As a creditor managing third-party collection vendors, ensuring their compliance and effectiveness is critical to protecting your brand, customers, and bottom line. But have you considered the risks posed by their vendors? These subcontractors, known as fourth parties, often play integral roles in service delivery but can introduce significant risks that ripple through your operations.
In this blog, we explore why auditing fourth-party vendors is essential and provide some practical strategies and techniques to mitigate these risks effectively.
The Importance of Fourth-Party Audits
Fourth-party vendors play crucial roles in data storage, skip tracing, IT support, security and software services. Their performance directly impacts your third-party collection agencies—and, by extension, your operations. This makes fourth party oversight a vital component of your audit strategy, ensuring no weak links in your vendor ecosystem.
While you may not have a direct relationship with fourth parties, their failures basically become your failures, and can result in:
- Regulatory Non-Compliance
Regulations such as GDPR, CCPA, or HIPAA (to name a few) require data protection measures that extend to subcontractors. Fourth-party breaches can place you and your third-party vendors at risk of hefty fines and legal exposure.
- Operational Disruptions
A downtime or failure by a critical fourth-party vendor can cripple your collection agency’s ability to perform, disrupting your cash flow and customer satisfaction.
- Data Breaches and Security Risks
We’ve seen some data breaches originate from smaller subcontractors with weaker cybersecurity defenses. If a fourth party is breached, sensitive customer data is exposed, eroding trust, damaging your reputation and often causing financial consequences.
Strategies for Effective Fourth-Party Auditing
Since creditors often lack direct contracts with fourth parties, oversight requires a strategic approach. You’ll be working with your third-party vendors as you evaluate their third-party (your fourth party at that point) vendor management and can review their actions as well as include your own tests and controls of practices. I like to consider all the activities in my third-party processes and risk management, from selection to onboarding to management and audit to end of relationship. I’m expecting my third party to have a robust Third-Party Vendor Risk Management program and oversight.
Here are actionable steps to manage this risk:
- Leverage Contractual Provisions – Put Fourth Party Oversight in the Contract
Include provisions in your third-party contracts that extend compliance requirements to subcontractors. Mandate that your vendors audit their fourth parties and provide evidence of due diligence.
- Demand Transparency from Third Parties
Require your third-party vendors to disclose their critical fourth-party relationships. Regularly review these subcontractors’ roles, contracts, confidentiality statements, NDAs and compliance standards. When conducting your oversight, you’ll want to be sure to verify that any of your contract requirements that extend to fourth parties are reviewed by the third party in their annual reviews. It’s not good enough to say, well there are 400 repo agents, that’s too many to audit. The vendor needs to manage any fourth parties utilized, and that means contracts, security, privacy, licensing, and other possible requirements.
- Prioritize Critical Dependencies
Focus audits on fourth parties that play vital roles, such as those managing customer data, IT infrastructure, or compliance reporting systems. Understanding the risk of fourth party vendors can help determine the appropriate levels of oversight for the situation. Understanding incident response and potential contingency plans can also help ensure minimal disruption if things do not go according to plan.
- Request Audit Reports and Oversight Documentation
Ask for the audit reports from your third party. They need to audit the fourth party and provide necessary verification. In your evaluation of the fourth party, you’ll want to review their activities, as well as evaluate with some tests and controls of your own. For example, sample 10 agreements with fourth parties, to see contract language includes your specific requirements. Or ask for ten licenses from the vendors and verify that licenses are up to date. Another test and control could involve training – ask for proof of the security training of a number of the fourth party vendors. Review the vendor’s audit reports or certifications. I’m always interested in remediation of vendors, and how that process works. Check with your third party for any vendors that are under a remediation process, or any that have been terminated. And, if there are terminated vendors, or vendors who no longer do business with the agency, I like to verify that access has been removed and also review the processes for destruction of data if appropriate.
- Monitor Continuously
Be sure to monitor or verify your third party is monitoring their relationships with their vendors. I like to have touch points throughout the year rather than wait until an annual audit. I’d rather know about gaps now, or risk areas, rather than wait until an annual review.
Why It Matters
Fourth party vendors can have a significant impact on a third-party agency – either enhancing their success, or the opposite. Don’t overlook this critical oversight step—it could save your business from significant risks. Failing to audit fourth parties can result in unwelcome consequences – possibly in regulatory fines, reputational damage, and operational breakdowns. By proactively addressing these relationships and potential risks, you safeguard your organization and enhance the resilience of your collection operations.
Fourth-party auditing isn’t just a best practice—it’s a necessity in today’s interconnected vendor ecosystem. By leveraging transparency, robust contractual clauses, and a well-planned audit and monitoring approach, you can see beyond the surface and ensure the integrity of your operations and maintain trust with your customers.
Author: Judy Hammond
Judy Hammond is founder and President of Resource Management Services, Inc. The corporation was founded in 1986 and specializes in auditing and consulting, serving the collection and recovery industry. As President of Resource Management Services, Inc., she has more than 35 years of experience with an emphasis on operational reviews for compliance and operational effectiveness of collection operations, both for creditors’ internal collection and recovery operations as well as collection agencies and attorneys. She has worked with top banks and financial institutions, utilities, credit unions and telcoms, (and their vendors) and has conducted many Best Practices projects. She is author of various industry publications: “Comprehensive Agency/Attorney Usage Study,” “Comprehensive Agency/ Attorney Usage Study II” and “Collect More From Collection Agencies”. Her work with creditors who were looking to sell debt for the first time, and subsequent Buyer/Seller research was the foundation for the second corporation, The Debt Marketplace, Inc. She worked with Dennis Hammond as co-founders of the Debt Buyers’ Association, (now RMAi), building the foundations for industry standards, as well as the original code of ethics. She developed and produced two industry conferences, Collection and Recovery Solutions and Debt Connection Symposium & Expo, from their inception in 2002 and 2006, respectively, to 2022. Prior to starting her own company, she worked with two large collection agencies.
Note: Resource Management Services, Inc. provides Third Party Auditing/Oversight services for Creditors. For more information, contact me at judy.hammond@resourcemanagement.com or check us out at ResourceManagement.com
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