QUESTION

Well, it has
finally happened, and we have been told that the CFPB is going to be doing an
examination of our company. I am in the compliance department, and, needless to
say, everyone is getting ready. But there is also anxiety about what to expect.
Nobody, including some top management, has ever been through a CFPB audit. Even
our legal counsel has never been involved in a CFPB exam. 

Our company has
never had a CFPB exam before! So, we need help understanding what is going to
happen. As part of our preparation, we are retaining your firm to do a CMS Tune-up, which will give us an overview of our Compliance Management System. I asked permission from our Chief Compliance Officer and our CEO to
write you for some guidance. We want to know what to expect. Please let us know
the usual way that the CFPB conducts its audits. 

What is the
customary way that we can expect the CFPB to audit us? 

Are there resources we can research for CFPB examination guidelines?

ANSWER

First,
everybody take a deep breath! The Consumer Financial Protection Bureau (CFPB)
is not your enemy. Consider it like state banking departments, which, like
them, is a sort of consumer advocacy agency. The CMS Tune-up is a good overview of your Compliance Management System. However, you should have a solid understanding of the CFPB’s examination process itself.

I began writing
extensively about the CFPB even before it was enfranchised. For instance, in
2009, I published an article entitled The CFPA Controversy: Asking the Tough
Questions. Indeed, in 2011, just days before the CFPB received its
enumerated authorities, I published a dialogue with Elizabeth Warren, who had advocated
for it in the halls of Congress, and in speeches, lectures, and interviews
throughout the United States. The article was entitled Opening a
Dialogue: Elizabeth Warren and the Mortgage Industry. I invited many
mortgage industry organizations and officials to participate in the interview
questions. Nearly all major mortgage industry associations responded to my
invitation. Senator Warren (then Professor Warren) and her staff worked with me
on this project. Send me a request if you want a copy of the foregoing
articles. 

Over the years,
my firm has worked with numerous companies in preparation for the CFPB
examination. We’ve worked with companies on resolving issues that the CFPB
found as a result of the examination. We’ve worked with companies on CFPB
administrative and legal matters, such as Civil Investigative Demands. We’ve
worked with companies on their compliance needs, both large and small institutions, that want to be proactive in anticipation of a CFPB examination. 

And here’s my
takeaway: the CFPB’s remit is to ensure consumer financial protection. If your
company complies with applicable Federal consumer laws, the CFPB will help to
ensure your company’s regulatory stability. 

Getting ready –
and staying ready – for a CFPB exam requires you to be aware of the CFPB’s
focus. There are essentially three supervisory activities in the CFPB’s
mandate, which are: 

1.   assessing compliance with Federal consumer
financial law;

2.   obtaining information about a supervised
institution’s activities and compliance systems and procedures; and

3.   detecting and assessing risks to consumers and
markets for consumer financial products and services.

Before the
Consumer Financial Protection Act, other Federal supervisory agencies conducted
consumer protection examinations of banks and credit unions. Many features of its
supervision program are based on the longstanding supervisory traditions of such
other agencies. 

As with other
supervisory agencies, CFPB supervisory activities are confidential. The
confidential nature of supervision promotes candid communication between
supervised entities and their regulators. These considerations also apply to both
bank and non-bank supervision. That said, I suggest you have counsel involved
in confidential communications. 

The CFPB’s supervision
operates as a continuous cycle. This graphic shows the examination cycle.[i]

Supervision Examination Cycle

You should
review the Supervision and Examination Manual issued
by the CFPB. This manual is the guide used by examiners to oversee companies
that provide consumer financial products or services. The manual describes how the
CFPB supervises and examines these companies and gives examiners explicit directions
on assessing compliance with Federal consumer financial laws. 

However, legal
discussions in the manual are not binding on examiners or other CFPB staff. A
supervisory finding that an institution has violated the law is based on the
governing statute and regulations applicable to that institution. The manual is
not a legal reference. Or, to put it succinctly, supervised institutions are
bound by statutes and regulations, not by the CFPB’s manual. 

The selection
of firms subject to audit is accomplished through a risk-based methodology that
prioritizes the allocation of supervisory resources. The prioritization
approach focuses on individual product lines at an institution rather than on a
comprehensive focus of all products and services offered by an institution.
This approach allows the CFPB to assess the likely risk to consumers across the
consumer financial marketplace in all product lines at all stages of a product’s
life cycle, including product development and implementation.[ii]
Affiliated organizations that fall under the CFPB’s jurisdiction are
considered, too. Because of this prioritization method, not every firm subject
to the CFPB’s supervision authority will get examined. 

There are seven
aspects involved in the role of examiners. Examiners typically do the
following: 

1.   Collect and review available information from
within the CFPB, other Federal and state agencies, and public sources,
consistent with statutory requirements; 

2.   Review documents and information obtained
through information requests sent to supervised entities; 

3.   Conduct onsite (or virtual) portions of exams to
observe, conduct interviews, review additional documents and information,
transaction test, and assess compliance management; 

4.   Consult within the CFPB on legal issues arising
from an examination, including legal violations; 

5.   Draw preliminary conclusions about the regulated
entity’s compliance management and its statutory and regulatory compliance
after internal consultation; 

6.   Consult within the CFPB about examination work
product and any corrective actions that the institution should take; 

7.   Send the supervisory communication to the
supervised entity. 

Examiners
usually discuss their preliminary conclusions during the examination.

At the end of
the exam, the examiners will provide a supervisory communication, such as an
exam report or supervisory letter, which includes their findings. The report
provides sections for the scope of review, conclusions and comments, and a rating.
There may be a section for Matters Requiring Attention (called an “MRA”).
MRAs are used to communicate specific goals to be
accomplished to address violations of law, risk of such violations, or
compliance management deficiencies. These sections are then followed by a
section for review and findings, usually consisting of subsections for the
compliance management review and various areas subject to review. 

It is possible
that examiners may find that an institution has violated a statute or regulation
or is at risk of such a violation. These findings are normally reviewed by
staff supporting the examiners at CFPB Headquarters. They are not final
determinations by the CFPB or the CFPB Director. Instead, they are part of the
supervisory process that aims to improve compliance and prevent violations. 

A final word
about supervision and enforcement. In our experience, most supervisory activities do not result in a referral
to the Office of Enforcement.
This office is equipped with many sources of information and tools for investigations,
such as consumer complaints, referrals from other agencies, whistleblowers, and
market intelligence. The CFPB’s enforcement activity has its own Life Cycle of Enforcement Action,
consisting of commencing enforcement investigations, fact gathering, hearing
from subjects of the investigations, and public enforcement actions. 

The CFPB decides
if a matter should be referred to the Office of Enforcement or stay within the supervisory
process. But, if a matter is referred for enforcement review, the Office of
Enforcement is not bound by the examiners’ preliminary findings. Enforcement
may take any additional investigative steps it considers necessary, such as
issuing Civil Investigative Demands. It will formulate a recommendation to the
CFPB Director about whether to initiate an enforcement action, which may be
narrower or broader than the examiners’ preliminary findings. However, the
Office of Enforcement will likely send a Notice and Opportunity to Respond and
Advise letter to invite input from the institution. 

Obviously, most
financial companies prefer the supervisory process to formal law enforcement
investigations. It is best to view the examination as a process to identify
issues before they become systemic or cause significant harm. Effective
supervision depends on cooperation by your company with examiners’ requests for
information, collaboration between the examiners and your company staff, and
clear, unambiguous communication. If you prepare properly and become familiar
with the examination process, your company should be in a position to respond appropriately to the CFPB’s audit
requirements. 

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

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• Source: https://mortgage-faqs.blogspot.com/2023/01/getting-prepared-for-cfpb-examination.html