“Good Common Sense Advice” for Lenders

Effective 3rd party vendor management is a life cycle relationship.

Regulators are pushing third party oversight at levels never before seen. Lenders are feeling the sometimes-heavy burden associated with demonstrating compliance with third party vendor management, particularly small community banks where it is not uncommon for staff to wear three or four different hats. Although regulators are vocal about requiring institutions to manage their vendor-related risks, there’s no how-to guidance for doing that. To help lenders get a better handle on “putting the vendor back in vendor management,” EDR Insight hosted a webinar last week titled “Vendor Management: Advice to Lenders in Using Appraisers, Environmental Professionals.”

Mitch Kreeger, MAI SRA MBA, Kreeger Consulting, and a well-known subject matter expert on appraisals, delivered a presentation that one attendee described as “full of common sense advice.” Kreeger focused specifically on how banks can find the right appraisers and environmental professionals, monitor vendor performance over time and maximize the bank-vendor relationship. Below are a few best practices from Kreeger’s presentation with links to more information:

  1. Avoid selection based on “faster and cheaper”

“There are plenty of studies from the downturn documenting that ‘faster, cheaper’ isn’t always better and can be risky.”

~Mitch Kreeger, MAI SRA MBA, Kreeger Consulting

“’Faster and cheaper’ shouldn’t be your target. When the due diligence is cut short, lender face higher risk and higher losses. The stakeholders’ opinion of senior management competency is lower.”

“You lower your own risk when you hire quality firms.”

  1. Hidden risks from poor vendor management

“The OCC guidance puts the onus on a bank’s Board of Directors and senior management to uphold safety and soundness, including the vendor management function.”

“If vendors are not managed closely, banks face hidden risks like reduced efficiency, reduced loyalty, lower quality and reliability, possible fraud and more.”

  1. Put a smart vendor management procedure in place

Random vendor selection will:

  • Injure a lender’s financial position, reputation
  • Result in poor vendor performance
  • Weaken the vendor-lender relationship, erode trust
  • Invite regulatory scrutiny, criticism

Look for vendors with:

  • Superior competency, experience (subject matter experts)
  • Market economics/relevant knowledge
  • Regulatory compliance expertise
  • Technology proficiency
  • Access to relevant market data resources
  • Access to market comparable resources
  • Ability to distinguish good from bad comps
  • Understanding of assignment complexity level
  • Understanding of lender’s focus, risk tolerances
  • Appreciation for treating bank customers with respect
  • Amicable attitude toward common goal of credible, compliant tools for “safe and sound” lending
  1. Host a vendor training forum

“Bring lenders, underwriters and appraisal staff face-to-face with appraisers, environmental experts for an informal training session.”

“When banks hold vendor training sessions, it shows vendors that their peers are high-level experts. They know that there’s a higher expectation for them. It demonstrates that there’s a serious intent for risk management at the bank.”

~Mitch Kreeger, MAI SRA MBA, Kreeger Consulting

  1. How do you rate your vendors?

“It is important to document vendor scorecards or ratings. Document. Document. Document. I can’t say that enough.”

Ongoing monitoring reviews should document:

  • Feedback (warnings, compliments, competency level, corrective actions or improvement plans)
  • Action (remove/suspend, reduce workload, recommend training, modify status)
  • Annual vendor due diligence (current license, E&O insurance, CEU status, competencies, pending litigation or regulatory action, contact info changes, etc.)
  • Annual vendor panel approval process (individual, whole panel or based on approved minimum guidelines)


– Replay of EDR Insight’s September 10th webinar: Vendor Management: Advice to Lenders in Using Appraisers, Environmental Professionals

– EDR INSIGHT’S VENDOR MANAGEMENT SERIES: Advice for Lenders in Using Appraisers and Environmental Professionals

In this three-part series, author Mitch Kreeger discusses the basics of vendor management compliance and design for appraisal and environmental risk functions, then offers advice to help lenders get started, closing with advanced tips on optimizing vendor relationships for a win-win-win (lender-vendor-customer) program:

– Replay of EDR Insight’s August 12th webinar: Vendor Management Best Practices: Is Your Program Up to Par?

In August, Scott Roller gave a high-level strategic discussion on the regulatory requirements for third party vendor management and a valuable list of the 12 “key dimensions” that banks should build into their policies to keep regulators at bay.