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Increasingly burdensome requirements, such as small business panels and cost-benefit analysis, inhibit writing of new regulations. But substituting enforcement actions that unevenly apply vague or unwritten rules betrays the regulatory mandate.
September 10 -
Consumer bureau, working in conjunction with OCC, orders Capital One to pay $210 million for deceptive credit-card marketing practices.
July 18 -
Financial institutions and consumer groups are each trying to influence a report that will help determine the rules for settling customer disputes.
December 10 -
With the help of technology and the FHFA, the CFPB can create Dynamic Disclosures for consumers. Better information will put borrowers on an equal footing with lenders, making non-Qualified Mortgage loans safer to originate.
December 10
As the Consumer Financial Protection Bureau promotes legislation for a statutory examination privilege similar to one the federal banking agencies fought for and secured in 2006, the CFPB Ombudsman has identified another important issue constraining the free flow of examination information to the CFPB.
Unlike the examination privilege, however, this issue – the presence of CFPB enforcement attorneys during agency supervisory examinations – does not require a legislative solution. Rather, it is entirely within the CFPB’s power to fix.
In its first annual report to CFPB Director Richard Cordray, one of the systemic issues the CFPB Ombudsman addresses is the agency's unique practice of having its enforcement attorneys present at examinations of depository institutions and other financial firms subject to the agency's oversight. The practice is not mirrored by other federal banking agencies.
While the presence of enforcement attorneys at examinations is apparently intended to increase the agency's efficiency, there is a legitimate concern – as suggested by the Ombudsman – that the practice may be causing institutions to be less willing to share information freely with the agency. As noted by the federal banking agencies and various federal courts in connection with the bank examination privilege in an OCC interpretive letter from 2003, supervisory and examination success "is highly dependent on a candid flow of information between the bank and [its regulator]."
In reviewing the agency's current practice, the Ombudsman met with CFPB leaders and staff, bank officials, outside attorneys and consultants to discuss the strengths and weaknesses of the current policy. Pursuant to these discussions, the Ombudsman recommended that the CFPB review and clarify what the enforcement attorney's role during supervisory examinations is.
The annual report notes that the CFPB has not yet acted on the Ombudsman's recommendations, but it appears that the agency is reviewing the issue. While it is unclear whether the CFPB will implement reforms to address the issues raised by the Ombudsman, it is clear that even the agency's own internal watchdog recognizes the dampening effect that the presence of an agency enforcement attorney may have on a full and frank discussion of the issues during an exam.
While some may suggest that the practice is warranted to enable agency attorneys to understand and address deficiencies adversely impacting consumers, ultimately everyone loses when opportunities for frank discussion are lost. Rather than improving efficiency, the precise opposite could occur with greater challenges presented for agency staff to understand the facts and be able to get to the bottom of things to resolve consumer issues and compliance problems.
The cumulative effect of the absence of a statutory examination privilege coupled with the presence of CFPB enforcement attorneys at CFPB examinations are aggravating factors that potentially inhibit the type of information exchange necessary to facilitate an effective and constructive examination process at the relatively new agency. While the CFPB has taken the steps available to pursue legislation to shore up the protection of information shared during examinations, the presence of enforcement attorneys at exams is the agency's own doing and it is entirely within the CFPB's power to end the practice or modify its impact.
The practice clearly has a chilling effect on the main objective of the supervisory examination process to promote the free flow of information between the regulator and the regulated institution so that issues may be effectively and efficiently addressed during an exam.
As the CFPB Ombudsman's office moves into its second year of operation, it remains to be seen how much influence the Ombudsman will have at the CFPB. While the annual report provides answers about the Ombudsman's current and emerging role, an important question that remains is how much weight the CFPB will place on the Ombudsman's recommendations. The agency's response to the Ombudsman's concerns about enforcement attorneys at examinations may tell us a lot about the Ombudsman's influence and effectiveness.
More importantly, the response may tell us even more about the culture and willingness of the CFPB to listen, respond to and effect policy change that requires the agency to recalibrate and balance its regulatory approach and enforcement interests to optimize the effectiveness of its supervision.
Kevin Petrasic is a partner in the Global Banking and Payments Systems practice of Paul Hastings.
