The Consumer Financial Protection Bureau is prepping a massive overhaul to its exam procedures designed to make it faster and free up enforcement personnel to pursue their own investigations outside of exams.
The agency revealed one major switch last week by saying it would no longer send enforcement attorneys to regular on-site exams beginning Nov. 1, much to the relief of bankers who have been complaining that their presence made the process unnecessarily hostile. But the biggest changes are still to come as the agency revamps its supervision, enforcement and fair lending division, according to Steven Antonakes, the CFPB's No. 2.
In an exclusive sit-down interview with American Banker, Antonakes said the agency wants to get exam reports to companies faster; give enforcement attorneys more time to focus on taking actions; and allow them more time to go after other markets, industries or larger participants that require greater oversight. Following is an edited Q&A about what the agency is planning:
What caused the CFPB to stop sending enforcement attorneys to on-site exams?
Antonakes: We've been at this for a couple years now and we've had the time to assess the effectiveness and efficiency of the operation. From the beginning, we intentionally grouped our supervision, enforcement and fair lending offices together because we wanted them to be integrated and familiar with the work that each office was doing. The integrated model was intended to ensure supervision and enforcement work very closely together. We found over time that the most efficient way of accomplishing that goal did not require the enforcement attorneys to accompany the examiners on site. We believe we can still maintain the goals of integration by having communication electronically off-site, and managed through our office of supervision policy.
Some bankers and consultants have said in the past that it feels intimidating when a fleet of enforcement attorneys come into the examination with the examiner. Did that have any influence on your decision to pull the enforcement attorneys out?
It really was about efficiency at the end of the day and how we thought we could be better at our work. Moreover, there's a degree of hyperbole here as well. I don't believe we ever sent a 'fleet' of enforcement attorneys into an exam. In most cases, it was either one or two from enforcement. It was never meant to foreshadow that enforcement was likely or even being considered. As a matter of fact, the vast majority of examinations we have conducted thus far have not resulted in formal enforcement actions. So again, it was a means of ensuring that there was strong communication throughout the examination process between our supervision and enforcement teams.
Was there ever any intention to be intimidating in this process?
No, never at all. Absolutely not.
Last year the CFPB Ombudsman's Office listed the use of enforcement attorneys at examinations among the agency's "systemic issues" and the Federal Reserve Office of Inspector General was also reviewing the process. The Fed's OIG report is expected to come out soon. Did that have any influence on the CFPB changing its policy before the report is released?
No. We have been aware of concerns that have been raised by others, but more than anything, we were looking internally in terms of how to be most effective and efficient in achieving our goals.
How involved were the enforcement attorneys during an examination? Was there some conversation that occurred?
There was—they were there to provide support to the examination team. In some respects, we thought by having them introduce themselves it was more transparent than having them behind the curtain.
What are those enforcement attorneys going to do now with that extra time of not having to be physically on-site for an exam?
Our goal is for the enforcement attorneys to have line of sight throughout the beginning, middle, and end of the exam process. We believe we can still achieve that objective without having the enforcement attorneys on site. Our enforcement team serves many functions, and supporting examinations is just one. They also conduct independent investigations and they have done a great deal of this type of work thus far. The recent action against the debt-settlement payment processor Meracord is just one example of an independent investigation our enforcement team conducted completely outside of the supervisory process.
With the enforcement attorneys not having to be at exams physically does this mean we will see more actions?
Here's how I would describe how I would want our supervision, enforcement and fair lending division to function: we are data driven, we are tough minded, but ultimately, we're fair and reasonable. We are not afraid to engage in difficult discussions if that's what is warranted. That being said, if entities are complying with the law then it's time for us to move on and take a look at where we believe risks may arise. I can't say whether this will result in more or fewer enforcement actions. I believe it's just an efficient way of getting our work done to protect consumers.
How many exams has the CFPB completed to date, whether that's bank or nonbank exams?
We've completed a substantial number of exams to date. A specific charge of the bureau is to attempt to level the playing field between banks and nonbank entities relative to compliance with federal consumer financial laws. This dual authority provides the Bureau with the opportunity to oversee consumer financial products and services across charters and business models. Consequently, charter or license type is becoming less relevant in determining how we will prioritize and schedule our examinations.
We have begun to implement a prioritization framework that allocates our examination, investigation, and fair lending resources across product types. Our supervisory approach encompasses an assessment of potential consumer risk, as well as a number of qualitative and quantitative factors. These factors include: the size of a product market; a regulated entity's market share in that product market; the potential for consumer harm related to a particular product market; and field and market intelligence that encompasses a range of issues including, but not limited to, the quality of a regulated entity's management, the existence of other regulatory actions, default rates, and consumer complaints.
When will those entities that have been examined the last two years see their final exam report?
We have issued hundreds of reports. We started with the banks, but have also conducted a good number of nonbank exams as well. To the extent that there's a value-add to the examination process for regulated entities, it's getting the report back in a timely fashion so that management can take corrective actions and enhance compliance programs, as necessary. We continue to make steady progress. At the outset, we made a purposeful decision to have a strong quality control function to ensure consistency in our examinations findings across the country and across banks and nonbanks. We sacrificed some timeliness in order to achieve this goal. We are now positioned to ensure consistency while also improving timeliness. Consequently we have steadily increased the number of examination reports we have issued over the last few quarters. We expect this trend to continue as we will be moving the exam product out much faster while maintaining the quality of the product.
What sort of timeframe would the agency like to get to in releasing the exam reports?
There will always be some variance, but generally, I would like the exam report to be issued within 90-120 days from the time the examiner leaves the institution. That's what we're trying to work towards. We're not quite there yet, but we're getting closer to it.
Where is the CFPB at in terms of being fully staffed for enforcement and supervision?
The enforcement office currently has north of 100 enforcement attorneys. The entire enforcement team totals about 150 and includes attorneys, investigators, and paralegals. For our supervision office, we're looking to staff it at about 600 people. That group is about 75% to 80% staffed, and our hope is that it will be fully staffed by the end of next year. We've been purposely staggering the growth in that group. In the early days, I was interviewing 125 people a week. We're just getting to a point where our managers can focus less on recruiting.
You mentioned the CFPB integrated the supervision and enforcement teams on exams so both sides can learn and understand the process. That being said, how can you ensure the new teams coming on would garner the same experience and understanding?
I am very proud of our examination team. Our examiners possess deep and varied experience. Our staffing goals remain recruiting high quality talent and developing future generations of consumer protection examiners. Given the start-up nature of the bureau, we previously relied exclusively on FFIEC classes and on-the-job training for our more junior examiners. We now have our examiner commissioning and formal training program coming on line. This year we delivered 24 sections (25 to 30 seats each) of three distinct course offerings to our examiners. This represents a substantial investment in their training and development. We have our own instructional design team who are creating classes and hiring instructors for those classes. This represents a new point in the maturation of our internal training and development program.
And how is the agency integrating its training with other regulators since you often share exams and rules?
It's very well integrated. In the mortgage space, given the upcoming mortgage origination and mortgage servicing rules in January, it's been very important for us to ensure that an institution—whether it's under our jurisdiction, the FDIC, the OCC or the Fed—that we are ensuring a consistent approach. We are planning joint training and have published interagency exam procedures. We're also making seats available for state examiners to further leverage our capacity to do work in the nonbank space.
The CFPB has already issued a slew of examination guidelines for various entities and products. Are there any other areas that the agency is forming guidelines for?
Situations are always changing, products change and new offerings come on. New guidelines are also often tied to our completion of our larger participant rulemakings. We have completed larger participant rulemakings for the markets for consumer debt collection and consumer reporting companies. Accordingly, larger players in both of these critical markets are now subject to oversight through the bureau's supervision and enforcement programs.
We hope to complete our third proposed larger participant rulemaking in the student loan servicing market by the end of the year.
Is there anything else that institutions can expect to see from this policy change?
We're just continuing to grow our capacity and our ability to utilize technology. We hope that results in greater efficiencies, in terms of time spent on site, the time it takes us to get the product out, and being able to deploy our staff where we think the greatest risks to consumers may lie.