Compliance and Outsourced Services
by Amanda Smith
Credit unions engage third-party vendors for a variety of reasons. Some third-party vendors bring expertise to the table that allows the credit union to offer products and services to its members that it would not otherwise be able to offer. Other vendors provide products and services in a manner that is more cost effective than if the credit union were to provide the product or service. These vendors play a valuable role in the credit union’s business and ability to serve its members; however, although the service may be outsourced, the responsibility and legal liability for regulatory compliance is ultimately the responsibility of the credit union.
From a compliance standpoint, the credit union is liable to its members and its regulators for the actions or inactions of the vendors with which it does business. For example, under the Truth in Lending Act and Regulation Z, in general, it is the party extending the credit to the consumer that will be held liable for violations, not the party that actually prepared or distributed the disclosures. While a properly negotiated contract may provide the credit union with some recourse against the vendor in the event the vendor violates a law or regulation, that will not change the fact that the credit union is also in violation of the law or regulation and the credit union will be exposed to potential administrative liability and sanctions as well as civil penalties.
The following is an example, albeit a worst case scenario, of how a small error by a vendor can cause widespread issues for a credit union. A credit union discovers, by way of an examination, that due to a programming error, its vendor had disclosed an understated APR on its credit card product for a period of one year. As an administrative sanction, the regulator ordered the credit union to reimburse the difference between the disclosed APR and the APR actually charged to these members. Subsequently, the credit union receives notice that it is being sued in a class action lawsuit for violations of the Truth in Lending Act and other assorted consumer protection laws where it may be subject to punitive damages. The credit union then has to expend time and money defending this case. Once the credit union ascertained its final damages it seeks indemnification from the vendor through a litigious process, subject to any limitation that may be set forth in the contract. Although the credit union may have recourse for monetary damages, one thing the credit union cannot seek to recoup from the vendor is the harm suffered to its reputation.
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