CFPB Supervision Chief: Old Methods, New Approach to Guide Exams

WASHINGTON — Examiners from the Consumer Financial Protection Bureau may look the same, but they won't necessarily see the same.

The bureau is employing many of the same examiners — and similar methods — that the banking regulators have used for years to conduct exams, according to the CFPB's supervision and examination manual released last week.

But the manual will require examiners to look at the information they gather in new ways, revealing a key difference in approach that places the consumer squarely in the middle of the exam process for the first time.

"It gets to the main focus of the agency," Steve Antonakes, the bureau's associate director for large bank supervision, said in an interview Monday. "Our primary concern is risk to consumers and if information is being provided to them up front in a transparent fashion."

While critics of the bureau have worried that it may focus on consumers at the expense of safety and soundness, the industry has so far had few complaints about the new guidelines.

Antonakes said the agency was careful to analyze the processes that other regulators had previously used, and relied on expertise from staff that—when combined—had hundreds of years of federal bank regulatory experience.

The manual incorporated many of the same procedures used by the Federal Financial Institutions Examination Council — of which the CFPB is now a member — for many of the laws now enforced by the bureau, including the Truth in Lending Act, Real Estate Settlement Procedures Act and Fair Credit Reporting Act.

"At the end of the day, I think about 75% of the manual was based on existing guidance," Antonakes said. "We tried to frame it a little bit differently, and then there is some specific CFPB-related work in there as well."

The bureau obtained the authority to supervise large banks with more than $10 billion in assets beginning July 21, along with the authority to enforce existing consumer financial laws. The law also authorized the CFPB to supervise nonbanks, but only after a permanent director is in place.

In addition to focusing on the risk to consumers, the manual outlines two other principals for CFPB exams: they should be data driven and applied similarly between banks and nonbanks.

"I think the other point we've tried to make numerous times is, 'This is version one,'" Antonakes said. "And we will refine it over time based upon feedback from our examination staff, based upon feedback from industry, consumer advocates, the public, whatever the case may be."

The manual will evolve with procedures organized by different products and lines of business, such as mortgage servicing, that are much more detailed than those of the previous regulators.

In addition to regular exams, the bureau also plans to conduct targeted reviews, focusing on a particular situation at an institution, as well as horizontal reviews, which will look across multiple institutions to examine issues relating to a particular product.

"It's just having the capacity at different times, if we saw an issue that we thought was warranted, rather than focusing on an institution, focus on a market," he said.

Examiners are also instructed to follow up with consumers — an entirely new practice — if the data or other information indicates that the bank may have violated the law. It will also conduct more transactional testing to review a broader sample of loan applications, for example, for potential violations.

The inspiration for those new procedures was drawn from practices that many states employed prior to the financial crisis, a sign of the close relationship that the CFPB is already forging with the states. A number of people on the supervision staff have a state background, including Antonakes and Richard Cordray, the enforcement chief and nominee to take over as the agency's director.

"It will also be increasingly valuable as we build up some of the nonbank procedures, because in essence, if nonbank work has been done, it's been done on the state side," Antonakes said.

There will be an ongoing process of reviewing the manual in its early days — perhaps every six months or so — to consider feedback and possible changes as more specific procedures are added, Antonakes said.

The agency also plans to hold town hall meetings and roundtable discussions to solicit feedback from regulated institutions outside of the exam process.

"In my experience in the past, that's when you usually get the best feedback, because it's better to have it outside of, (rather than) directly tied to, a specific exam that's ongoing,"

he said.

For the most part, however, the industry had few complaints about the manual's first iteration.

Richard Riese, the director of the American Bankers Association's Center for Regulatory Compliance, said there are some choices of language and requirements that raise concerns.

But he said the structure and approach for exams echo what prudential regulators have done in the past. Banks whose products and practices are rooted in fairness to consumers — as most are, Riese said — shouldn't have a problem.

"These are expectations that banks should not find alien, but should find that we're capable of responding to, and hopefully without any kind of extraordinary new burden being done," he said. "This should be largely business as usual."

L. Richard Fischer, a partner with the law firm Morrison & Foerster, agreed that nothing about the manual is troublesome — yet.

"I didn't see anything that caused me to pick up the phone and call a client and say, 'Armageddon is just around the corner," Fischer said.

But Fischer said the bureau's mortgage servicing provisions indicate that it plans to take a much more detailed approach on that issue, which could sap a tremendous amount of effort and resources.

"Ordinarily in an examination, it's usually far more high level," Fischer said. "You get into the details only when there is a particular problem, and then you dig in terms of the problem."

One could argue, however, that the agency will only be examining the largest banks — about 100 — who are more active in mortgage lending, Fischer said.

Fischer said he wouldn't be surprised if they turned next to debit cards and pricing as they continue to add detailed procedures by specific product lines.

"As each of these other areas develop in more detail, I think that's when you will see the separation, you'll see the difference," from the other exam manuals, he said.

Several industry observers took comfort in the fact that CFPB based the manual on guidelines from the FFIEC.

But Fischer said he is anxious to see how the bureau works with the council on an ongoing basis.

"It's one thing to use the FFIEC guidance at the 20,000 foot level," Fischer said. "It's another then to just go off, like the mortgage-related provisions, which were in greater detail, on your own."

Under Dodd-Frank, the agency was required to join the FFIEC, Federal Deposit Insurance Corp. and the Financial Stability Oversight Council. It has already staffed the FFIEC's six standing task forces, including those focused on supervision, consumer compliance and examiner education.

"There's a great deal of coordination which is occurring with the federal banking agencies behind the scenes, but then you also have these more formal mechanisms where that kind of work is occurring as well," Antonakes said.

Kip Weissman, a partner with Luse, Gorman, Pomerenck & Schick, said the manual's compliance management requirements may raise some concerns for banks. Although most of the largest banks have sophisticated compliance management programs that develop and maintain internal controls, banks closer to the $10 billion mark may have to add another layer of risk management, which of course costs money.

The manual's provisions relating to unfair, deceptive and abusive acts or practices was predictable, Weissman said, but it will be difficult to know how the provisions will be applied or interpreted in the field until banks have seen a few rounds of exams.

"The first entities examined are really going to have no certainty as to what the approach is going to be," Weissman said. "And that's going to continue for a while."