SERVICE PROVIDER POLICY

A. Philosophy Re: Service Providers
Creating beneficial and effective relationships with Service Providers is essential to the successful operations of the Credit Union. Service Providers enable the Credit Union to be able to provide services more efficiently and effectively and to provide valuable financial services to members that cannot be offered through the traditional credit union model. The Credit Union will evaluate its internal resources and determine whether there are strategic and/or business benefits to using Service Providers for specific services. The Credit Union desires to work to create long term service partnerships with trusted Service Providers that are mutually beneficial. Some of the Service Providers used by the Credit Union will be credit union service organizations (CUSOs). The issues the Credit Union will consider prior to investing in a CUSO are set forth in the Credit Union’s CUSO Investment Policy.

B. Background and Purpose of Policy
The purpose of the Service Provider Policy is to provide guidance to the Credit Union in considering, selecting, implementing, monitoring and managing service partnerships in order to enhance the success of the service partnerships. This Service Provider Policy covers both CUSO and non-CUSO Service Providers. The Credit Union will contract with Service Providers only if they have demonstrated the ability to provide the services consistent with this Policy. This requirement does not exclude start-up operations if the start-up operation has a viable business plan with experienced persons and sufficient resources to implement the plan.

C. Definitions
1. Collaboration Manager: A senior staff member, appointed by the President, who reports directly to the President and works with the staff and board to help identify, select, implement, monitor and manage all of the Credit Unions service partnerships. The Collaboration Manager will also implement the CUSO Investment Policy.

2. Subject Matter Expert: The Credit Union staff member that is knowledgeable about the subject matter of the services in question and works with the Collaboration Manager in identifying, selecting, implementing, monitoring and managing the specific service partnerships There will be a specific Subject Matter Expert for each collaboration depending on the service provided by the collaboration. The Collaboration Manager shall appoint the Subject Matter Expert after consultation with the President.

3. Service Provider: A third party service provider which may or may not be a credit union or CUSO.

D. Administration of Service Provider Policy
The Collaboration Manager, in conjunction with the designated Subject Matter Expert, as appropriate, shall administer this policy by performing the following duties:

1. Identification of Service Provider Opportunities
a. Acquiring knowledge of service provider opportunities.
b. Networking with professional colleagues to determine the experience of other credit unions with specific Service Providers.
c. Bringing to the attention of the senior staff service provider opportunities, especially for those services that will enhance and promote the strategic goals of the Credit Union.
d. Supporting the senior staff and the board in the strategic planning process as strategic direction and service solutions are considered.
e. Identification of operational and regulatory risks associated with the service partnerships.
f. Evaluating the potential service provider opportunities in accordance with the issues identified in this Policy.
g. Understanding the licensing, compliance and regulatory issues associated with a proposed service.

2. Selection of Service Providers
a. Administering the selection process for Service Providers.
b. Preparation of specifications and requests for proposals as may be used in the selection process.
c. Compiling and evaluating responses to requests for proposals.
d. Coordinating the interview and due diligence of Service Provider candidates.
e. Compiling the due diligence on Service Providers per Section D.
f. Acting as liaison between the Credit Union and Service Providers.
g. Presentation of results and recommendations to staff and/or board.
h. The President or his/her designee shall have the authority to enter into agreements with Service Providers consistent with the Credit Union’s strategic plan and business plan.

3. Implementation of Services by Service Providers
a. Negotiation of agreements with Service Providers consistent with the Service Provider Policy and the needs identified by the Subject Matter Expert.
b. Coordinating the integration of the services with the Credit Union, including the education of the Credit Unions staff on the purpose and value of the services.
c. Reviewing and recommending to the President any performance incentives to the Credit Union staff to incent them to support the success of the service partnership.
d. Coordinating the resolution of any implementation and operational issues between the Credit Union staff and the Service Provider staff.

4. Monitoring Service Partnerships

a. Collecting performance reports from the Service Provider and conducting performance review sessions with them on no less than a quarterly basis.
b. Providing the performance reports to the Credit Union senior staff and board.

5. Managing Service Partnerships

a. Making recommendations to the President regarding actions to improve the service partnership.
b. Counseling the Credit Union staff and the Service Provider on remedial actions to address issues and, if not satisfactorily resolved, recommend to the President in writing actions to hold persons or organizations accountable.
c. Coordinating the implementation of procedures to manage the operational and regulatory risks
d. Liaison with the regulators and the Credit Union retained professionals regarding service partnerships.
e. Coordinating the termination and transition of service partnerships.

D. Due Diligence Considerations

The Collaboration Manager shall perform due diligence to assist the Credit Union in evaluating potential Service Provider opportunities. The issues to be considered include the following:

1. Background Check

a. What is the experience of the Service Provider and its key people in performing the services?
b. What is the reputation of the Service Provider and its key people in providing the services?
c. What is the reputation of the Service Provider and its key people for honesty and fair dealing?
d. What are the licenses required to perform the services and do the Service Providers and/or the Credit Union have them?
e. Are there any material claims, lawsuits or regulatory actions pending against the Service Provider and, if so, what is the nature and status of the actions?
f. What do the Service Provider’s clients (both the current and past) report as to the performance of Service Provider?
g. Are there third party verifiers of Service Provider’s performance or reputation, e.g. better business bureau, attorney general, chamber of commerce, FTC?
h. The Credit Union will work with Service Providers that have business practices that are consistent with the Credit Unions service level for its members.
i. In selecting a Service Provider, preference will be given to Service Providers that are credit unions or CUSOs as there is an alignment of purpose with credit union owner users that is valuable to Credit Union.

2. Business Model, Cash Flow, Financial Strength and Operation Control

a. Who are the participants in the delivery of services from or in conjunction with the Service Provider and what shared ownership or other potential conflicts exist between the participants?
b. How does the income and expense flow between the participants and how can the credit union track it?
c. Do the Service Provider and the other key participants have sufficient financial resources to deliver the services as promised?
d. Does the Service Provider have other indicators of financial and operational controls, e.g. SAS 70 reports?

3. Legal and Accounting Considerations

a. Will the Service Provider be willing to use a service agreement that conforms to Section F of this Policy?
b. Are there any accounting issues to track, identify and classify transactions that need to be resolved?

4. Risk Identification, Measurement, Monitoring and Control

a. Identify the criticality of the services and the relative level of due diligence and risk management required.
(i) Is the service Highly Critical (the service supports a core service of the credit union and the impact of failure would cause an immediate and significant member services issue and/or safety and soundness issue). If so, due diligence shall be performed on entities providing Highly Critical services to or through the Service Provider.
(ii) Is the service Critical (the service supports a core service of the credit union and impact of failure is mitigated by the fact that the credit union has alternative service options that would prevent an immediate and significant member services issue and/or safety and soundness issue).
(iii) Is the service Non-Critical (the service does not support a core service of the credit union and impact of failure will not present an immediate and significant member services issue and/or safety and soundness issue).
(iv) Has the Service Provider effectively provided services to the Credit Union? If so, less due diligence is required.
(v) Is the Service Provider a CUSO which is controlled by credit unions? If so, the there is greater confidence in the client service orientation of the Service Provider.
b. Evaluate potential risks to credit, interest rate, liquidity, transaction, compliance, strategic and reputation.
c. Evaluate the expectations of the Credit Union and Service Provider, the staff expertise of Credit Union and Service Provider, the impact on membership, cost/benefit analysis (including the cost of the Credit Union monitoring and support) and exit strategy.
d. Are there measurable and achievable performance standards (deliverables)?
e. Can and will the Service Provider supply performance reports on the deliverables that are subject to independent verification by the Credit Union?

F. Essential Elements in a Service Provider Relationship and Agreement

The Collaboration Manager shall insure that all Service Provider agreements include the following terms:

1. The duties of the parties shall be clearly defined.

2. The risks assumed by the parties shall be fairly allocated so that neither party is assuming risks that are not within the substantial ability of the responsible party to control the risk.

3. The critical expectations of the parties shall be defined, e.g., the type and level of support expected by the other party, acceptable service levels, reporting requirements and minimal levels of business and income.

4. The parties shall fully disclose the revenue and expense flow so that both parties fully understand where each dollar in the relationship is generated and paid.

5. After due diligence, the Credit Union should be satisfied that the revenue and expense sharing is within market range so that both parties are treated fairly.

6. The Service Provider shall provide reports to the Credit Union on a monthly or other specific periodic basis that provides all the key elements necessary to measure the whether the acceptable service levels are being met, e.g., number of members served, amount of revenue generated, and disposition of member complaints.

7. The Credit Union shall protect its brand and not permit its name or logo to be used by the Service Provider without the Credit Unions permission.

8. The agreement should consider which risks should be insured, the adequacy of the insurance and the party that obtains the insurance.

9. The warranties, indemnifications and limits to damages shall be examined to determine if the Credit Union has adequate remedies if there is a failure to perform by the Service Provider.

10. The member relationship shall be protected by not permitting any solicitations by the Service Provider or other third parties during and after the term of the agreement without the expressed written consent of the Credit Union. The only interaction with the members by the Service Provider and its affiliates shall be solely to provide the services under the agreement. No member information shall be used other than to provide the services under the agreement.

11. Unless there are good reasons to the contrary, the agreements shall provide for no-cause terminations by the Credit Union with relatively short notice periods. Some exceptions may be given if the Service Provider has legitimate set-up costs that have to be recovered over an initial minimum term or there are significant financial incentives to have longer terms. In every case, the Credit Union shall have the ability to terminate for cause at any time. For Cause should be defined in the Agreement.

12. At termination, the Service Provider shall cooperate with the Credit Union to transform the accounts and information to the Credit Union or the Credit Unions new affiliated Service Provider. The transferring Service Provider shall not charge a fee for this service unless market conditions render such a fee to be reasonable. All out-of-pocket costs are generally reimbursed to the Service Provider.

13. There shall be no restriction on the Credit Union to solicit its members for any services post termination, provided that in some circumstances the Credit Union may agree not to target market existing clients of the Service Provider for some period of time, provided that revenue continues to be shared with the Credit Union on those accounts.

14. The parties shall comply with all applicable privacy laws, including the Guidelines of Part 748 of the NCUA Regulations. All member information disclosed to the Service Provider shall be destroyed or returned by the Service Provider after termination of the agreement. The Service Provider is entitled to keep information provided by the member directly to the Service Provider and where the member continues to use the Service Provider.

15. The agreement shall provide a time and cost efficient method of resolving conflicts. Arbitrations are preferred with an exception for injunctive actions for privacy violations. The site of the arbitration and court action and applicable law is preferred to be local but this is flexible to the situation.

16. The Credit Union shall be kept informed of all member complaints and the disposition/resolution of the complaints. The Service Partner shall be required to make every reasonable effort to promptly and satisfactorily resolve member complaints and the failure to do so at an agreed level will be an item of for cause termination of the agreement.

This is the work product of the law firm of Messick & Lauer P.C. in Media, PA www.cusolaw.com. This Policy is illustrative and not meant to be used without legal review for the specific client situation. You may obtain permission and legal advice in the use of this Policy by contacting us at 610-891-9000 or gmessick@cusolaw.com .