It appears that one of the chief enforcement tools of the Consumer Financial Protection Bureau is the use of the horizontal audit.
A horizontal audit arises when the CFPB learns in the course of one audit that another company or entity may be engaged in the same or similar problematic practice. For example, if Lender A copied and used the same contract as Lender B and the CFPB learned this in the course of an audit of Lender B and found the contract was unlawful it is likely the CFPB would immediately thereafter contact or audit Lender B. Indeed, we are seeing multiple examples of this. When the CFPB initiates enforcement actions, they usually involve multiple entities receiving investigation demands simultaneously or in rapid succession. Consider the fact that a few weeks ago lenders across the United States began receiving letters from the CFPB concerning marketing agreements with Realtors. Then, yesterday, debt consolidation companies began receiving investigatory demands the very day that a debt consolidation company faced a criminal indictment that was initiated through a CFPB referral.
The way the CFPB identifies horizontal targets is by interviewing staff, identifying local common third-party providers, and reviewing correspondence and email communications to ascertain the business relationships where common compliance problems may be likely. Once it locates the source of a compliance deficiency and/or a third-party provider or affiliation that historically ignored compliance obligations, it connects the dots to find other entities where compliance violations are more likely to be present.
Ultimately, this simply accentuates the need for lenders to take seriously the CFPB’s requirement that they undertake due diligence to ensure that service providers are viable business partners from the perspective of their customers’ best interests, and that lenders take “personal responsibility” for compliance rather than blindly defer to the actions of others. These days the concept of “guilt by association” has an entirely new (and important) context.
