The CFPB: How to Prepare for an Examination...The CFPB may demand production of documentary...
Transcript of The CFPB: How to Prepare for an Examination...The CFPB may demand production of documentary...
Legal Counsel to theFinancial Services Industry
The CFPB: How to Prepare for an Examination
Jeffrey P. NaimonJonice Gray TuckerLori J. Sommerfield
July 26, 2012
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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
Presentation Overview
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CFPB Leadership Changes
On June 19, 2012, the CFPB announced several changes to its executive leadership team
Supervision Division– Steve Antonakes: Promoted to Associate Director of Supervision– Paul Sanford: Now Acting Assistant Director of Large Bank
Supervision Office of General Counsel
– Meredith Fuchs: Promoted to General Counsel– Len Kennedy: Former General Counsel; now Senior Advisor and
Counselor to Director Cordray Ombudsman
– Wendy Kamenshine: Promoted from acting to permanent Ombudsman
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CFPB Staffing Update
The CFPB continues to increase its staffing: – As of December 2011, the CFPB had more than 750 employees– As of June 2012, it had more than 900 employees
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
– Currently, over half of CFPB staff is focused on examination and enforcement; this trend is expected to continue:
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Examinations:Purpose & Principles
Purpose of CFPB compliance examinations– 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 CFPB examination principles
– Focus on consumers– Data-driven– Consistency
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Types of examinations– 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
Examinations:Types of Exams
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The CFPB Examination Cycle
Pre-examination/scoping Examination (offsite and
onsite) Communicate conclusions
and required corrective action
Monitoring
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Notice– Institutions will “generally” be notified in advance of examination
Non-banks– Identified for examination on the basis of risks to consumers– Examinations will be coordinated with state and federal
prudential regulators Banks
– Will develop regular examination schedule based on: 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: Scheduling
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Examinations: Compliance Management System
CFPB expectations concerning financial institutions’ Compliance Management Systems
– Framework “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
– Policies and procedures Consider conducting a gap analysis under attorney-client privilege Tailored to the institution
– Consumer complaint management
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Examinations: Experience to Date
Several trends have emerged during recent CFPB examinations
– Enforcement attorneys attend examination meetings and are involved in all aspects of the examination process
– Most of the examination process occurs onsite Where is the Bureau focusing its attention?
– Mortgage servicing and mortgage lending– Credit cards– Auto lending (direct and indirect)
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Examinations:General Preparation
Preparing for a CFPB Examination– 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
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Privilege Issues
Prepare for privilege issues that will arise with production of attorney-client privileged or confidential documents
– 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
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Privilege Issues (cont.)
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
– Combines H.R. 6125, introduced earlier in 2012, and another House bill directed at ATM fee disclosures
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Examinations: Pre-Exam Process
Prepare the premises– 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
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Examinations: Pre-Exam Communications
CFPB will typically schedule an initial teleconference to clarify scope of the exam, responsibilities, resources, and document control
– 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
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Examinations: Onsite Exam Process
Prepare for examiners’ arrival– Expectations regarding composition of the team and examiner
behavior 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– Respond promptly through the RRM– If prompt response is not possible, be up-front about feasible
timeframe
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Examinations:Exit Meeting and Response
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
– Several options to address unfavorable ratings (e.g., deal with examiners, regional offices, and then Ombudsman)
– Management will need to coordinate and prepare a written, timely response and corrective action plan
– The institution may also be required to pay civil fines or provide customer remediation
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CFPB Enforcement Authority
Investigations– 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 Administrative enforcement actions & civil actions in Federal
District Court– 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– Required to refer evidence of criminal activity to DOJ
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Enforcement: New Final Rules
On June 29, the CFPB enacted new final rules and interim final rules governing its enforcement activities– Investigations – Final rule issued on June 6, 2012 (77 Fed. Reg.
39108, June 29, 2012) – Rules of Practice for Adjudication Proceedings – Final rule
issued on June 6, 2012 (77 Fed. Reg. 39083, June 29, 2012) Includes “general rules” governing deadlines, filing of papers and
appearances– State Official Notification Rule – Final rule issued on June 6, 2012
(77 Fed. Reg. 39116, June 29, 2012) – 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
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Final rules relating to investigations describe the procedures for investigations pursuant to§1052 of the Dodd-Frank Act
– Rules drawn from procedures used by the FTC, SEC, and other prudential regulators
– Rules address: Notification of purpose Investigational hearings Rights of witnesses in investigations Civil Investigative Demands (CIDs) and Noncompliance with CIDs
Enforcement: Investigations
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Enforcement: Civil Investigative Demands
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
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Enforcement: Investigative Hearings
Hearings are under oath or affirmation and stenographically reported– Becomes part of record of investigation– Other means of recording may be authorized
Exclude all persons from the room except:– 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
– 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”
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Notice and Opportunity to Respond and Advise (“NORA”) − CFPB Bulletin 2011-04
– 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 a40-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
Enforcement: NORA
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Status of Key Rulemakings
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? – 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
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Status of Key Rulemakings (cont.)
Status of additional key rules– Proposed rules implementing loan originator compensation law,
data reporting requirements, restrictions on high-cost loans, maintenance of escrow accounts, and other servicing practices 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– Rule to define “larger market participants” in certain financial
product and service markets, including debt collection and consumer reporting 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
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Questions?
Jeffrey P. [email protected]
Jonice Gray [email protected]
Lori J. [email protected]
www.buckleysandler.com202-349-8000