Interagency Statement on EDP Service Contracts - FFIEC

GuidanceFederal Financial Institutions Examination Council (FFIEC)Risk Management

This interagency statement alerts financial institutions to potential risks in contracting for EDP services and/or failing to properly account for certain contract provisions.

ISSUE:

Some financial institutions are entering into EDP servicing contracts that contain provisions which may adversely affect the institution. Contract provisions may include extended terms (up to ten years), significant increases in costs after the first few years, and/or substantial cancellation penalties.

In addition, some service contracts improperly offer inducements that allow an institution to retain or increase capital by deferring losses on the disposition of assets or avoiding expense recognition for current charges. Institutions experiencing earnings and capital problems are particularly attracted to these inducements.

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