Fed Releases New Standards for Bank Consultants

WASHINGTON — The Federal Reserve Board issued revised standards on Thursday dictating how banks should oversee service providers, including consultants.

Regulators have been cracking down on shortfalls in companies' supervision of third party consultants following botched reviews of foreclosure practices, which were lengthy and expensive.

The Fed's guidance laid out a number of factors that banks should consider in hiring and supervising a servicer provider, while stressing that the board of directors and senior management of financial institutions are still accountable for all activities conducted by outside hires.

"Financial institutions are responsible for ensuring that all activities conducted by service providers comply with applicable laws and regulations and are consistent with safe and sound banking practices," according to a press release announcing the guidance.

Even with new ground rules, the agency said it was not discouraging financial institutions from outsourcing activities to service providers, only that they should be aware of the potential risks.

"If service provider relationships are not managed effectively, they may expose financial institutions to risks that can result in reputational problems, financial loss, or regulatory actions," according to the release.

The Fed is the second banking regulator to take action with regard to outside consultants. Last month, the Office of the Comptroller of the Currency outlined new standards on when a bank should hire an outside consultant and whether the work was acceptable to the agency.

Banks were also told they should vet the consultant's credentials and provide that information to the OCC.

"While consultants can provide knowledge, expertise, and additional resources, we must take care to ensure they maintain independence and are subject to appropriate oversight," said Comptroller of the Currency Thomas Curry in the Nov. 12 press release.

The new standards come at a time when the agencies have been under pressure to release a report by the end of the year that provides details of an independent review of millions of borrowers who faced foreclosure. That review was conducted by bank consultants, but eventually scrapped by regulators because it was taking too long.