an addendum to our core contract signed that allows integration between core vendor and AML software vendor. It was a 1-2 page document that had a one-time cost of roughly $1,000. Would you have legal review something like that too?

And to answer the original's question, we are currently a shop around $500M. We do not have Legal review every contract, and there is not a defined threshold under which they would. Current policy says legal will review "as needed" or something similar. However, we are thinking of defining a threshold which was actually recommended by our examiners.

It shouldn't just be based on money, though that is an important factor. You should (formally or informally) risk rate contracts based on relevant factors the same way you do other things. Some considerations:

* Total cost
* Vendor access to NPI
* Criticality of service provided (failure of digital banking is more disruptive than failure of some back office financial accounting software that doesn't affect deposit accounts or loans)
* Risk exposure if product or service is deficient (will it create regulatory violations or exposure to claims from customers or other risk?)
* Reputational impact of product or service deficiency

There are some cases where the total cost may not be that significant but other issues create higher risk. Collection agency contracts and repossession contracts/service orders are good examples.