Law firms providing mortgage servicer clients default-related legal services are vendors, and financial services companies need to treat them as such. Not only that, law firms often interact directly and continuously with borrowers during the most sensitive periods of the lending relationship: foreclosure, bankruptcy, and eviction. As such, it should come as little surprise that federal regulators, including the Office of Comptroller of the Currency (OCC) and the Consumer Financial Protection Bureau (CFPB) specifically target law firms in their regulatory guidance and enforcement activities.

In our dual capacity as outside counsel for servicer-vendor management groups and as vendors, we approach vendor management issues from a unique perspective. Based upon our experience in this area, we believe financial services companies should ask themselves a series of questions to determine whether their law firm vendor management programs are sufficiently robust and comprehensive.

Here are the first five questions you should consider:

1. Do you have standardized legal services agreements with your firms?

Servicers should have written agreements with all legal service providers. These agreements should clearly describe the contractual relationship between the law firm and the servicer. Issues such as confidentiality, insurance, scope of services, term/termination, representations and warranties, and indemnification should all be covered in the agreements. While contract templates can be standardized, servicers should recognize that certain provisions may be uniquely problematic for law firms. For example, indemnification provisions may be complicated by firm insurance policies, and confidentiality provisions may awkwardly overlapobligations imposed upon law firms by applicable ethical rules. This is not to say law firms deserve less scrutiny than other vendors, but servicers should be willing to listen and try to understand what their law firms have to say.

2. Do you focus on borrower-facing interactions?

Law firms must have robust policies, procedures, training, and other infrastructure. However, the law firm vendor management process must always begin and end with a focus on borrowers. In building the program, servicers should identify the areas where law firms interact with borrowers and make sure those areas fall within the scope of the oversight program. Look at Fair Debt letters, reinstatement and payoff letters, treatment of non-recoverable costs, and protection of borrower personal information. From a regulatory perspective, protecting the borrower will almost certainly be what catches the regulator’s attention.

3. Does your program fit your organization?

There is no simple “off the shelf” law firm vendor management program. The program that works for a servicer with $10 billion in serviced loans will be different from the servicer with a $50 million portfolio. The fundamentals of those programs may be the same, but the mechanics, processes, documentation, and implementation may be extremely different. As we have told clients before, some clients need the space shuttle, while others are just fine with a Buick. Additionally, a variety of other factors, such as corporate culture and experience of vendor management personnel, may come into play in designing a program.

4. Is there an attorney file review component in your program?

After nearly a decade of close scrutiny, most law firms providing default-related legal services have developed impressive looking lists of policies and procedures. It is not uncommon for a firm’s information security policies alone to stretch to more than a hundred pages. But not all firms that look good on paper are able to translate that into error-free legal services. In terms of remediation, it seems to us that an increasing percentage of the issues we find at firms are found through review of actual legal files. As a corollary, while operational law firm reviews performed by non-legal consultants can be extremely valuable, not having a lawyer review actual files is a potentially significant gap. File review checklists can be an important tool, but should only be one component of the review process. The most effective remediation is a collaborative process that recognizes the subject matter expertise of the law firm.

5. Are problems you identify during reviews corrected?

One of the primary purposes of any vendor management program is identifying issues were vendor remediation is necessary or appropriate. If you fail to properly track and document those issues through to completion, you may create bigger problems than you are solving. Regulators will be understandably skeptical and troubled if problems persist from one year to the next. To counter this, we recommend clients develop a formal process to track unresolved law firm remediation and to document completion of those processes. Preserve evidence of how each item is addressed. And, where a law firm has a repeat finding from one year to the next, make sure that finding is highlighted with the firm and subject to additional, heightened scrutiny.

The next five questions you should ask your vendor management program will be published next week. Stay tuned…