Risk Assessments Will Guide Nonbank Supervision: CFPB's Twohig

WASHINGTON — After months of waiting as their counterparts began examining banks, the Consumer Financial Protection Bureau's nonbank supervision team began the enormous task Thursday of overseeing the rest of the consumer financial sector.

The team reached out to state officials this week as they begin to determine which companies pose the most risk, and which should be targeted for examination first in the mortgage, payday and student loan markets. They are also working to finalize a rule that will define which other markets will be subject to CFPB oversight.

"I'm hopeful that within a month, we'll be starting the actual notification and pre-exam scoping," said Peggy Twohig, the bureau's associate director for nonbank supervision, in an interview. "When exactly we'll have boots on the ground, I don't know for sure, but I'm optimistic it will be shortly after that."

The sheer size of the nonbank sector also means the bureau will use risk assessments to determine where to focus its resources.

Some observers have estimated the number of coverd companies to be in the hundreds of thousands, but with little data available on companies outside of the mortgage market, even the agency doesn't have an official list yet.

One of its first tasks is determining just how many companies fall into its jurisdiction.

"There's not that much information on some of these other markets, or even with that, there's not the good kind of rich data on exactly the sort of other things you might factor in to assess risk," Twohig said. "So one of our tasks will be to learn, to collect information and to over time understand the market and the players well enough so that we can do more calibrated risk assessments."

The Dodd-Frank Act dictated where the bureau should focus most of its attention by giving it the authority to oversee any company, regardless of size, in three markets: mortgages, payday lending and student loans.

Agency officials have made no secret that they intend to place a high priority on the mortgage market. In addition to developing rules that establish new servicing guidelines and require lenders to verify a borrower's ability to repay, the CFPB has also established specific guidelines for examiners when reviewing mortgage servicing activities during the supervisory process.

Those guidelines will apply to both bank and nonbank supervision, and will be expanded in the future to include mortgage origination, Twohig said.

"Given the backdrop of the financial crisis and everything that went on in the mortgage market, that's something that we obviously want to get on top of and stay on top of," she said.

The goal of the agency's supervision programs — indeed, one of its primary responsibilities — is to provide consistent oversight for both banks and nonbanks.

As such, Twohig has worked side-by-side with the bureau's associate director of bank supervision, former Massachusetts banking commissioner Steve Antonakes, to ensure the two programs dovetail. Examiners will use the same field manual to guide examinations of both banks and nonnbanks, and everyone will conduct exams on both kinds of institutions.

The goal is to train them to try to look at each institution through the same lens, regardless of charter, Twohig said.

"We think that alone will help provide the kind of similar oversight or parity," she said. "That is one of the reasons that we are designing the staffing that way, to try to get that consistent viewpoint. We don't have to worry about whether they are looking with the same lens; they will because they are going to be doing both."

There are, of course, distinctions between banks and nonbanks, including differing organizational structures, operations and levels of compliance, Twohig said.

"That's something we will just have to learn about as we go," Twohig said. "Our examiners will be gathering the information, evaluating it and will be responding accordingly. So it will be kind of adjusted to the particular entity."

Although nonbank exams follow a similar pattern to nonbanks, it will be an iterative process, Twohig said.

"Our first couple of exams are going to be ones where we see how it goes," she said. "And we expect that over time we will be able to build it up. We view this as a ramping up of a new program. We want to do it well, and so we want to be deliberative about how we start out and see how it's going, and then learn from that and reset."

It would be unrealistic to think the CFPB will be able to achieve exact parity in regulating banks and nonbanks, she said. But she said the agency is striving to provide consistent oversight between the two sectors — something that hasn't existed until now.

One of the ways it intends to do that is by assessing risk in each nonbank market and among companies, and focusing supervision resources where they are needed most.

The agency views state officials as key partners in that effort. Many states have established supervision programs that track nonbank activity, and many of them see problems on the ground before they reach the federal level. The CFPB signed a memorandum of understanding more than a year ago with the Conference of State Bank Supervisors, for example, to share information and coordinate supervision efforts.

"Now that we have a director, we can begin those discussions …about exactly who we might want to contact for an exam and exchange information through the M.O.U.'s we have in place on who they've (examined) recently, and make sure we're using our resources wisely, and make sure we're not duplicating things that they've just done," she said.

Under Dodd-Frank, the bureau was only allowed to supervise nondepository institutions when it had a permanent director. Although Twohig and her team have been in place for months, they were unable to do much work until Wednesday, when the president appointed Richard Cordray as the bureau's first director through a recess appointment. Despite complaints from Republicans that the appointment was not valid, Cordray moved immediately to exercise the bureau's authority by launching the nonbank supervision program on his first full day on the job.

Twohig said consumer complaints will also be factored in to the risk assessments, but only to a certain degree.

"Sometimes consumers don't always know to complain about something," she said. During the height of the mortgage bubble, for example, she said the Federal Trade Commission received few mortgage complaints.

Another important risk factor is the size or number of transactions.

"The bigger the reach, the more the potential risk is there," she said.

Twohig joined the bureau in 2010 after serving as director of the Treasury Department's Office of Consumer Protection and a key member of the CFPB implementation team. Prior to that, she had served as the associate director in the FTC's division of financial practices, where she worked on enforcement and policy issues related to consumer financial services.

Twohig earned a reputation as a fair but tough regulator at the FTC. But she said her role at CFPB is an entirely different one focused on ongoing oversight rather than law enforcement.

One of the exciting things about having the supervision tool at the CFPB, Twohig said, is that it's better suited to situations that may fall into a gray area, or when there might have been a misunderstanding by a company that is operating in good faith and trying to comply with the law.

"When you have a hammer, there has to be a nail for you to do something about it," she said. "If that's your only tool, something has to turn into a law enforcement action or you can't affect change.

"The supervision tool is more suited to encouraging a conversation about the views on compliance and helping the company move to a better compliance in a way that doesn't necessarily have to be a public law enforcement action," she said.