Insights

You may be anxious about an upcoming Consumer Financial Protection Bureau examination or the thought that the CFPB may come knocking at your door. On October 31, 2012, the CFPB issued Supervisory Highlights: Fall 2012 to shed light on the examination process by providing information on the kinds of activities that the agency reviewed from July 2011 to September 2012.

Review of Compliance Management System

The Supervisory Highlights stated that it is a priority of the CFPB to review a provider’s compliance management system (CMS) to ensure that the CMS is fully implemented. A fully implemented CMS will help avoid violations of federal consumer financial laws or expeditiously identify violations that may be corrected soon after they occur. The Supervisory Highlights recommend that providers develop and implement a comprehensive CMS that addresses internal controls and oversight, training, internal monitoring, consumer complaint response, independent testing and auditing, third-party service provider oversight, recordkeeping, product development and business acquisition, and marketing practices for all products and services over their entire lifecycle. A CMS will best be implemented by enhancing regulatory knowledge and expertise and by clearly communicating policies and procedures to employees who follow them.

With respect to third-party service providers, the CMS must include risk-based procedures governing the retention and monitoring of the service provider relationship. The CMS should also include policies and procedures to monitor and test compliance to ensure that the third-party service provider is complying with Federal consumer financial law.

A provider also must establish a fair lending compliance program based on the size and complexity of the provider and the products and services it offers. Common features of well developed fair lending compliance programs include:

• An up-to-date fair lending policy statement;
• Regular review of lending policies and statistical analysis of loan data to determine whether there is a disparate impact in pricing, underwriting, or other aspects of the credit transaction for various types of products;
• Regular assessment of the marketing of loan products;
• Regular fair lending training for all employees, officers and Board members;
• Ongoing monitoring for compliance with fair lending policies and procedures;
• Ongoing monitoring for compliance with other policies and procedures intended to reduce fair lending risk; and
• Meaningful oversight of the fair lending compliance program by management and the board of directors when appropriate.

Violations Identified in CFPB Examinations

In addition to violations of federal consumer financial laws identified in public enforcement actions, the Supervisory Highlights identified the following violations in non-public CFPB examinations:

• Violating the CARD Act “Ability to Pay” provisions by increasing credit lines at the request of consumers under the age of 21 without receiving written consent from co-applicants age 21 or older when the increase was based on the ability to pay of the older co-applicant;
• Violating the rate reevaluation requirements of the CARD Act by failing to perform a review of an acquired portfolio within 6 months and failing to establish written policies for rate reevaluation practices;
• Failing to sufficiently train and inform employees of the Fair Credit Reporting Act requirements, which led to improper reporting of credit information;
• Violating the Real Estate Settlement Procedures Act by improperly or inadequately completing the Good Faith Estimate and the HUD-1 settlement statement which led to improper disclosures of costs and other terms to consumers;
• Violating the Truth in Lending Act by failing to provide accurate interest rate disclosures, payment amounts and schedules, and disclosures of late payments, security interests, and assumption policies; and
• Failing to capture and accurately report Home Mortgage Disclosure Act data.

To correct the violations, the CFPB asked providers to develop and implement policies and procedures to improve their CMS, correct errors, and provide compensation to customers when customers were harmed.

How the Supervisory Highlights Impact You

The CFPB plans to periodically release Supervisory Highlights to help providers of financial products and services understand its supervisory expectations.

You should review the current and future Supervisory Highlights to determine whether your operations currently meet the CFPB’s expectations. If not, you should take corrective actions identified in the Supervisory Highlights to avoid or correct problems at the earliest date possible. This review may also help reduce anxiety concerning the CFPB examination process.

Shawnielle Predeoux is an associate of Hudson Cook, LLP, in the firm’s Hanover, Maryland office. Shawnielle can be reached at 410-865-5425 or by email at spredeoux@hudco.com.