At a Feb. 18 meeting with The Exchequer Club – an organization comprised of senior professionals from trade associations, federal regulatory agencies, law firms, congressional committees and national press with a primary interest in national economic and financial policy – Consumer Financial Protection Bureau (CFPB) Deputy Director Steven Antonakes provided an outline of the CFPB’s supervisory program.
CFPB supervision: What the bureau does, how it affects your business, and key things you need to know (Part 1)
What does the CFPB’s approach mean for regulated entities?
Antonakes’ detailing of the supervisory process reveals nothing new, according to Benjamin Olson, a partner at Buckley Sandler LLP and a former deputy assistant director for the CFPB’s Office of Regulations.
“The bureau’s approach to supervision has evolved along with the agency, but a risk-based approach to allocating supervision resources has been part of its thinking from the beginning. The bureau knows it will not be able to visit regularly every bank, credit union and non-bank subject to its supervisory authority, so it focuses on the institutions and practices that it believes present the greatest potential risk to consumers,” Olson said in a written statement.
Olson added that to set its priorities, the CFPB uses the information from the complaints that it receives and from other public sources.
“The best way for a CFPB-supervised institution to protect itself is to monitor and address the complaints it receives, the complaints the bureau receives, and – to the extent possible – the complaints posted on third-party websites. In addition, institutions should monitor the bureau’s public statements because the bureau often signals that an area will be a priority before taking action. Mortgage servicing is the best example of this,” Olson wrote.
Some of Antonakes’ remarks suggest that the CFPB expects to find violations: “If we are risk prioritizing our exams correctly, including examining a number of non-banks that have not previously been subject to federal supervision, it is likely that a number of our examinations will yield findings that warrant some form of corrective action,” Antonakes said.
So what about issues that might fall through the cracks?
According to Lucy Griffin, who is the president of Compliance Resources Inc. in Reston, Va., and a veteran of several federal agencies, the product-line approach gets a very patchy result.
“Investigating one aspect of an institution’s performance ignores the ‘big picture’ of how compliance is managed within the institution. The CFPB can find a problem – such as overzealous cross-selling in a third-party call center – and conclude that because there is a violation, there must be weaknesses in the compliance program. But the diagnostics end there. The enforcement order tells the institution to fix the problem – whatever it is,” Griffin said in a written statement.
“Missing from the CFPB’s enforcement cases is attention to the management structure, policies and program of the entire institution that you find in enforcement actions brought by the supervisory agencies. They understand that in order to fix and prevent problems, it is necessary to look more broadly to determine cause, effect and prevention,” Griffin said, adding that supervision is designed to prevent violations and their resulting harm to consumers.
Griffin stated that only enforcement agencies follow the product-line approach and, with enforcement, there needs to be a violation and resulting harm, so the process is not very conducive to preventing violations in the first place.
“The enforcement approach that the CFPB is taking enables the bureau to make a big splash with each case, but fundamentally, it leaves the rest of the industry – and other parts of the subject company – unsupervised. The result is that they can bring an enforcement action on a particular practice and overlook other problems,” Griffin said.
Leonard Chanin, a lawyer with Morrison & Foerster and former assistant director at the CFPB’s Office of Regulations, said that there are some pluses and minuses to the CFPB’s approach. Chanin said that such an approach is effective for when supervisory resources are limited, but there is the possibility that certain issues that could pass unnoticed. Consumers might not file complaints, or even know when a certain action is a violation of law. For example, with topics such as fair lending, consumers might not know how other consumers have been treated in order to spot possible disparate treatment.
Chanin said he wouldn’t take comfort or discomfort in Antonakes’ remarks, but would recommend that institutions make sure that they have a strong compliance management system in place.
Finally, the approach that the CFPB says it takes seems to have a disconnect with its supervised audience. In his remarks, Antonakes said: “We strive to bring an emphasis on humility to all of our work. We understand the enormity of our mission and our responsibility to treat businesses reasonably with an understanding of the burdens associated with regulatory compliance. … We aspire to supervise and enforce federal consumer protection laws fairly in a way that protects law-abiding businesses from unfair competition by those companies that seek advantage by breaking the law.”
The idea, though, that CFPB examiners are humble government officials who are tasked with an enormous mission does not appear to come off that way in the industries it oversees. “Everything I have heard from the industry and other consultants is quite the opposite of what Steve describes,” Griffin said.
What should covered persons takeaway from Antonake’s remarks?
- Nothing major within the CFPB’s approach has changed.
- Debt collection and mortgage servicing were considered as higher risks to consumers.
- “Banks are sitting ducks being used as target practice,” by the CFPB, Griffin said.
- Recommendations include 1) monitoring and addressing the complaints received by you and the CFPB as well as those posted on third-party websites; 2) monitoring the CFPB’s public statements; and 3) maintaining a strong compliance management system.
- A copy of the CFPB examination manual can be found at http://www.consumerfinance.gov/guidance/supervision/manual/.