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The CFPB: How to
Prepare for an
Examination
Legal Counsel to the
Financial Services Industry
Jeffrey P. Naimon
Jonice Gray Tucker
Lori J. Sommerfield
July 26, 2012
Presentation Overview
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Changes to CFPB leadership and staffing update
Overview of examination process
Preparation for CFPB examinations
What to expect during and after the exam
CFPB enforcement proceedings in focus
Status of key CFPB rulemakings
CFPB Leadership Changes
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On June 19, 2012, the CFPB announced several changes to
its executive leadership team
Supervision Division
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Office of General Counsel
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Meredith Fuchs: Promoted to General Counsel
Len Kennedy: Former General Counsel; now Senior Advisor and
Counselor to Director Cordray
Ombudsman
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Steve Antonakes: Promoted to Associate Director of Supervision
Paul Sanford: Now Acting Assistant Director of Large Bank
Supervision
Wendy Kamenshine: Promoted from acting to permanent
Ombudsman
CFPB Staffing Update
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The CFPB continues to increase its staffing:
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The Bureau plans to increase staffing to a total of 1500 employees over
next two years
CFPB is planning to significantly increase its Supervision, Enforcement
and Fair Lending & Equal Opportunity staff and budget
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As of December 2011, the CFPB had more than 750 employees
As of June 2012, it had more than 900 employees
Currently, over half of CFPB staff is focused on examination and
enforcement; this trend is expected to continue:
Examinations:
Purpose & Principles
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Purpose of CFPB compliance examinations
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CFPB examination principles
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Assess compliance with federal consumer financial laws
Obtain information about compliance activities, systems, and
procedures
Evaluate risks posed to consumers and markets by consumer
financial products and services
Focus on consumers
Data-driven
Consistency
Examinations:
Types of Exams
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Types of examinations
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Scheduled reviews
Target reviews
Horizontal reviews
Product or line of business-specific reviews (e.g., mortgage
servicing, credit cards, etc.)
Fair lending and UDAAP exams will be part of every
CFPB compliance examination going forward
The CFPB Examination Cycle
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Pre-examination/scoping
Examination (offsite and
onsite)
Communicate conclusions
and required corrective
action
Monitoring
Examinations:
Scheduling
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Notice
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Non-banks
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Institutions will “generally” be notified in advance of examination
Identified for examination on the basis of risks to consumers
Examinations will be coordinated with state and federal
prudential regulators
Banks
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Will develop regular examination schedule based on:
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Assessment of risks to consumers
Requirements that CFPB coordinate examinations of large
depository institutions and affiliates and conduct “simultaneous”
examinations of depository institutions, as well as coordinating
examinations with State regulators
Examinations:
Compliance Management System
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CFPB expectations concerning financial institutions’
Compliance Management Systems
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Framework
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Policies and procedures
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“Top-down” approach should span from Board of Directors to
employees performing routine business functions
Ensure sufficient compliance staffing and budget to manage risks
Must be well-documented
Monitoring and testing necessary
Consider conducting a gap analysis under attorney-client privilege
Tailored to the institution
Consumer complaint management
Examinations:
Experience to Date
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Several trends have emerged during recent CFPB
examinations
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Where is the Bureau focusing its attention?
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Enforcement attorneys attend examination meetings and are
involved in all aspects of the examination process
Most of the examination process occurs onsite
Mortgage servicing and mortgage lending
Credit cards
Auto lending (direct and indirect)
Examinations:
General Preparation
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Preparing for a CFPB Examination
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Potential for voluminous, business-line-specific informational,
document, and data requests
Responses to the CFPB should be centrally managed by a
Regulatory Relationship Manager (“RRM”) or outside counsel
Important that responses are internally consistent and consistent
with current policies, procedures, and practices
Should have internal action plan for handling issues relating to
requests for production of attorney-client privileged or
confidential documents
Privilege Issues
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Prepare for privilege issues that will arise with production
of attorney-client privileged or confidential documents
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The Dodd-Frank Act did not include a provision protecting the
privileged nature of materials shared with the CFPB in the way
that privileged materials disclosed to the federal banking
regulators are protected under 12 U.S.C.§1828(x)
Since early 2012, the Bureau has taken the position that
privileged materials must be disclosed to the CFPB subject to its
supervisory authority
On July 5, 2012, the CFPB issued a final rule based on this legal
argument that goes into effect on August 6, 2012
Privilege Issues (cont.)
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Several bills have been introduced to address protection
of privileged materials provided to the CFPB
Even though bills amending§1828(x) to include the
CFPB within the statute’s scope have broad bipartisan
support, Congress has failed to enact legislation making
this legislative fix
Most recent bill, S. 3394, was introduced on July 17,
2012 by Senate Banking Committee Chairman
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Combines H.R. 6125, introduced earlier in 2012, and another
House bill directed at ATM fee disclosures
Examinations:
Pre-Exam Process
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Prepare the premises
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How will the CFPB gain access to physical buildings?
What office space will be made available to the CFPB?
How will the institution protect information security for documents
and data provided to CFPB examiners?
Prepare the staff who will interface with CFPB examiners
Manage information flow through the RRM or outside
counsel
Maintain control over documents that will be disclosed to
the CFPB
Prepare as if prudential regulators and state banking
agencies may join in the CFPB examination
Examinations:
Pre-Exam Communications
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CFPB will typically schedule an initial teleconference to
clarify scope of the exam, responsibilities, resources,
and document control
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Likely that the agenda will be provided by CFPB in advance
Critical for financial institution to explain the business
model to the CFPB and work to set appropriate
expectations
CFPB may schedule a preliminary “meet and greet”
between its examiners and the financial institution in
advance of the on-site portion of exam
Examinations:
Onsite Exam Process
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Prepare for examiners’ arrival
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Coordinate with CFPB to schedule a kick-off meeting
with presentations by executive and senior management
Manage CFPB expectations regarding information and
data requests during the examination
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Expectations regarding composition of the team and examiner
behavior
Respond promptly through the RRM
If prompt response is not possible, be up-front about feasible
timeframe
Examinations:
Exit Meeting and Response
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Exit Meeting: Once the onsite part of the exam concludes, the
examiners will hold an exit meeting to orally share their preliminary
findings with management
Exam Report: Following the exit meeting, the CFPB will evaluate
the information collected and prepare a written examination report,
which will contain the examiners’ findings and an exam rating
Exam Response: After reviewing the report, the institution must
respond
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Several options to address unfavorable ratings (e.g., deal with
examiners, regional offices, and then Ombudsman)
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Management will need to coordinate and prepare a written, timely
response and corrective action plan
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The institution may also be required to pay civil fines or provide
customer remediation
CFPB Enforcement Authority
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Investigations
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Administrative enforcement actions & civil actions in Federal
District Court
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Relief sought may include: rescission of contracts, refund of money,
return of real property, monetary damages, civil monetary penalties,
public notification of the violation, and limits on activities, among
other forms of relief
CFPB has no criminal enforcement authority
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Authorized to conduct investigations into potential violations of
consumer financial laws
May be conducted jointly with other regulators
May include subpoenas or civil investigative demands for testimony,
responses to written questions, documents, or other materials
Required to refer evidence of criminal activity to DOJ
Enforcement:
New Final Rules
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On June 29, the CFPB enacted new final rules and interim
final rules governing its enforcement activities
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Investigations – Final rule issued on June 6, 2012 (77 Fed. Reg.
39108, June 29, 2012)
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Rules of Practice for Adjudication Proceedings – Final rule
issued on June 6, 2012 (77 Fed. Reg. 39083, June 29, 2012)
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Includes “general rules” governing deadlines, filing of papers and
appearances
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State Official Notification Rule – Final rule issued on June 6, 2012
(77 Fed. Reg. 39116, June 29, 2012)
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Equal Access to Justice Act (“EAJA”) Implementation Rule –
Interim final rule with request for public comment issued on June 6,
2012 (77 Fed. Reg. 39117, June 29, 2012); notice and comment
period ends on August 28, 2012
Enforcement:
Investigations
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Final rules relating to investigations describe the
procedures for investigations pursuant to§1052 of the
Dodd-Frank Act
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Rules drawn from procedures used by the FTC, SEC, and other
prudential regulators
Rules address:
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Notification of purpose
Investigational hearings
Rights of witnesses in investigations
Civil Investigative Demands (CIDs) and Noncompliance with CIDs
Enforcement:
Civil Investigative Demands
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Under the new final rules, CIDs may be issued by the CFPB
Director, the Assistant Director of the Office of Enforcement,
or a Deputy Assistant Director of the Office of Enforcement
The CFPB may demand production of documentary materials,
tangible things, written reports, answers to questions, or
testimony
Responses must be made under oath or sworn certificate
Under the interim final rules, CFPB must meet and confer with
CID recipients within 10 days of issuing the demand to
discuss the recipient’s response
Recipients may petition for an order modifying or setting aside
a CID
Enforcement:
Investigative Hearings
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Hearings are under oath or affirmation and stenographically reported
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Exclude all persons from the room except:
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Person being examined
His or her counsel
The officer before whom the testimony is being taken
Any investigator or representative of an agency with which the Bureau is engaged in a
joint investigation
Person transcribing the testimony
Counsel may advise witness not to answer a question and state on the
record the reason for refusal
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Becomes part of record of investigation
Other means of recording may be authorized
May not otherwise interrupt
May request at the end of the examination that the witness be allowed to clarify an
answer
The Bureau investigator may grant or deny request in his or her sole discretion
Under the final interim rules, the CFPB may seek to disbar an attorney deemed to
have engaged in “disorderly, dilatory, obstructionist, or contumacious conduct, or
contemptuous language during an investigational hearing”
Enforcement:
NORA
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Notice and Opportunity to Respond and Advise
(“NORA”) − CFPB Bulletin 2011-04
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CFPB’s Office of Enforcement may give notice to the individual
or entity subject to the investigation and may offer an opportunity
to submit a written response prior to initiating an enforcement
action
Response must be submitted within 14 calendar days with a
40-page limit
Any factual assertions must be made under oath by someone
with personal knowledge of the facts
Submissions may be discoverable by third parties
Status of Key Rulemakings
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CFPB’s Fall 2011 Agency Rule List submitted to the Office of
Management and Budget, the Bureau listed several rules
that it intended to publish before the end of July 2012
How did the Bureau do?
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Final rule on ability to repay for qualified mortgages – on 6/5/12, the
CFPB reopened the comment period on the Fed’s proposed rule,
which closed on 7/9/12; final rule expected by year-end 2012
Proposed rule integrating TILA and RESPA disclosures – proposed
rule issued on 7/9/12; comment period closes 9/7/12 and 11/6/12
Proposed rules to define the scope of the CFPB’s non-bank
supervision program – proposed rule issued 5/25/12; comment period
closed 7/24/12
Interagency mortgage servicing standards – under development; final
rule expected by 1/21/13
Status of Key Rulemakings (cont.)
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Status of additional key rules
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Proposed rules implementing loan originator compensation law,
data reporting requirements, restrictions on high-cost loans,
maintenance of escrow accounts, and other servicing practices
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Rule to define “larger market participants” in certain financial
product and service markets, including debt collection and
consumer reporting
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CFPB issued proposed rules to address high-cost loans on 7/9/12
While the Federal Reserve Board issued rules to address escrow
accounts on 2/23/11, the CFPB has yet to do so
Proposals under development for loan originator compensation, data
reporting, and appraisal requirements
Proposed rule published on 2/17/12; comment period closed on 4/17/12
Final rule relating to “larger consumer reporting agencies” released on
7/16/12; effective 9/30/12
Final rule on “larger debt collection agencies” expected fall of 2012
Questions?
Jeffrey P. Naimon
[email protected]
Jonice Gray Tucker
[email protected]
Lori J. Sommerfield
[email protected]
www.buckleysandler.com
202-349-8000
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