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Answer: The bank should define specific events that are considered a default under the contract and give the provider an opportunity to resolve a default before terminating the contract.
D is correct. The agreement should define specific events that constitute a default, and the bank should give the provider an opportunity to cure the default if one of these events occur instead of immediately terminating the contract. A is incorrect. While the bank should audit the provider's processes, the bank shouldn't give the provider the right to audit its own processes. B is incorrect. Neither of these actions are required to comply with best practices, although the bank should assess the adequacy of the provider's insurance policy. C is incorrect. The provider should develop its own incentive compensation structure, and the bank should review it. The bank should ensure that sales reps do not receive an incentive compensation structure which would encourage the bank or its customers to take too much risk, and a high proportion of variable compensation would be problematic in this respect.
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A bank wants to reduce its operating expenses and considers hiring a third-party service provider to offer additional loan origination and credit services to some of the bank's customers. The bank's legal department has begun negotiating the terms of a contract with the provider. Which of the following describes the most appropriate set of due diligence actions for the bank to take before signing the contract?
A
The bank should audit the service provider's operational processes and also give the service provider the similar right to audit the bank's processes.
B
The bank should purchase insurance to cover potential losses resulting from the provider's services and should require that the provider deposit collateral with the bank to mitigate performance risk.
C
The bank should determine the compensation structure for the provider's sales representatives and ensure that it incentivizes their productivity through a high proportion of variable compensation.
D
The bank should define specific events that are considered a default under the contract and give the provider an opportunity to resolve a default before terminating the contract.
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