The use of third-party servicers poses a risk to financial institutions, the Office of Comptroller of the Currency says in its semiannual risk perspectives report; but there’s not much the NCUA can do about it.
In its report, which covers banks, the OCC said that many financial institutions are increasingly relying on such vendors to provide vital services.
However, under federal law, the NCUA does not have the power to provide oversight for such companies; it is the only financial regulator lacking that authority.
“The NCUA’s lack of vendor authority—unique among federal financial institutions regulators—continues to present a blind spot and a significant potential risk to the Share Insurance Fund and, therefore, to the credit union industry,” said NCUA spokesman John Fairbanks. “The increasing reliance upon third-party vendors by credit unions, particularly small credit unions that may not have the capacity to fully monitor vendors, compounds this risk.”
In its report, the OCC notes that “Consolidation has increased among significant service providers, as has consolidation in the financial services industry.”
The consolidation means that banks are relying on a smaller group of third-party servicers.
“Increased use of a limited number of third-party service providers can also, however, create concentrated points of failure resulting in systemic risk to the financial services sector that banks can address through appropriate due diligence and ongoing oversight,” the OCC said.
The report echoes warnings made for several years by the Financial Stability Oversight Council, which has called on Congress to give the NCUA oversight power over servicers.
Despite these warnings, credit union trade groups insist that the NCUA does not need oversight power over third-party servicers.
“The agency doesn’t have experience or funding authorization” to conduct oversight of vendors, said CUNA Chief Advocacy Officer Ryan Donovan.
And he added that since some servicers also work for banks and they are subject to oversight by the banking regulators.
NAFCU officials agreed.
“All credit unions comply with robust rules requiring due diligence over their third-party service providers,” said NAFCU Director of Regulatory Affairs Alexander Monterrubio. These rules are vigorously followed and have proven to be successful. “
He said that the agency would have to spend a significant amount of money to train current staff or hire consultants, adding that there has been no “demonstrable need.”
