documents in the last year, by the Centers for Medicare & Medicaid Services This letter emphasizes our concerns related to third-party relationships between banks and non-banks in the context of providing deposit services, installment loans, lines of credit, and single-repayment loans. 4. Carefully assess indemnification clauses that require the banking organization to hold the third party harmless from liability.Start Printed Page 38193. when cloud computing providers are in a third-party relationship with a bank. In these situations, bank management is limited in its ability to conduct the type of due diligence, contract negotiation, and ongoing monitoring that it normally would, even if the third-party relationship involves or supports a bank's critical activities. The comment period closed on October 18, 2021 and the agencies are still reviewing the comments received. If a bank considers these activities to be low risk, management should refer to FAQ No. The proposed guidance provides examples of third-party relationships, including use of independent consultants, networking arrangements, merchant payment processing services, services provided by affiliates and subsidiaries, joint ventures, and other business arrangements in which a banking organization has an ongoing relationship or may have responsibility for the associated records. Browse our These relationships could include partnerships, joint ventures, or other types of formal legal structures or informal arrangements. documents in the last year, 84 Open for Comment, Economic Sanctions & Foreign Assets Control, Guercino's Friar With a Gold Earring Exhibition, National Highway Traffic Safety Administration, Moving Beyond COVID-19 Vaccination Requirements for Federal Workers, Imposing Sanctions on Certain Persons Destabilizing Sudan and Undermining the Goal of a Democratic Transition, Office of the Comptroller of the Currency, C. Tailored Approach to Third-Party Risk Management, E. Due Diligence and Collaborative Arrangements, f. Qualifications and Backgrounds of Company Principals, k. Incident Reporting and Management Programs, p. Conflicting Contractual Arrangements With Other Parties, c. Responsibilities for Providing, Receiving, and Retaining Information, d. The Right To Audit and Require Remediation, e. Responsibility for Compliance With Applicable Laws and Regulations, i. The proposed guidance would offer a framework based on sound risk management principles for banking organizations to consider in developing risk management practices for all stages in the life cycle of third-party relationships that takes into account the level of risk, complexity, and size of the banking organization and the nature of the third-party relationship. 3. This year, the agencies released proposed interagency guidance on risk management for financial institutions entering into third-party relationships, followed shortly after by a guide for community banks that need to conduct due diligence on fintechs. These may include core bank processing, information technology services, accounting, compliance, human resources, and loan servicing. 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. Part 364 -Standards for Safety and Soundness, Corporate Expert in Examination Policy, Division of Risk Management Supervision, Chief, Supervisory Policy Section, Division of Depositor and Consumer Protection. Use of third parties can reduce management's direct control of activities and may introduce new risks or increase existing risks, such as operational, compliance, reputation, strategic, and credit risks and the interrelationship of these risks. Validation reports provided by a third-party model provider should identify model aspects that were reviewed, highlighting potential deficiencies over a range of financial and economic conditions (as applicable), and determining whether adjustments or other compensating controls are warranted. A security breach at the data aggregator could compromise numerous customer banking credentials and sensitive customer information, causing harm to the bank's customers and potentially causing reputation and security risk and financial liability for the bank. Effective risk management processes include assessing the risks of outsourcing due diligence when relying on the services of other banking organizations, utilities, consortiums, or other similar arrangements and assessment standards. More extensive due diligence is particularly important when a third-party relationship is higher risk or where it involves critical activities. If a banking organization uncovers information that warrants additional scrutiny, the banking organization should consider broadening the scope or assessment methods of the due diligence as needed. Proposed Interagency Guidance on Third-Party Relationships: Risk - FDIC 86 FR 38182 (July 19, 2021). April 2022 The OCC announces its restructuring of community and midsize bank supervision, including adding fintech supervision specialists and appointing a deputy comptroller with primary responsibility for "novel banks and technology service providers." Read our breakdown here: Proposed Interagency Guidance on Third-Party Relationships - update 0 Like Laure Slezak Posted 02-18-2022 03:18 PM Has there been any word on the status of the proposed guidance? The FDIC insures deposits; examines and This repetition of headings to form internal navigation links A bank may have a third-party relationship with a third party that has subcontracted with a cloud service provider to house systems that support the third-party service provider. A banking organization's use of third parties does not diminish the respective responsibilities of its board of directors to provide oversight of senior management to perform the activity in a safe and sound manner and in compliance with applicable laws and regulations, including those related to consumer protection.[11]. 9. documents in the last year, by the Federal Highway Administration and the National Highway Traffic Safety Administration (Originally FAQ No. The OCC realizes that although banks may want in-depth information, they may not receive all the information they seek on each critical third-party service provider, particularly from new companies. Developing and implementing the banking organization's third-party risk management process; Confirming that appropriate due diligence and ongoing monitoring is conducted on third parties and presenting results to the board when making recommendations to use third parties that involve critical activities; Reviewing and approving contracts with third parties; Providing appropriate organizational structures, management and staffing (level and expertise); Confirming that third parties comply with the banking organization's policies and reporting requirements; Providing that third parties be notified of significant operational issues at the banking organization that may affect the third party; Confirming that the banking organization has an appropriate system of internal controls and regularly tests the controls to manage risks associated with third-party relationships; Confirming that the banking organization's compliance management system is appropriate to the nature, size, complexity, and scope of its third-party business arrangements; Providing that third parties regularly test and implement agreed-upon remediation when issues arise; Escalating significant issues to the board; Terminating business arrangements with third parties that do not meet expectations or no longer align with the banking organization's strategic goals, objectives, or risk appetite; and. 4. For relevant third-party relationships, stipulate that the performance of activities by external parties for the banking organization is subject to regulatory examination oversight, including access to all work papers, drafts, and other materials.[19]. Federal Deposit Insurance Corporation. A Notice by the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Comptroller of the Currency on 07/19/2021. Assess options to employ if a third party's ability to deliver operations is impaired. documents in the last year, 286 For example, banking organizations may be able to collaborate when performing due diligence, negotiating contracts, and performing ongoing monitoring. 11. TSP reports of examination14 are available only to banks that have contractual relationships with the TSPs at the time of the examination. 24. Effective validation reports include clear executive summaries, with a statement of model purpose and a synopsis of model validation results, including major limitations and key assumptions. How may a bank use third-party assessment services (sometimes referred to as third-party utilities)? Third-Party Relationships: Frequently Asked Questions to Supplement OCC Review and consider the third party's incident reporting and management programs to ensure there are clearly documented processes, timelines, and accountability for identifying, reporting, investigating, and escalating incidents. Determine whether and how the third party plans to use the banking organization's name in marketing efforts. The same relationship may present varying levels of risk across banks. Determine whether the contract: Additionally, effective contracts enable the banking organization to terminate the relationship upon reasonable notice and without penalty in the event that the banking organization's primary federal banking regulator formally directs the banking organization to terminate the relationship. Include appropriate warranties on the part of the third party related to its acquisition of licenses or subscription for use of any intellectual property developed by other third parties. These efforts may include research to confirm ownership and understand business practices of the firms; direct communication to learn security and governance practices; review of independent audit reports and assessments; and ongoing monitoring of data-sharing activities. In meeting its due diligence and ongoing monitoring responsibilities, a bank may review a third party's SOC 1 report prepared in accordance with SSAE 18 to evaluate the third party's client(s)' internal controls over financial reporting, including policies, processes, and internal controls. See "Proposed Interagency Guidance on Third-Party Relationships: Risk Manage-ment," 86 Fed. The American Bankers Association yesterday provided detailed feedback on interagency third-party risk management guidance proposed by the Federal Reserve, FDIC and OCC. Whether the report, certificate, or audit is consistent with widely recognized standards. The OCC has received requests for clarification regarding business arrangements and how those arrangements relate to OCC Bulletin 2013-29. 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. may use when assessing and managing risks associated with third-party relationships. Friday, July 16, 2021. Refer to OCC Bulletin 2001-12, Bank-Provided Account Aggregation Services: Guidance to Banks (national banks) for more information on direct relationships. OCC Bulletin 2013-29 states that depending on the significance of the third-party relationship, a bank's analysis of a third party's financial condition may be as comprehensive as if the bank were extending credit to the third-party service provider. A service-level agreement between the banking organization and third party specifies measures surrounding the expectations and responsibilities for both parties, including conformance with regulatory standards or rules. Comments should be directed to: Board: When submitting comments, please consider submitting your Start Printed Page 38183comments by email or fax because paper mail in the Washington, DC area and at the Board may be subject to delay. documents in the last year, 408 Refer to OCC Bulletin 2019-62, Consumer Compliance: Interagency Statement on the Use of Alternative Data in Credit Underwriting, for more information about compliance risk management considerations regarding the use of alternative data. Banking organizations, including smaller and less complex banking organizations, should adopt risk management practices commensurate with the level of risk and complexity of their third-party relationships and the risk and complexity of the banking organization's operations. To what extent does the discussion of business arrangement in the proposed guidance provide sufficient clarity to permit banking organizations to identify those arrangements for which the guidance is appropriate? Where problems are identified, the banking organization should seek to renegotiate at the earliest opportunity. retain appropriate documentation of all their efforts to obtain information and related decisions. The proposed guidance describes third-party relationships as business arrangements between a banking organization and another entity, by contract or otherwise. 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. This guidance offers a framework based on sound risk management principles that banking organizations supervised by the Board of Governors of the Federal Reserve System (Board), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (together, the agencies)[9] As used in this bulletin, banks refers collectively to national banks, federal savings associations, and federal branches and agencies of foreign banking organizations. In overseeing the management of risks associated with third-party relationships, boards of directors (or directors) typically consider the following factors, among others: When executing and implementing third-party relationship risk Start Printed Page 38194management strategies and policies, management typically considers: Banking organizations typically conduct periodic independent reviews of the third-party risk management process, particularly when third parties perform critical activities. Based on that analysis, data that present greater compliance risk warrant more robust compliance management. (Originally FAQ No. ACTION: Proposed interagency guidance and request for comment; extension of comment period. Profile, FDIC Academic focuses on general considerations, potential sources of information, and illustrative examples that may be relevant as a community bank conducts due diligence on a financial technology company. The bank has a business arrangement with the party receiving the bank's referral. 5. In some instances, a banking organization may not be able to obtain the desired due diligence information from the third party. Banking organizations periodically re-assess existing relationships to determine whether the nature of an activity subsequently becomes critical. Neither a written contract nor a monetary exchange is necessary to establish a business arrangement; all that is necessary is an agreement between the bank and the third party. on FederalRegister.gov What type of due diligence and ongoing monitoring should be applied to these companies? documents in the last year, 128 Third-party assessment service companies have been formed to help banking organizations with third-party risk management, including due diligence. The proposed guidance states that a banking organization's use of third parties does not diminish its responsibility to perform an activity in a safe and sound manner and in compliance with applicable laws and regulations. daily Federal Register on FederalRegister.gov will remain an unofficial The board should receive sufficient information to understand the bank's strategy for use of third parties to support products, services, and operations and understand key dependencies, costs, and limitations that the bank has with these third parties. the official website and that any information you provide is documents in the last year, 20 During due diligence, bank management should evaluate the volume and types of subcontracted activities and the subcontractors' geographic locations. Some community banks have joined an alliance to create a standardized contract with their common third-party service providers and improve negotiating power. Consider whether the contract should establish a dispute resolution process (arbitration, mediation, or other means) to resolve problems between the banking organization and the third party in an expeditious manner, and whether the third party should continue to provide activities to the banking organization during the dispute resolution period. Confirm that the contract gives the banking organization the right to monitor the third party's compliance with applicable laws, regulations, and policies, conduct periodic reviews to verify adherence to expectations, and require remediation if issues arise. What collaboration opportunities exist to address cyber threats to banks as well as to their third-party relationships? Proposed Interagency Guidance on Third-Party Relationships to Replace How does a bank's board of directors approve contracts with third parties that involve critical activities? James P. Sheesley, Assistant Executive Secretary. ensure that contracts meet the bank's needs. In such an arrangement, the bank's customer authorizes the sharing of information and the bank typically is not receiving a direct service or financial benefit from the third party. Confirm that the third party's escalation and notification processes meet the banking organization's expectations and regulatory requirements. 7. 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. 38,182 (July 19, 2021). 11 from OCC Bulletin 2017-21), 21. Bank management should understand and evaluate the results of validation and risk control activities that are conducted by third parties. 12. Evaluate whether additional risks may arise from the third party's reliance on subcontractors and, as appropriate, conduct similar due diligence on the third party's critical subcontractors, such as when additional risk may arise due to concentration-related risk, when the third party outsources significant activities, or when subcontracting poses other material risks. Financial Institution Letter FIL-50-2021 (July 13, 2021) Proposed Interagency Guidance on Third-Party Relationships: Risk Management Suggested Distribution: FDIC-Supervised Institutions Suggested Routing: Board of Directors Chief Executive Officer Chief Financial Officer Chief Risk Officer Chief Compliance Officer Related Topics: Key Takeaways From the Proposed Interagency Guidance on Third-Party Some fintech companies offer other ways for banks to partner with them. Aggregators are often intermediaries between the financial technology (fintech) applications that consumers use to access their data and the sources of data at financial services companies. How could the proposed guidance be enhanced to provide more clarity on conducting due diligence for subcontractor relationships? The information in this list is consistent with the Interagency Policy Statement on the Use of Alternative Data in Credit Underwriting. 13. The proposed guidance indicates that banking organizations should adopt third-party risk management processes that are commensurate with the identified level of risk and complexity from the third-party relationships, and with the organizational structure of each banking organization. There is no one way for banks to structure their third-party risk management process. OCC Bulletin 2013-29 states that a third-party relationship is any business arrangement between a bank and another entity, by contract or otherwise. electronic version on GPOs govinfo.gov. What additional information, if any, could the proposed guidance provide for banking organizations to consider when managing risks related to different types of business arrangements with third parties? After third parties complete the questionnaires, the results can be shared with numerous banks and other clients.
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