If you're a compliance officer at a consumer financial services company, the two words most likely to keep you awake at night are "CFPB" and "examination." As the Consumer Financial Protection Bureau (CFPB or Bureau) celebrates its fifth anniversary on July 21, 2016, the Bureau has settled into its role as the primary supervisor of consumer financial products and services. For compliance officers, the prospect of a CFPB examination can be daunting: voluminous document requests, several months of onsite visits, and the potential for remediation and penalties in the event of significant identified deficiencies.
The key to surviving a CFPB examination lies in careful preparation – preferably before the Bureau targets your company for scrutiny. The companies in the best position to manage a CFPB examination are usually those that understand and follow applicable laws, have invested significant time and resources into building their compliance management programs, and have the capacity to make corrections when needed.
The Examination Process
Established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Act), the CFPB supervises depository institutions and other providers of consumer financial services. The CFPB is responsible for implementing and enforcing federal consumer financial law, including the Electronic Fund Transfer Act, the Fair Credit Reporting Act, and the Truth in Lending Act. In addition, the CFPB has enforcement and supervision authority over unfair, deceptive, or abusive acts or practices (UDAAP) involving consumer financial products or services.
When it comes to supervision, the CFPB has authority over large banks, thrifts, and credit unions with over $10 billion in assets and their affiliates and service providers, as well as "larger participants" in markets for other consumer financial services, such as debt collection and credit reporting, among other activities. In other words, there are entire industries that are now subject to CFPB examination that were previously unregulated at the federal level, including nonbank financial services providers, debt collectors, small-dollar lenders, debt relief companies, and auto dealers, to name just a few.
The purpose of the CFPB's examination process is to assess a company's compliance with federal consumer financial laws, obtain information about the company's activities and compliance systems or procedures, and detect and assess risks to consumers and markets for consumer financial products and services. The CFPB identifies an entity for examination based on an assessment of the entity's risk to consumers, including its size, volume of consumer financial transactions, and volume of complaints in the CFPB's consumer complaint database. The CFPB will usually provide an entity with 30 to 60 days' advance notice of an examination.
Depending on the nature of the examinee's operations, the CFPB will generally engage in the following during the course of an examination:
- Collect and review available information (from within the CFPB, from other federal and state regulators, and from public sources);
- Request and review documents and information from the entity, including, for example, compliance policies and procedures, training materials, contracts, and audit findings;
- Go onsite to observe, conduct interviews, and review documents and information;
- Draw preliminary conclusions about the regulated entity's compliance management and its statutory and regulatory compliance;
- Draft the examination report; and
- After final internal clearance, finalize and transmit the report to the supervised entity.
The CFPB has adopted the Federal Financial Institutions Examination Council (FFIEC) Uniform Consumer Compliance Rating System, through which the CFPB will assign a confidential consumer compliance rating to an entity as part of the examination. The rating system evaluates an entity's compliance with Federal consumer financial law and the adequacy of its compliance systems. The rating is based on a scale of 1 through 5, with "1" representing the highest rating and lowest level of supervisory concern, and "5" representing need for "the strongest supervisory attention."
The CFPB will generally close an examination by providing the examinee with a report setting forth a compliance rating and any identified supervisory concerns. The report will provide a detailed summary of the examination, a discussion of areas of concern, and potential deficiencies and action items for remediation (known as "matters requiring attention"). The CFPB encourages proactive self-correction, but some circumstances may nevertheless be sufficiently serious to warrant a public enforcement action.
If an examination matter is referred for enforcement, the CFPB has authority to bring an administrative proceeding or file a civil complaint in federal district court. The Bureau can obtain legal or equitable relief for violations of federal consumer financial law, including, but not limited to, equitable monetary relief (e.g., restitution) and civil monetary penalties (which range, depending on the severity of the challenged conduct, from $5,437 to $1,087,450 for each day during which a violation continues).
How to Manage a CFPB Examination
If the best defense is a good offense, then the best way to prepare for a CFPB examination is to conduct a detailed internal review of your compliance operations (a "mock audit") prior to a formal examination to identify areas of potential weakness or other areas that might draw the attention of examiners. This exercise not only will help button up areas of potential weakness before an examination, but will also train staff on how to respond to requests for information, interviews, and other examination activities in a timely and professional manner.
Once an examination notice is received, there are a number of steps that can help ensure a smooth process and, it is hoped, a positive outcome:
- Designate an employee (preferably within the legal or compliance department) to serve as the point of contact for the CFPB examination team and the document collection and production process.
- Prepare and train staff who will likely interface with CFPB examiners.
- Set up an initial meeting with examiners to explain the company's business model and set appropriate expectations. The beginning of the examination is the best opportunity to demonstrate your "culture of compliance" and educate the examiners on the company's structure and operations. This may include preparing brief presentations on the company's organizational structure and compliance framework.
- Set aside dedicated office and workspace for CFPB examiners onsite.
- Respond in a timely manner to examiner requests and work with examiners to identify their key areas of interest and how the company can best provide the requested information. At the same time it is important to manage examiner expectations and maintain clear lines of communication. Establishing boundaries early in the process can help conserve your staff's resources and ensure that you provide accurate and clear information.
- Work with counsel to review all submissions to the CFPB for responsiveness, privilege, and consistency.
Most importantly, if the examiners identify areas of concern, work with counsel to assess the preliminary findings, and "self-correct" or resolve the issues prior to the CFPB's issuance of a final examination report (as appropriate). In this regard, CFPB enforcement attorneys play an important and active role in the examination process, including helping to frame the scope of individual examinations through drafting and presenting the final report of examination. Most importantly, CFPB enforcement attorneys help determine whether a potential violation of law identified during an examination should be resolved through the confidential supervisory process or through a formal and public enforcement action. The examination process has led to or supported several recent public enforcement actions, resulting in over $50 million in consumer remediation and other payments, and over $8 million in civil money penalties.
It is therefore critical to resolve examiner concerns before they snowball into a bigger problem. Document the steps you take and then provide a copy to the examiners to ensure that your company's commitment to compliance is included as part of the examination record. Taking steps to resolve examiner concerns in advance can result in a final report with a better rating (meaning less future scrutiny), and in cases of serious identified deficiencies, limiting damages to a "matter requiring attention" instead of an "enforcement action."
If unsuccessful in addressing the Bureau's concerns, your company will likely receive a Potential Action and Request for Response (PARR) letter listing the Bureau's preliminary findings of alleged violations and informing your company that the Bureau is considering an enforcement action. Providing a strong written response to the PARR letter is the last, best chance to avoid an adverse examination report or enforcement action. To be effective, the written response should aggressively argue the supporting facts and legal arguments, highlight the steps taken to self-correct, and explain why an enforcement action is unnecessary.
Finally, adverse examination findings or a less than satisfactory compliance rating (a 3, 4, or 5) may be appealed by following the CFPB's appeal process, which establishes strict timeframes, requires that submissions be in writing, and puts CFPB staff in the role of final arbiter of the appeal. The appeals process also does not allow appeals of findings that have been recommended for an enforcement action. This underscores the importance of challenging adverse findings as early as possible in the examination process.
Matters that are good candidates for appeal are those that are based on specific established facts and disputed interpretations of law that have been developed and preserved through the examination process. Thus, having a strong record of factual findings, including efforts to correct such findings, as needed, can be critical. The process is often difficult, but well worth it for supervised entities that are seeking to push back against the CFPB and preserve their ability to challenge findings in court.
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Preparing for and responding to a CFPB examination can be a daunting process. The key to surviving an examination is to understand and follow applicable laws, invest time and resources in your CMS program and staff, and work closely with examiners to ensure a fair and accurate process.