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How Mortgage Brokers Can Minimize the Risks When Using Third-Party Vendors

Mortgage brokers often rely on the expertise of third-party vendors, such as transaction coordinators, in the course of your work. The use of these additional real estate professionals can help to streamline processes and provide an improved customer experience.

Using third-party vendors does bring with it some potential risks that, as a mortgage broker, you must be aware of. In this blog, we explore what these risks are and also cover practical strategies for mortgage brokers to avoid a lawsuit.

What Could Go Wrong?

Compliance Risks

Mortgage brokers are subject to strict industry regulations. If a mortgage broker works with a third-party vendor, and that vendor fails to comply, it can have severe consequences. In the same way a real estate broker would be held responsible for their real estate licensees, a mortgage broker will be held responsible for the actions (or inactions) of their third-party vendors. It is essential that mortgage brokers work with vendors they can trust who know industry regulations. Ongoing monitoring of the compliance of the work is also critical to avoid a lawsuit.  

Data Breaches

If you are a mortgage broker and provide a third-party vendor with access to your information systems, you need to consider the risk of data breaches. The loss of sensitive client information has the potential to cause severe reputational damage as well as possible lawsuits. To prevent this from happening, mortgage brokers should only provide access to the information the vendor must have to do the work. Ensure your vendor is aware of your confidentiality and data protection policies. Get their agreement to comply with these in writing. And be sure your errors and omissions insurance includes coverage for data breaches.

Cybersecurity Risks
As a mortgage broker, you will likely have cybersecurity measures in place to protect your business. You may review with your staff how to handle unknown emails with links or attachments. Consider that your third-party vendors may not have the same level of protection. Be sure to check what measures they have in place before entrusting them with your corporate information, or before accepting files from them. Because hackers and scammers are becoming increasingly sophisticated in their methods, cybersecurity problems are a high risk that needs to be managed. Your mortgage brokerage may need comprehensive cyberliability insurance.

Service Quality Concerns

Reputations are built and broken on quality of service. If you plan to use third-party vendors, ensure they can provide you with assurance that their services are up to standard. If they fail to provide great service to your clients, you may lose clients and damage relationships. This can cause significant damage to your reputation. If your third-party vendor causes transaction delays, costing your clients financially, you may even have a claim made against you. 

Practical Tips for Mortgage Brokers to Minimize the Risks

Do Your Due Diligence
Any potential third-party vendors must be vetted to ensure they are a good fit for your mortgage broker business. This includes:

  • Seeking recommendations or references
  • Checking their reviews and work history
  • Confirming their qualifications and licenses (where applicable)
  • Asking the third-party vendor any questions you might have, especially about their knowledge of the regulations you must follow, and their own procedures for preventing viruses in their documents and malware on their computers
  • Ensuring the business is financially sound, and not at risk of sudden closure
  • Checking any previous legal claims. 

Focus on Clear Communication
Clear communication is key for effective third-party vendor relationships. Make sure expectations are clear and the required outcomes can be achieved in the right timeframes to keep your clients happy. 

Mortgage brokers should educate vendors about your policies and procedures. This needs to cover things like client confidentiality, compliance and regulatory requirements, and data security. 

Regular Monitoring of Vendors
Mortgage brokers need to monitor the performance of third-party vendors to ensure compliance. This may be onerous in the initial stages of engagement. However, over time, as you do more work with each vendor, you will build a greater level of trust. It makes sense to establish and maintain good relationships with vendors because it’s easier to work with known entities than to continuously onboard new third-party vendors. 

See also RESPA compliance for Mortgage Brokers

As a Mortgage Broker, You Must Protect Yourself 

While engaging third-party vendors can provide substantial benefits to you as a mortgage broker, you must consider the risks. An important part of that is having the right mortgage broker Errors and Omissions insurance in place. 

Because CRES is part of one of the largest insurance brokers in the world, we have access to more E&O options for mortgage brokers than just about anyone. We can find the best coverage at the best price for you or your office. Contact the CRES team at 800-880-2747 and we can help tailor an insurance package to specifically suit the needs of your business today.

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