I am pleased to introduce my new colleague Bo Ranney to our blog readers.  Bo joins Ballard Spahr’s Consumer Financial Services Group after having spent three years at the CFPB.  I expect Bo to be a valuable resource to our clients, particularly in preparing for CFPB exams and in dealing with CFPB examiners during the course of an ongoing exam.

Bo joined the CFPB’s Office of Supervision in October 2011.  Although based in Supervision, Bo also had opportunities during his tenure with the CFPB to work on matters for the CFPB’s Office of Enforcement and Research, Markets, and Regulations (RMR) Division.

While in Supervision, Bo was involved in numerous compliance examinations of bank and nonbank institutions and led exam teams as the examiner-in-charge.  In conducting the exams, Bo reviewed an institution’s consumer files and internal documents to ensure compliance with federal consumer financial protection laws.  He also regularly met with senior management at financial institutions to discuss alleged violations discovered during an exam and collaborated with CFPB Supervision Policy and Enforcement staff regarding how the Bureau should address such violations, including whether they should be identified as a matter requiring attention (MRA) in the exam report or considered for a public enforcement action.

As part of his work in Enforcement, Bo played a key role on the team that filed the CFPB’s first application for a temporary restraining order in a matter that involved a law firm that allegedly engaged in unlawful mortgage modification practices.  He also worked on cases involving alleged violations of the Consumer Financial Protection Act, the Fair Debt Collection Practices Act, the Mortgage Assistance Relief Services Rule, and the Telemarketing Sales Rule.  While in RMR, Bo worked across multiple Bureau Divisions to help produce small entity compliance guides addressing the Bureau’s new mortgage rules and related web content.

On December 9, from 12:00 PM to 1:00 PM ET, Bo will be sharing insights from his tenure at the CFPB in a webinar, “Everything You Want To Know About CFPB Exams but Have Been Afraid To Ask: An Insider’s Perspective.”  A link to register is available here.

Along with its proposed larger participant rule for the auto financing market, the CFPB recently issued a special edition of Supervisory Highlights (“report”) describing its fair credit supervisory activity in what it characterizes as “the indirect automobile lending market.”

The report indicates that CFPB supervisory examination teams have been conducting targeted Equal Credit Opportunity Act compliance reviews of “indirect auto lenders.  “This is the segue into the surprising news that multiple targeted ECOA reviews conducted during the last two years have resulted in non-public, supervisory resolutions with several auto “lenders” involving approximately $56 million in redress for approximately 190,000 consumers.

The report includes numerous assertions and observations drawn from supervisory examinations.  It also explains the CFPB’s use of the hybrid Bayesian Improved Surname Geocoding (BISG) methodology to proxy for unidentified race and ethnicity in the non-mortgage context.  The report was accompanied by a white paper explaining this proxy methodology in further detail and reporting that a study conducted by the CFPB had concluded that this “integrated approach to building a proxy is more accurate than either surname or geographic data individually.”

Our legal alert containing a detailed discussion of the report and the white paper on the BISG proxy methodology is available here.  On October 16, 2014, Ballard Spahr attorneys will discuss these developments in a webinar, “Auto Finance II: Fair Credit,” from 12:00 p.m. to 1:00 p.m. ET.  The registration form is available here.

Earlier this week, the results of an evaluation of the CFPB’s supervision program conducted by the Office of Inspector General (OIG) that the CFPB shares with the Fed were released in a report entitled “The CFPB Can Improve the Efficiency and Effectiveness of Its Supervisory Activities.”  The report is based on data in the CFPB’s Supervisory Examination System (SES) database as of July 31, 2013.  As of that date, the CFPB had completed 82 examinations (excluding baseline reviews), which resulted in 35 reports of examination and 47 supervisory letters.  63 of the completed examinations were of depository institutions and 19 were of nondepository institutions. 

The report begins with a background discussion that serves as a useful primer on the operation of the CFPB’s supervision program.  For example, the OIG details the types of exams conducted by the CFPB, the “products” that result from an exam (i.e. report or supervisory letter), and the process for exam scheduling, planning, execution, and reporting. 

The background discussion is followed by 8 findings, with each finding accompanied by recommended actions for the CFPB to take to address the finding and the CFPB’s response.  Key findings include the OIG’s conclusion that: 

  • The CFPB did not meet its internal timeliness requirements for exam reporting, with nearly 60% of the 82 drafts submitted to headquarters by regional exam teams not meeting the CFPB’s requirement for submission within 30 days of fieldwork completion and 90% of the drafts that received headquarters approval not meeting the 30-day requirement for such approval.  The report notes that several exams have been outstanding for more than a year “indicating that the agency is not providing timely written feedback to the institutions it supervises.”  It also observes that “[t]he CFPB’s inability to provide examination reports to institutions in a timely manner creates uncertainty for supervised institutions.”
  • The CFPB did not consistently use standard compliance rating definitions.  In two out of eight sampled examination products, CFPB staff had edited standard definitions to omit information and add qualifying language to the assessment of discriminatory acts or practices.  More specifically, in one examination that included ECOA compliance, the CFPB altered the FFIEC’s definition for a 3 rating to state that no “overt” discriminatory acts or practices were evidenced.  The examiners had identified the discretion given to the institution’s customer service representatives to grant fee waivers as a situation that created a risk of ECOA violations.  While the CFPB required the institution to create policies and procedures limiting such discretion, the report did not indicate “whether the CFPB identified any discriminatory acts or practices, suggesting that the CFPB did not reach a definitive conclusion as to whether fee waivers had been granted on a discriminatory basis.”  The OIG found that by adjusting the standard definition to insert “overt,” the CFPB had created “the appearance that the CFPB deviated from the standard template language to qualify its rating of the supervised institution, calling into question the appropriateness of the assigned rating.”  A second examination team that had also added the word “overt” had copied such language from the other report rather than from the CFPB’s template.
  • The CFPB’s examination reporting policy has not been updated to reflect the December 2012 reorganization of the CFPB’s supervision offices or the current definition of fieldwork completion (which initiates the reporting process).  The OIG found the outdated definition to be a potential source of confusion among staff responsible for drafting and reviewing examination reports and that the entry of incorrect dates by examiners into SES could impact the CFPB’s ability to track performance against reporting milestones.
  • The CFPB did not have a consistent approach to scheduling or tracking examination staff hours.  The OIG observed that the lack of a policy for scheduling or tracking “hinders the CFPB’s ability to hold staff and regions accountable for the staff resources allocated and time expended on examinations.”
  • The CFPB has not yet finalized its commissioning program for new examiners and lacks a formal, centralized process to track examiners’ completion of on-the-job modules.  The CFPB has a smaller proportion of commissioned examiners to noncommissioned examiners than peer federal regulators. 

The OIG indicates that since completing its field work in October 2013, it has been told by senior CFPB officials that various measures have been taken to address certain findings in the report, including streamlining the report review process and reducing the number of examination reports that have not been issued.  As part of its follow-up activities, the OIG plans to assess whether such measures and the other planned measures that the CFPB outlined in its responses address the OIG’s findings and recommendations. 

In his remarks yesterday to the Consumer Bankers Association, Steven Antonakes, CFPB Deputy Director, said that the CFPB is 80% staffed insofar as examiners are concerned and that he expects the examination staff to be fully-staffed within a year.  He also expects that the CFPB will be meeting its deadlines for issuing exam reports within the same time frame.  Mr. Antonakes did not mention the OIG report.

Politico has reported that, effective November 1, the CFPB will end its practice of having enforcement attorneys regularly participate in examinations of supervised entities. According to the report, Director Cordray announced the change on a conference call with CFPB examiners. The report indicated that a CFPB spokeswoman attributed the change to an internal review that aimed to improve the supervision process and found that having both examiners and enforcement attorneys present at exams was not efficient.

Since first learning of the CFPB’s practice, we have expressed our deep concern about the practice’s inhibiting effect on free and open communications between the CFPB and supervised entities and urged the CFPB to reconsider the practice. In ending the practice, the CFPB appears to have listened to those concerns which were widely-voiced by industry. It is probably not completely coincidental that the CFPB did this about face when the Fed’s Office of Inspector General was poised to issue a report about this controversial practice. We commend the CFPB for making the change and hope it will lead to a more cooperative and less enforcement-oriented examination process.

While the change in policy is welcomed, it would be a serious mistake for any supervised institution to read the change as signifying that the CFPB will become more lax in exercising its supervisory authority. Indeed, Director Cordray made clear in his announcement of the change that there will still be very close communication between examiners and enforcement attorneys.

Remarks made by Ori Lev, the CFPB’s Deputy Enforcement Director for Litigation, at the ABA Consumer Financial Services Committee’s spring meeting last week further clarified the role of CFPB enforcement attorneys in CFPB exams. His remarks, coupled with comments made by another CFPB official at the Committee’s winter meeting, leave no doubt that the enforcement attorneys are much more than passive observers. 

 At the winter meeting, Kristen Donoghue from the Bureau’s Office of Enforcement indicated that there was close collaboration between supervisory and enforcement staff and that enforcement attorneys “support,” “help,” and “assist” supervisory staff in exams. 

Speaking at the spring meeting program titled “CFPB Investigations, Enforcement and Settlement,” Mr. Lev forcefully rejected any suggestion that the presence of an enforcement attorney at an examination meant the supervised entity was being targeted for an enforcement action.  He indicated that staffing enforcement attorneys on examinations “has nothing to do with the risk we perceive” at the supervised entity “because enforcement attorneys are at every exam.” 

Mr. Lev gave some insight into the nature of the “support” provided by enforcement attorneys. He indicated that one of the CFPB’s rationales for having enforcement attorneys participate in exams is to give the onsite enforcement attorney a better understanding of the supervised entity than the attorney would have by just looking at an after the fact report of the exam results. To that end, examiners and onsite enforcement attorneys may work together in the course of an examination, and such cooperation may lead to additional areas of examination for determining whether a compliance violation has occurred.

The CFPB’s practice of bringing enforcement attorneys to examinations has been a continuing concern for industry.  In particular, supervised entities worry that the participation of enforcement attorneys in examinations inhibits free and open communication, and signals the CFPB’s intention to use the examination process as a development ground for enforcement actions.  

We were pleased to see that the 2012 CFPB Ombudsman’s Report, released last November, contained some indication that the Bureau was listening to the industry’s concerns. The report stated, that as a result of meetings held with representatives of industry and others, the Ombudsman was recommending that the CFPB review its policy of having enforcement attorneys present at examinations. 

It now appears that the Fed’s Office of the Inspector General will be looking at the CFPB’s practice.   In its work plan updated as of February 22, 2013, the OIG stated that it “is conducting an evaluation of the CFPB’s integration of enforcement attorneys into its examinations of banking and nonbanking institutions’ compliance with applicable consumer protection laws and regulations.”   According to the report, the OIG’s objectives are to assess the “potential risks” associated with the CFPB’s practice and the “effectiveness of any safeguards that the CFPB has adopted to mitigate [such] potential risks.”

We blogged recently about H.R. 4014, which President Obama signed into law near the end of 2012.  The law identifies the CFPB as a regulator to whom a regulated entity may submit privileged information without waiving any state or federal law privilege and provides that the CFPB may share privileged information of a regulated entity with other federal agencies without waiver of any state or federal law privilege. 

The protections afforded by H.R. 4014 have several important limitations, which we have explored in a recent legal alert.  Not only does H.R. 4014 provide no explicit protection for privileged information provided to state attorneys general, it does not address the fundamental threshold issue of whether the CFPB has the right to compel production of privileged documents in examinations.  This issue is particularly critical in light of the role that enforcement lawyers are playing in CFPB exams and the likelihood (if not certainty) that any privileged information provided to exam staff will be shared with enforcement attorneys when the CFPB believes there may be legal violations.

Calvin Hagins, of the CFPB’s Office of Supervision, and Kristen Donoghue, Assistant Litigation Deputy in the Bureau’s Office of Enforcement, addressed privilege issues at the ABA Consumer Financial Services Committee meeting in Naples, Florida.  Mr. Hagins explained that, during his time at the Office of the Comptroller of the Currency, he reviewed “everything” in connection with bank examinations, ostensibly including privileged materials.  However, the issue of whether a bank agency (or the CFPB) can override the attorney-client privilege has not been previously litigated.  In our view, the statutory basis for the authority to require production of privileged documents on the part of prudential regulators such as the OCC is unclear, at best.  The Bureau’s authority, in our view, is even weaker, because the prudential regulators have frequently justified their asserted access to privileged documents by their need to evaluate the “safety and soundness” of a bank’s operations.  The CFPB has no responsibility for safety and soundness.

Later at the same meeting, a round table discussed the impact of potential CFPB sharing of privileged information with state authorities.  During that discussion Gerald Sachs, Senior Counsel, Enforcement Strategy for the CFPB, advised that the CFPB was aware of the potential privilege issue and that guidance might be forthcoming.

One thing is certain, though: the issue of whether the CFPB has authority to compel the production of privileged documents in an examination is far from settled, and we expect that challenges to the CFPB’s ability to do so will be forthcoming.

The discussions at the ABA Consumer Financial Services Winter Meeting have reached biblical proportions (literally).  The participants on yesterday’s CFPB Exams and Enforcement panel read from the New Testament on “ravening wolves in sheep’s clothing” (later clarified as NOT a reference to CFPB enforcement attorneys) and how the “wise man built his house upon a rock” (the rock being a strong compliance program).  

The representatives from the CFPB on the panel were a bit more revelatory on one of industry’s main concerns and on which we have previously posted: the participation of enforcement attorneys in supervisory exams.  Kristen Donoghue from the Bureau’s Office of Enforcement observed that, as an organizational matter, enforcement attorneys are housed with supervisory staff in the same division: Supervision, Enforcement, and Fair Lending.  She indicated that such a structure naturally results in close collaboration, a feature of the Bureau that she said Enforcement Director Kent Markus has termed “obsessive collaboration.”  Ms. Donoghue was careful to say that enforcement attorneys “support,” “help,” and “assist” supervisory staff in exams, thereby implying that enforcement attorneys play a subordinate role in exams.  

Of course industry is not just concerned about how much enforcement attorneys participate in exams, but also about sharing of potentially privileged information received as part of exams with enforcement attorneys.  When Alan Kaplinsky raised this possibility, Calvin Hagins in the CFPB’s Office of Supervision responded that the prudential regulators have long shared information with and sought participation from enforcement staff.  Another panelist countered that the CFPB is the “new cop on the beat” and it has signaled it intends to break with some past practices.  Indeed, the CFPB has a new mission and a broader mandate, so past regulatory practices cannot guarantee future practices.  

A key objective of enforcement attorneys participating in exams, according to Ms. Donaghue, is to ensure consistency.  The CFPB, as a “data-driven agency,” needs its attorneys to be familiar with products, players, and practices across the industry to ensure consistent enforcement efforts.  Director Cordray has similarly spoken of the need to “cross-train” enforcement attorneys by participating in exams.  

The CFPB representatives on yesterday’s panel sought to reassure industry that enforcement attorneys are not meant to send a message that there is a compliance problem.  Such a position is consistent with the CFPB’s goal to have “gotcha-free” exams.

A final footnote: the CFPB representatives were questioned about the CFPB’s intentions regarding mystery shopping, particularly given the Bureau’s much-discussed job posting for investigators to inform the Bureau’s enforcement efforts.  Both Ms. Donaghue and Mr. Hagins disclaimed any knowledge of the positions.  In a subsequent panel, Chris Peterson, CFPB Senior Counsel for Enforcement Strategy, declined to comment on the Bureau’s mystery shopping plans, although he said that mystery shopping is another practice that the prudential regulators have done in the past.    


I am at the ABA Consumer Financial Services Committee’s meeting in Naples, Florida.  (There is record attendance at this year’s meeting—nearly 225 consumer financial services lawyers.  I am sure that the CFPB deserves some credit for this.)  And yesterday morning, I listened to a panel on CFPB exams and enforcement actions on which Calvin Hagins, the leader of the CFPB’s examination staff, spoke.  

Mr. Hagins shed some light on how exams are conducted that, if true, should be comforting to our clients.  Mr. Hagins emphasized that exams “are not an exercise of gotcha” and that “there should not be any surprises” in final exam reports.  He indicated that examiners should be discussing findings with the institution during the course of the exam.  He also said that, when an issue is uncovered and brought to the institution’s attention, the CFPB “prefers to get buy in on corrective action” from the institution and should not have to rely on a more heavy-handed approach to ensure compliance unless the institution fails to modify its practices. 

Mr. Hagins also suggested that CFPB’s exam approach relies more on interviews of and discussions with an institution’s senior managers than the exam approaches of the prudential regulators. 

When asked about the CFPB’s long delay in conducting exit interviews and issuing exam reports following non-bank exams, Mr. Hagins explained that “the process is long because lots of internal review takes place.”  He said the agency is seeking to ensure consistency as to its guidance and conclusions across institutions, geographic areas and products.  These comments seemed to imply that the delay is not due to the CFPB’s preparing to drop the hammer on those whose exams were conducted months ago. 

Assuming that the long delay in concluding exams is not a harbinger of bad things, our experiences with CFPB exams are generally consistent with what Mr. Hagins describes.  To the extent an exam is not proceeding in this manner, Mr. Hagins invited institutions to contact him directly.


The CFPB is reorganizing its headquarters staff for supervision so it will no longer be divided into separate offices for nonbank and large bank supervision.  While there will continue to be two offices, one office will now be focused on exams and the other will be focused on policy. 

The exam office will oversee the CFPB’s efforts to: “recruit, train, and commission examiners; ensure policies and procedures are followed; and plan and execute examinations appropriately in light of [the CFPB’s]  resources and priorities.”  Paul Sanford will serve as the office’s Acting Assistant Director and four regional offices will report to the headquarters office. 

The policy office “will ensure that policy decisions for supervision are consistent with both the law and [the CFPB’s] mission, and that they are consistent across markets, charters, and regions.”  The office will be organized by product or service market rather than by the type of financial institution, with the strategies and policies it develops to apply to banks and nonbanks. Peggy Twohig will serve as the office’s  Assistant Director. 

While time will tell, our initial impression is that the reorganization could represent an improvement to the extent it fosters equal treatment of banks and nonbanks.