Why Vendor Due Diligence is Crucial for Credit Unions and Banks

By: Web Finance Direct

For banks and credit unions alike, the increasingly interconnected landscape of the lending sector can come with its challenges. With the threats of ransomware, auto loan fraud, and more on the rise, it is crucial for lenders to fortify their operations, ensuring seamless processes and aligning with applicants with proven credit scores. One way to do this, especially for lenders that engage in indirect lending, is vendor due diligence (VDD).

Vendor due diligence is a comprehensive evaluation process conducted by a company or organization when considering entering into a business relationship with a third-party vendor or supplier,” says Andrea Silvers, Vice President of Lender Relations at Web Finance Direct. “ The purpose of vendor management for credit unions and banks is to assess and verify the vendor’s capabilities, financial stability, reputation, and compliance with relevant laws and regulations.”

So, what are some best practices for vendor due diligence? And how can it lead to more informed decision-making?

Why is Vendor Due Diligence so Important? 

From reputational risks to cybersecurity concerns to potential breaches of compliance regulations, inadequate vendor due diligence can bring a number of consequences to banks and credit unions.

Vendor due diligence helps credit unions and banks avoid potential issues such as financial instability, legal troubles, data breaches, or supply chain disruptions that could negatively affect their operations and reputation,” says Silvers.

By meticulously examining a vendor’s background, financial health, and operational capabilities, institutions safeguard themselves from potential risks, ensuring smooth collaborations and securing the trust of their stakeholders. 

“If a borrower relies on vendors for critical goods or services, for example, and those vendors fail to deliver, it can disrupt the borrower’s operations and impact their ability to repay loans,” says Silvers. “Conducting vendor due diligence helps lenders identify and assess these risks, allowing them to make more informed lending decisions.”

So, how can lenders best deploy vendor due diligence?

The Vendor Due Diligence Checklist

While there are a number of ways vendors can go about this process, there are a number of steps that should be included in any due diligence strategy.

Employ a Dedicated Due Diligence Team

They say teamwork makes the dream work. In the case of vendor due diligence, that is absolutely true. Utilizing a team or individual specifically trained in due diligence ensures that a credit union or bank’s process remains consistent, which goes a long way toward meeting compliance. 

“If the borrower’s vendors are not compliant with relevant laws and regulations, it can expose the borrower to legal and regulatory risks. Lenders may want to verify that the borrower’s vendors are in good legal standing to minimize these risks and better meet compliance requirements,” says Silvers.

Take Part in Regular VDD Training

Because the financial landscape we live in is constantly evolving, it is important to make sure your vendor due diligence team is always on top of new regulations and practices. Equipping your team with the latest knowledge and skills can make the process much more streamlined in the long term.

Embrace New Technologies

One of the biggest challenges to vendor due diligence is document and record keeping, according to Silvers. So, how can banks and credit unions navigate around this challenge? By turning to software to simplify their operations.

“Maintaining thorough and organized records of vendor due diligence activities is crucial for regulatory compliance and audit purposes. Failing to document the process adequately can lead to compliance issues,” says Silvers.

Maintain Relationships with Dealers

Another best practice for vendor due diligence is to establish consistent lines of communication and transparency with the dealerships you work with. By promoting transparency, institutions can ensure that vendors fully understand their expectations and can swiftly address any concerns or issues that arise during the partnership.

“Vendor due diligence should also be conducted in response to significant changes in the vendor’s status or operations. This includes changes in ownership, financial instability, data breaches, or other events that could impact the vendor’s ability to fulfill its obligations,” says Silvers.

Leverage CLEAR Reports

CLEAR reporting is a comprehensive investigative platform used by organizations for various purposes related to risk assessment and vendor due diligence. At Web Finance Direct, it is paramount to our commitment to match lenders with qualified dealerships across the auto, RV, marine, and powersport industries.

“Web Finance Direct utilizes Thomson Reuters CLEAR for all dealerships that we work with. It provides access to a wide range of public and proprietary data sources to help assess the risks associated with the business,” says Silvers. “We pull a CLEAR report for every dealership that we work with to ensure they pass the minimum CLEAR risk assessment standards. If the minimum risk assessment standards are not met, we will not work with that dealership.”

To learn more about joining our network of lenders and the benefits of indirect lending through a trusted partner, contact our team. You can also check out the rest of our blogs to stay up-to-date on the stories defining the lending industry.

Vendor Due Diligence FAQs

What is Vendor Due Diligence?

VDD is a process where financial institutions evaluate third-party vendors to ensure they align with operational, financial, and regulatory standards.

How can Vendor Due Diligence reduce risk in lending operations?

VDD ensures that third-party vendors involved in lending operations meet stringent standards for data security, process integrity, and regulatory compliance.

What are the best practices for conducting Vendor Due Diligence?

Best practices for vendor due diligence include maintaining consistent lines of communication with the dealerships, turning to technology to assist with record keeping, and leveraging the power of CLEAR reporting.

How often should credit unions and lenders perform Vendor Due Diligence?

It’s essential to strike a balance between maintaining a proactive approach to risk management and avoiding excessive administrative burdens on your organization and vendors. Regularly reassess your vendor relationships and due diligence processes to ensure they remain effective and aligned with your business goals and regulatory obligations.