The Office of Inspector General for the Fed/CFPB has sent a memorandum to the CFPB, the subject of which is “The CFPB Can Enhance Its Process for Notifying Prudential Regulators of Potential Material Violations.” The memo follows up on a report issued last month by the Offices of Inspector General for the Fed/CFPB, FDIC, Treasury and NCUA setting forth the results of their review of the extent to which the CFPB and prudential regulators (FDIC, Fed, OCC and NCUA) were coordinating their supervisory activities and avoiding duplication of regulatory oversight responsibilities.
For insured depository institutions and credit unions with assets of $10 billion or less, Dodd-Frank left the authority to examine such institutions for compliance with federal consumer financial laws with the prudential regulators but allowed the CFPB to include its examiners on a sampling basis in examinations. While the OIGs found that the CFPB and prudential regulators were generally coordinating their regulatory oversight activities for federal consumer financial laws consistent with Dodd-Frank, they found various opportunities for enhanced coordination, including with regard to the CFPB’s approach for providing notifications or recommendations to the prudential regulators when the CFPB believes a smaller institution has violated a federal consumer financial law.
In its memorandum, the Fed/CFPB OIG states that it was unable to verify that the CFPB has been consistently complying with Section 1026(d) of Dodd-Frank, which requires the CFPB to notify the relevant prudential regulator in writing and recommend appropriate action if it has reason to believe that an insured depository institution or credit union with assets of $10 billion or less has committed a material violation of a federal consumer financial law. Section 1026(d) also requires the relevant prudential regulator to respond in writing within 60 days. The OIG found that the CFPB did not have a policy to require the tracking of such written notifications and recommendations or responses and also did not have guidelines outlining the factors to be considered when assessing the materiality of a violation, detailing any approvals needed for such a determination, or describing when a written notification or recommendation is necessary.
The Fed/CFPB OIG’s memorandum contains a recommendation for the CFPB to develop and implement a policy that (1) outlines the process for assessing the materiality of a violation and provides guidance on determining whether a written notification or recommendation is necessary, and (2) requires the tracking of such written notifications and recommendations and responses. The memo indicates that since the OIG discussed its recommendations with the CFPB, the CFPB finalized a policy that outlines an escalation and approval process that precedes a written notification and a tracking process for written notifications and recommendations. In his response to the memo, CFPB Deputy Director Steven Antonakes indicated that the CFPB also plans to track written responses received from prudential regulators.
The Fed/CFPB OIG noted in its memorandum that there have already been three instances in which the CFPB has notified prudential regulators of a potential material violation of federal consumer financial law by a smaller institution. As a result, smaller institutions should expect to see more such notifications from the CFPB to prudential regulators.