The Consumer Financial Protection Bureau (CFPB) earlier this month informed the nation’s financial institutions that they must closely supervise any law firms, document processing companies or other outside contractors hired to help service loans. The guidance from the CFPB specifically notes that banks and other financial institutions can be held liable for the harm caused by third-party service providers that fail to comply with the law. Many of the abuses addressed by the National Mortgage Settlement — including improper notarization and document signing practices — were committed by law firms and other independent contractors hired to process foreclosures on behalf of mortgage companies. Under the terms of the CFPB’s guidance, financial institutions are expected to: Verify that third-party contractors understand and are capable of complying with legal requirements related to the services they provide; Ensure that contractors properly train and supervise their employees to comply with the law; and Establish internal controls to monitor the work performed by contractors and promptly correct any problems. In a related action, the Federal Reserve Board last month issued a consent order requiring Morgan Stanley to rectify a “pattern of misconduct and negligence” in residential loan servicing and foreclosure processing at its mortgage subsidiary. According to the order, the company’s subsidiary, Saxon Mortgage Services, Inc., engaged in a number of “robo-signing” practices, including improperly notarizing and preparing foreclosure documents. Even though Morgan Stanley recently sold the subsidiary, it is responsible for providing “remediation to borrowers who suffered financial injury as a result of wrongful foreclosures.” If the firm reenters the mortgage business, it must implement policies and procedures to make sure its employees and outside contractors are properly trained and supervised to comply with all legal requirements for servicing loans and processing foreclosures.