On February 20, the SEC’s Office of Compliance Inspections and Examinations (OCIE) launched a previously-announced initiative directed at investment advisers that have never been examined, focusing on those that have been registered with the SEC for three or more years. OCIE plans to conduct examinations of a “significant percentage” of advisers that have not been examined since they registered with the SEC. The examinations will focus on compliance programs, filings and disclosure, marketing, portfolio management, and safekeeping of client assets. The SEC plans to host regional meetings for investment advisers to learn more about the examination process.
On February 25, the FDIC issued FIL-9-2014 to notify supervised institutions of new consumer compliance examination procedures for the mortgage rules issued pursuant to the Dodd-Frank Act, that took effect nearly two months ago. FDIC examiners will use the revised interagency procedures to evaluate institutions’ compliance with the new mortgage rules. The FDIC states that during initial compliance examinations, FDIC examiners will expect institutions to be familiar with the mortgage rules’ requirements and have a plan for implementing the requirements. Those plans should contain “clear timeframes and benchmarks” for updating compliance management systems and relevant compliance programs. “FDIC examiners will consider the overall compliance efforts of an institution and take into account progress the institution has made in implementing its plan.”
On February 7, the OCC issued an updated Mortgage Banking booklet of the Comptroller’s Handbook. The revised booklet (i) provides updated guidance to examiners and bankers on assessing the quantity of risk associated with mortgage banking and the quality of mortgage banking risk management; (ii) makes wholesale changes to the functional areas of production, secondary marketing, servicing, and mortgage servicing rights; and (iii) addresses recent CFPB amendments to Regulation X and Regulation Z, as well as other Dodd-Frank related statutory and regulatory changes. The updated booklet replaces a similarly titled booklet issued in March 1996, as well as Section 750 (Mortgage Banking) issued in November 2008 as part of the former OTS Examination Handbook. On February 12, the OCC issued a revised Retirement Plan Products and Services booklet of the Comptroller’s Handbook that (i) updates examination procedures and groups them by risk; (ii) updates references and adds a list of abbreviations; (iii) adds references to recent significant U.S. Department of Labor regulations and policy issuances; (iv) adds a discussion of Bank Secrecy Act/anti-money laundering and Regulation R; and (v) adds a discussion of board and senior management responsibilities regarding oversight of risk management.
On January 30, the CFPB issued a new Supervisory Highlights report. The report publicly announces changes to the CFPB’s examination reports and supervisory letters. Beginning in January 2014 the CFPB is changing the format of the Examination Reports and Supervisory Letters (collectively referred to as reports) that it sends to supervised entities after conducting compliance reviews. The changes to the report templates aim to: (i) facilitate drafting by examiners; (ii) simplify reports and reduce repetition; and (iii) facilitate follow-up reporting by supervised entities about actions they take to address compliance management weaknesses or legal violations found at CFPB reviews.
The primary template changes include:
- Elimination of Recommendations. Any recommendations for improving currently satisfactory processes will be provided orally when examiners are on-site.
- Elimination of the list of CFPB team members participating in a review. Reports will continue to be signed by the Examiner in Charge and provide regional management contact information.
- Creation of a single section in the report that includes all of the items that the CFPB expects the entity to address when the review identifies violations of law or weaknesses in compliance management. This entire section will be referred to as “Matters Requiring Attention,” regardless of whether the CFPB is requiring specific attention by an entity’s Board of Directors. The CFPB will no longer include additional “Required Corrective Actions.” The entity receiving the report will be expected to furnish periodic progress reports to the CFPB about all Matters Requiring Attention. The frequency of reporting will be tailored to the specific matters in a report.
The report also provides “supervisory observations,” which are limited to mortgage servicing. In a section on non-public supervisory actions the report states recent supervisory activities have resulted in at least $2.6 million in remediation to consumers, and that these non-public supervisory actions generally have been the product of CFPB examinations, either through examiner findings or self-reported violations during an exam.
On January 23, the CFPB proposed a rule that would allow the agency to supervise nonbank “larger participants” in the international money transfer market. The proposed rule defines “larger participant” to include any entity that provides one million or more international money transfers annually, which the CFPB estimates will extend oversight to roughly 25 of the largest providers in the market. Providers that do not meet the million-transfer threshold may still be subject to the CFPB’s supervisory authority if the Bureau has reasonable cause to determine they pose risk to consumers. Although the CFPB proposes to use aggregate annual international money transfers as the criterion for establishing which entities are “larger participants” of the international money transfer market, the CFPB also considered and has requested comment on use of annual receipts from international money transfers and annual transmitted dollar volume as potential alternatives.
The CFPB suggests that examinations of such providers will focus on compliance with the Remittance Rule—particularly with respect to new requirements addressing disclosures, cancellation options, and error corrections—and that the agency will “coordinate [examinations] with appropriate State regulatory authorities.” The CFPB released examination procedures for use in assessing compliance with the remittance transfer requirements last year.
Dodd-Frank granted the CFPB authority to supervise “larger participants” in the consumer financial space, as defined by rule. The agency has already finalized similar rules covering “larger participants” in student loan servicing, debt collection, and consumer reporting markets. The proposal, if finalized, would be the fourth larger-participant rule adopted by the CFPB.
A CFPB factsheet on the proposal is available here. The CFPB will accept comments for 60 days from publication of the proposed rule in the Federal Register.
On January 9, the SEC National Examination Program (NEP) published its examination priorities for 2014. The NEP’s market-wide priorities include (i) fraud detection and prevention; (ii) corporate governance and enterprise risk management; (iii) technology controls; (iv) issues posed by the convergence of broker-dealer and investment adviser businesses and by new rules and regulations; and (v) retirement investments and rollovers. The NEP also identifies priorities for specific program areas, including (i) investment advisers and investment companies; (ii) broker-dealers; (iii) clearing and transfer agents; (iv) market oversight program areas; and (v) clearance and settlement. For example, for the investment advisers and investment companies program area, the NEP plans to focus on certain emerging risks including (i) advisers who have never been previously examined, including new private fund advisers, (ii) wrap fee programs, (iii) quantitative trading models, and (iv) payments by advisers and funds to entities that distribute mutual funds.
On December 3, the CFPB Ombudsman’s Office submitted its second annual report to the Director of the CFPB. The report contains an update on the systemic recommendations made last year and new recommendations stemming from the Ombudsman’s review of (i) how the CFPB shares information, (ii) caller experience with the CFPB contact center, and (iii) the supervisory examination process. The Ombudsman’s recommendations relate primarily to further standardizing and clarifying what a financial entity may expect throughout the examination lifecycle and to ensuring industry and consumer access to CFPB information in a consistent and timely manner. According to the Ombudsman, the Bureau was receptive to all suggestions and feedback. Read more…
On November 15, Bloomberg reported that the CFPB is examining credit card issuers’ rewards programs. The article quotes CFPB Director Cordray stating that rewards programs can involve “detailed and confusing rules” and that the CFPB “will be reviewing whether rewards disclosures are being made in a clear and transparent manner.” The CFPB’s recent Credit CARD Act report identified rewards product disclosures as one of many card practices that “pose risks to consumers and may warrant further scrutiny by the Bureau.”
Bloomberg reported that the examinations cover the marketing of rewards programs, “particularly the marquee promise of a given card, such as cash back, or redeemable airline miles, and what a customer needs to do to get it.” The article notes that there is no apparent sudden rise in consumer complaints about rewards, but the CFPB has targeted the programs because they are, according to the source, the primary reason consumers choose a particular card.
While the CFPB reportedly is not examining the disclosures on the basis that they could present UDAAP risk, the article states that the scope of the targeted examinations includes (i) the time it takes for card holders to redeem their rewards, (ii) the potentially obscure nature of the conditions on redeeming rewards, (iii) programs that require increasing amounts of spending over time to redeem an award, and (iv) forfeiture and reinstatement of rewards.
On October 22, the CFPB released the procedures its examiners will use in assessing financial institutions’ compliance with the remittance transfer requirements of Regulation E. Amendments to those regulations, finalized by the CFPB earlier this year, are set to take effect October 28, 2013. In general, the rule requires remittance transfer providers that offer remittances as part of their “normal course of business” to: (i) provide written pre-payment disclosures of the exchange rates and fees associated with a transfer of funds as well as the amount of funds the recipient will receive; and (ii) investigate consumer disputes and remedy errors. The rule does not apply to financial institutions that consistently provide 100 or fewer remittance transfers each year, or to transactions under $15.
The new examination procedures detail the specific objectives examiners should pursue as part of the examination, including to: (i) assess the quality of the regulated entity’s compliance risk management systems with respect to its remittance transfer business; (ii) identify acts or practices relating to remittance transfers that materially increase the risk of violations of federal consumer financial law and associated harm to consumers; (iii) gather facts that help to determine whether a supervised entity engages in acts or practices that are likely to violate federal consumer financial law; and (iv) determine whether a violation of a federal consumer financial law has occurred and, if so, whether further supervisory or enforcement actions are appropriate. In doing so, CFPB examiners will look not only at potential risks related to the remittance regulations, but also outside the remittance rule to assess “other risks to consumers,” including potential unfair, deceptive, and abusive acts and practices and Gramm-Leach-Bliley Act privacy violations. Finally, consistent with other examination procedures published by the CFPB, the examiners are instructed to conduct both a management- and policy-level review as well as a transaction-level review to inform the stated examination objectives.
Also on October 22, the CFPB announced a new tool designed to make it easier for the public to navigate the regulations subject to CFPB oversight. To start, the new eRegulations tool includes only Regulation E, which implements the Electronic Funds Transfer Act and includes the remittance requirements discussed above. Noting that federal regulations can be difficult to navigate, the CFPB redesigned the electronic presentation of its regulations, including by (i) defining key terms throughout, (ii) providing official interpretations throughout, (iii) linking certain sections of the “Federal Register preambles” to help explain the background of a particular paragraph, and (iv) providing the ability to see previous, current, and future versions. The CFPB notes that the tool is a work in progress and that suggestions from the public are welcome. Further, the CFPB encourages other agencies, developers, or groups to use and adapt the system.
As reported last week, the CFPB has decided to stop sending enforcement attorneys to routine examinations of financial institutions effective November 1. In a recent interview, CFPB Deputy Director Steven Antonakes said that the decision followed an “assess[ment of] the effectiveness and efficiency of the operation” over the past two years. He clarified that the presence of enforcement attorneys was “absolutely not” intended to intimidate supervised institutions but rather reflected the CFPB’s ongoing efforts to ensure “strong communication” between supervision and enforcement teams throughout the examination process.
Going forward, Antonakes explained that enforcement attorneys will continue to have a “line of sight throughout the beginning, middle, and end of the exam process,” in addition to serving other important functions, like conducting independent investigations. He noted the recent action targeting a debt settlement payment processor as “just one example of an independent investigation [the] enforcement team conducted completely outside of the supervisory process”. Read more…
This week, the NCUA issued Letter No. 13-FCU-09 to advise federally insured credit unions of changes to its examination report. The NCUA made the changes to “streamline the examination report, better clarify the priority exam action items to be resolved, reduce redundancy, and ensure consistency.” In an effort to help credit union officials clearly differentiate between major and minor problems in order to prioritize corrective actions, and to enhance consistency in the examination process, the Document of Resolution (DOR) and Examiner’s Findings will now be stand-alone documents. For any material problems identified in an examination, the examiner’s concern and documented support for that concern will be included in the DOR, along with corrective action plans. The letter also provides a table that details, document-by-document, other changes to the examination report. Full implementation will begin with examinations starting on or after January 1, 2014.
The CFPB has decided to end its policy of sending enforcement attorneys to routine examinations of supervised financial institutions. The policy change will take effect on November 1, 2013.
The CFPB decision followed an internal review designed to streamline the examination process and make it less costly. The CFPB asserts that the change was not in response to criticism it has received from supervised institutions and others. Bank and nonbank financial service providers and their trade associations have objected to the CFPB’s policy from its start, arguing that it differs from the traditional approach taken by other federal regulators and limits the effectiveness of the examination process. Hearing those concerns, last November the CFPB Ombudsman’s Office identified the presence of enforcement attorneys at supervisory examinations as one of several “systemic issues” at the Bureau and recommended that the CFPB review its implementation of the policy. In addition, the Federal Reserve Office of Inspector General, which also serves as the CFPB’s inspector general, was in the process of reviewing the policy and was set to release its report in the coming weeks, and just recently the Bipartisan Policy Center called on the CFPB to end the policy.
On September 24, the Bipartisan Policy Center (BPC) released a paper and held an event regarding the CFPB’s activities in its first three years, and potential changes to the agency and its policies going forward. The paper, generally critical of the CFPB’s use of guidance, expressed a preference for rulemakings to implement policy. The BPC argued that if the CFPB must issue substantive guidance, then it should employ a more open and transparent process, seeking input from a variety of parties, including consumer groups and regulated entities. In addition, the BPC identified several concerns with the CFPB’s supervisory and examination processes and recommended that the CFPB, among other things, (i) establish a specific policy setting timelines for closing out examinations, (ii) end its policy of including enforcement staff in the supervisory process, (iii) renew its effort to recruit and train high-quality supervisory and examination staff, and (iv) improve coordination with other agencies, particularly to integrate the CFPB’s product-based approach. The BPC also addressed, among other things, the CFPB’s requests for data from regulated entities, the use of its civil penalty fund, oversight of the Bureau, and the development and implementation of performance metrics.
On September 17, the CFPB released revised short-term, small-dollar lending Examination Procedures that incorporate the regulations issued by the Department of Defense (DoD) to implemente the Military Lending Act (MLA), which addresses alleged predatory lending practices by lenders that operate near military bases. The CFPB was given explicit power to enforce the MLA in the National Defense Authorization Act for Fiscal Year 2013.
The revised Procedures note that the MLA covers active-duty military members and their dependents and applies to “consumer credit,” defined as closed-end loans that are payday loans with a term of 91 days or fewer and an amount financed of $2,000 or less as well as certain vehicle title loans and tax refund anticipation loans. The revised Manual notes the special requirements of the MLA, including: (i) capping the Military Annual Percentage Rate (the APR under TILA plus other charges such as credit insurance premiums and fees for certain credit-related ancillary products) at 36 percent; (ii) prohibiting a lender from holding a post-dated personal check, debit authorization, or title to a vehicle for repayment or security; (iii) prohibiting mandatory arbitration clauses and waivers of legal rights under the SCRA or other consumer protection laws; (iv) prohibiting lenders from rolling over loans, unless the new transaction results in more favorable terms for the consumer; (v) prohibiting lenders from requiring consumers to pay through the military wage allotment system; and (vi) prohibiting prepayment penalties.
The CFPB’s press release notes the Bureau’s ongoing coordination with the Department of Defense on servicemember protection, as described in the agencies’ 2012 Joint Statement of Principles on small-dollar lending.
Over the past year, the CFPB has started to publicly outline its supervisory approach to student lending and servicing. In doing so, it repeatedly has identified similarities between the lending practices that led to the subprime mortgage crisis and the escalating default rate in the burgeoning level of student loan debt. Rather than wait for a student loan crisis, the CFPB is attempting to put in place a program it hopes can help prevent one.
As part of that program, at the end of 2012, the CFPB released its student loan examination procedures. Also in 2012 the CFPB released two reports (July 2012 and October 2012) aimed at curbing purported violations of law, and it has continued to highlight student loan issues this year, including in a recent update on student loan complaints. In addition, in March of 2013, partly to address the complaints of student loan debtors, the CFPB announced its intention to supervise and examine the larger non-bank education loan servicers. That rule should be finalized next month.
Student lenders and servicers also should take note of the CFPB’s recently issued debt collection guidance, which, among other things, holds CFPB-supervised creditors accountable for engaging in acts or practices the CFPB considers to be unfair, deceptive, and/or abusive (UDAAP) when collecting their own debts. Many of the guideposts set forth in the guidance reflect the standards to which third-party debt collectors are held accountable under the FDCPA.
For more information about the CFPB’s debt collection guidance, please see a recent article by BuckleySandler Partner Valerie Hletko. Over the coming months, look for additional articles from BuckleySandler attorneys about the CFPB’s activities in the area of student loans and other non-mortgage consumer financial products and services.