Why it matters

In recent weeks, both Consumer Financial Protection Bureau (CFPB) Director Richard Cordray and Deputy Director Steven Antonakes have provided insight about the Bureau’s operations. Antonakes discussed the risk-based approach taken by the CFPB when evaluating whether to take a confidential supervisory or public enforcement action. In contrast to the other federal banking agencies, the Bureau focuses on risks to consumers rather than risks to institutions, he explained, and conducts examinations by product line instead of by institution. “We think our careful and reasoned approach to taking corrective action will result in consistency for industry and fairness for consumers,” Antonakes said. Adding to the conversation, Cordray discussed with the National Association of Attorneys General the “four D’s” that guide the Bureau’s enforcement activity: deceptive marketing, debt traps, dead ends, and discrimination. He also noted that the Bureau has recovered $5.3 billion in relief for consumers and more than $200 million in civil money penalties to date. As a relatively young agency with evolving policies, these statements from senior CFPB representatives are useful to persons subject to CFPB oversight and enforcement in determining what activities and practices the CFPB may view as problematic as well as areas that may raise future supervision issues.

Detailed discussion

In prepared remarks delivered at The Exchequer Club, Antonakes provided an explanation of the Bureau’s risk-based supervision program and the factors used when considering when—and what type of—enforcement action is necessary.

Antonakes emphasized the consumer-centric nature of the Bureau, noting that the CFPB’s “mission is to protect consumers by promoting a consumer financial services marketplace where consumers can understand the costs, benefits, and risks of the financial decisions that they make.”

To that end, as the leader of the Bureau’s Division of Supervision, Enforcement, and Fair Lending, he guides a risk-based and institutional product line-oriented approach to supervision. With an extremely broad scope of supervisory authority—from banks, thrifts, and credit unions to the larger participants of markets such as foreign money transmitters and debt collectors—it “was clear to us from the outset that the traditional approach to supervision wouldn’t work at the Bureau,” Antonakes explained.

Instead of visiting all the regulated institutions on a regular schedule—which would tax the limited resources of the Bureau—the CFPB elected to focus on consumer protection issues instead of institutions, which “drives our strong focus on consumer compliance management systems to ensure that regulated institutions adapt their controls to their business strategies and operational complexity,” he said.

By conducting examinations by product line rather than by institution, “we assess the likely risk to consumers in all product lines, at all stages of a product’s life cycle, and across wide swathes of the entire consumer financial marketplace,” Antonakes added.

Practically speaking, what this means is breaking down an institution into distinct product lines—such as auto lending, deposit accounts, mortgage origination, and credit cards at a large bank. These institutional product lines are then compared across institutions, charters, or licenses. Each product line is evaluated for issues such as the potential for consumer harm related to a particular market, the size of the product market, the supervised entity’s market share, and the risks inherent to the supervised entity’s operations.

Risks to consumers are examined on two levels, Antonakes told attendees: the market level and the institution level. This allows the Bureau to consider the relative risks to the consumer from each institution’s activity within any given market by considering market share as well as “field and market intelligence” with qualitative and quantitative factors such as the strength of compliance management systems, the existence of other regulatory actions, and the number and severity of consumer complaints, for example.

“Taken together, the information that we gather about each institutional product line at the market-level and at the institutional-level allows us to focus our resources where consumers have the greatest potential to be harmed,” Antonakes said. “Relatively higher risk institutional product lines within relatively higher risk markets are our highest priority.”

At the conclusion of a review, the CFPB provides a “roll-up examination report” that summarizes the Bureau’s examinations and includes the Federal Financial Institutions Examination Council compliance rating as well as a supervisory plan for smaller or less complex entities.

Where more significant violations are found, the Bureau forwards the matter to its action review committee. Based on a severity of examination findings, the committee will recommend whether confidential supervisory action or a public enforcement action should occur.

What factors are considered? Antonakes said they fall into three categories: violation-focused factors, institution-focused factors, and policy-focused factors. “For example, we are more likely to pursue public enforcement if we identify improper foreclosures than slightly miscalculated APRs,” he noted. “If we suspect a troubling practice is widespread, we may want to put the entire industry on notice through public enforcement actions.”

The behavior of an institution after the violation occurred is also an important consideration, Antonakes said, such as whether the entity cooperated with the Bureau, or self-identified or self-corrected the violation, which “may tilt the balance in favor of using the supervisory tool.”

Director Richard Cordray also provided insight into the workings of the Bureau in a recent speech to the National Association of Attorneys General (NAAG).

The CFPB strives to combat the “four D’s,” he said: deceptive marketing, debt traps, dead ends, and discrimination.

“It is obvious that consumers cannot make sound financial choices if they are given inaccurate or false information,” he said. “But when key information is deliberately withheld, or when the information provided is misleading, consumers similarly have a hard time making sound choices.” Cordray highlighted many efforts by the CFPB against deceptive marketing, highlighting a recent action in the for-profit college industry.

Discussing debt traps, Cordray pinpointed payday loans as a major focus for the Bureau, the first federal agency to supervise payday lenders for compliance with federal consumer financial laws. Currently in “the latter stages” of formulating new rules for the market, Cordray promised that state AGs—who have “extensive and varied experience” in the area—will have the opportunity to review and evaluate the forthcoming proposals.

Dead ends—or when “consumers have limited clout because they cannot choose the business they are dealing with”—led Cordray to reference the CFPB’s work in the realms of credit reporting and debt collection, another area where the Bureau is in the process of crafting regulations.

Finally, Cordray noted that discrimination remains a priority, with the Bureau keeping “a watchful eye” on the auto industry and leveraging technology to help identify patterns in mortgage origination that may be discriminatory. “[W]e are working to secure the right to equal treatment in the financial marketplace based on individual merit and responsibility,” he said.

The Director—who referenced his own past life as Attorney General of the state of Ohio—concluded by noting that in the last three and one-half years, the publicly announced enforcement actions of the Bureau have resulted in $5.3 billion in relief to 15 million consumers and more than $200 million in civil money penalties.

To read Deputy Director Antonakes’ prepared remarks, click here.

To read Director Cordray’s prepared remarks, click here.