A sudden Consumer Financial Protection Bureau audit is the fear that keeps compliance departments and servicing executives up at night.
But preparing for a CFPB probe is generally straightforward as long as servicers and lenders are both “proactive” and able to apply a common-sense approach to the process, industry experts say.
"Being reactive in compliance is always much more expensive and painful than being proactive," said Michael Waldron, respected partner at the law firm Ballard Spahr.
While speaking at the SourceMedia mortgage servicing conference sponsored by National Mortgage News in Dallas, Ann Thompson, a senior analyst for the CFPB Office of Supervision Policy, spelled out the key elements the bureau is evaluating when sending examiners into a servicing firm.
The consumer agency is largely focused on risks to consumers during the loss mitigation process, as well as issues that can pop up at any stage of the foreclosure process or during the transfer of mortgage servicing rights.
Essentially, the bureau is examining for compliance with federal financial laws.
The CFPB also advises servicers to pay close attention to additional risks posed through third-party service providers.
So how can a servicer determine if they are in compliance with CFPB guidelines in the case of an audit?
Waldron and a team of panelists, including CFPB representatives and compliance officers, created a top ten list of areas that servicers need to address.
The first step is to create a scalable compliance management system.
The first thing a CFPB examiner will do is review a firm’s compliance management system, panelists noted.
The system put in place should provide guidance on everything from oversight, compliance, consumer complaint requests and compliance audits.
Other essential ingredients to pass an audit include effective communication strategies, highlighting and sharing the responsibilities with boards and management, the creation of an enterprise training program and reliable information management.
Servicers also should ensure they are heeding all fair lending laws, testing for disparate impact treatment while also addressing consumer complaints and implementing an error resolution program.
Servicers also need to manage for UDAAP risks and compliance while closely managing third-party vendors and ensuring robust policies and procedures are in place.
"The important takeaway from what you learned today – and I can attest to this as a general counsel – complaints not only start audits, they start lawsuits," Waldron said.
Waldron noted he’s been in many servicing shops, and those feeling ahead of the game in terms of CFPB compliance may in fact be lagging behind unless they fairly assess their internal systems.
"There are shops I have been in that tell me they don’t have an issue with customer complaints because they only have a couple of them," Waldron explained.
However, he sees a low number of complaints as reflective of a business that may not be capturing all of its complaints into an organized platform, creating hidden risks that an outside auditor may uncover later on.
"If you are not capturing complaints at a rate commensurate with your activity, you are not allowing for a framework to capture those complaints," Waldron said. "The bottom line they are being swept under the rug at some point in the system."
Waldron noted that unless servicers address those issues proactively and build a framework to capture complaints early on, a servicing shop might be creating difficulties that could turn into lawsuits later on.
The CFPB also used the opportunity to assure servicers that the agency is trying to be transparent in everything examiners are looking for, allowing every firm the opportunity to be prepared.
A few best practices include reviewing previous fair lending cases for clues on how to define ‘safe lending’ in relation to discrimination statutes and adopt fair lending policies that not only make sense, but can withstand scrutiny later on.
As for what the CFPB reviews, panelists said field examiners evaluate all business operations from the executive board level down to individual file reviews.