The Costs of Ignoring Third-Party Risk Management in Mortgage Firms

The mortgage and lending sector operates within a very complex risk management landscape — a landscape that becomes increasingly complex when you add in the issue of risk management. For lenders and mortgage firms, third-party vendors are an important consideration when examined within the context of risk management. But what happens if a firm’s leadership and stakeholders opt to ignore the issue of third-party risk management (TPRM)t in a mortgage firm? Stated simply, the outcome can be devastating to a business and its interests. 

What is Third-Party Risk Management (TPRM)? 

Third-party risk management or TPRM refers to the practice of identifying and mitigating third-party-related risk factors that may be impacting a business. 

When we say “third-party,” this refers to parties who engage with the company and its interests. Examples include vendors and contractors, who generally account for a majority of a mortgage firm’s third-party engagements. 

How Do Vendors, Contractors, and Other Third-Parties Affect Mortgage Firms as it Relates to TPRM? 

Each relationship has its own dynamics, and this also rings true for third-party risk management relationships. Each third party will have a slightly different role and unique relationship dynamics with a mortgage firm. To be successful in mitigating risk, an organization must account for these variations as they develop a third-party risk management strategy. 

It all sounds rather involved and complex, right? Effective third-party risk management is a challenge and some mortgage firms may be inclined to focus on other aspects of risk management. But this can open the door to some major risk management challenges and subsequent losses. 

Vendors, Contractors, and Understanding Third-Party Risks for Mortgage Firms

Vendors and contractors account for a lion’s share of the third parties who are on a mortgage firm’s TPRM playing field, making them major considerations when developing a risk management strategy.

Vendors can take many forms, from the guy who hauls in those giant jugs for the water dispenser, to the team of trainers who are hired to host a day-long workshop for a mortgage firm’s employees. Vendors are relevant for third-party risk management because they are often granted access to sensitive systems, documents, and information that can easily be exploited by dishonest individuals. 

Contractors represent another example of a threat within the context of a mortgage firm’s third-party risk management landscape. A mortgage firm may work with a contractor in the course of doing business. For example, a mortgage and lending firm may want to migrate their company’s documents and paperwork to a cloud-based storage platform. This business may opt to call in a contractor to set up a cloud platform, oversee the migration and then manage the platform for a period of time. In performing this sort of work, the IT contractor poses a threat in terms of risk management because they have access to documents containing sensitive information that could easily be exploited by a dishonest individual. This is just one example of the damage that can arise when a vulnerability is seized upon by the wrong person (or people). 

The Costs of Ignoring Third-Party Risk Management in Mortgage Firms

The costs of ignoring third-party risk management in mortgage firms can be severe. But at times, investing in third-party risk management can be a hard sell since decision-makers are often more keen to be reactive versus proactive.  

The reality is that third-party risk factors and related vulnerabilities can have a profound impact on a mortgage firm and other companies in this business sector, with impacts ranging from strategic to operational to financial and beyond. Illustrating the potential effects of ignoring TPRM can be part of an effective strategy if you’re looking to gain support for a third-party risk management and mitigation initiative. 

Let’s examine a few of the adverse impacts that one may encounter if a mortgage firm opts to ignore TPRM in its risk management and mitigation strategies. 

The Cost of Data Theft and Third-Party Risk Management

Mortgage firms collect and store large volumes of sensitive data. This includes personal data for the mortgage firm’s loan applicants and clients/borrowers, along with financial information from these individuals. This information is highly sought-after by criminals for the purposes of identity theft and the like. 

Data theft is an extremely challenging issue to confront as a business — especially if you’re a business in the financial sector — because it represents a breach of trust. An individual provides very sensitive personal and financial information to a business and they expect that this information will be safe and protected. When that doesn’t happen and the mortgage firm’s data stores are compromised, clients are left feeling unsettled and even violated. This is not only bad for businesses with existing clients, but it can also have a profoundly adverse impact on the mortgage firm’s future business. Prospective clients may be reluctant to work with a mortgage firm that has been involved in a data breach incident.

When a vulnerability is exploited and an incident occurs, there is always some degree of operational disruption. This too comes into play as you evaluate the effects of ignoring the various risk factors, threats, and vulnerabilities that confront a mortgage firm. 

When all is said and done, the costs of ignoring this risk can include: 

• Financial loss due to the departure of existing clients;
• Financial loss due to fewer new clients; and
• Reputation damage makes it difficult to pull in new clients. 

There’s also the cost of repairing the damage from a TPRM-related incident. This task is one that can be extremely difficult. This is especially true in the case of a data breach involving clients’ sensitive personal and financial information. Even the most experienced public relations firms may get only mediocre results in their attempts to repair a mortgage firm’s reputation following this sort of incident. Regaining the public’s trust is very difficult, especially when it’s an individual’s personal and financial information at stake. 

This TPRM example involving a mortgage firm that’s targeted for a data breach/data theft incident actually speaks to several regions or domains of risk, including the following: 

• Financial Risk
• Reputational Risk; 
• Regulatory Compliance Risk; and
• Security Risk. 

While we’ve outlined the financial, security, and reputational aspects of TPRM, there’s also the issue of regulatory compliance-related risk. Mortgage lenders are part of the highly-regulated financial sector and as such, they’re subject to intense regulatory oversight which extends into the area of data management. Therefore, a data breach involving a vendor, contractor or other third party could also make a mortgage firm non-compliant, resulting in significant fines and penalties. 

Using TPRM Software to Protect Your Mortgage Firm

The costs of ignoring third-party risk management in mortgage firms and other companies within the financial space can be significant. But a bit of strategizing, combined with the right technology can go a long way toward minimizing risk and vulnerabilities. 

TPRM software offers a good solution as these platforms provide a centralized framework that guides a mortgage firm’s risk mitigation efforts. At iTech, we specialize in the development of third-party risk management software solutions. Our team will work to identify your firm’s unique risk management needs and we’ll use these insights to architect a TPRM software platform for your business. Contact iTech today to discuss your mortgage firm’s risk management challenges.