Beware of Vendor ‘Trickle-Up Effect,’ Lawyer Advises

canstockphoto20761045Lenders need to scrutinize their service providers closely, particularly as the powersports industry expands and more vendors enter the space, said Molly Calkins, partner of the Consumer Financial Services Practice Group at Akerman LLP.

“When it comes to your vendors, beware of the ‘trickle-up effect,’” which is when a lender is held liable for a third-party service provider’s actions, Calkins said. The bureau issued a white paper in April 2012, announcing that companies are liable for violations by their service providers, she said.

“Vendors’ liability for security breaches or violations are imputed to your company, so scrutinize your service providers and hold them to your same high standards,” Calkins advised. “These are your obligations when it comes to vendor management,” she said, referencing a slide presentation. For example, both a vendor and lender could be liable for the same consumer harm and for credit reporting errors in misrepresentations, she explained.

Lenders need to focus on a variety of best practices to ensure their service providers are compliant, Calkins said. Lenders need to know the risks posed by each vendor, and conduct thorough due diligence to verify each provider is capable of complying with consumer financial laws, she added.

Additionally, lenders should review their service provider’s policies and internal controls to ensure appropriate oversight and training of employees, Calkins said, and set clear compliance expectations in service provider contracts — with enforceable consequences for compliance violations.

“Establish internal controls and ongoing monitoring to determine whether a service provider is complying with consumer financial laws,” Calkins said. Then, “take prompt corrective action to address problems identified through monitoring, including terminating the relationship,” she added.

Best practices are like a race line, Calkins explained. “Every racetrack has one line that’s the fastest way around, and that line is your default objective,” she said. “You might have to deviate from that line, depending on trek conditions and other racers, or going through a corner too hot. But deviating from that line is risky, and either way there are risks.”

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