With the advent of the CFPB and increased coordination between banking, regulatory and enforcement agencies, financial institutions and non-depository institutions alike must revisit their approach to compliance. Conducting business in the post-financial crisis era is fraught with challenges, and institutions that do not respond will eventually face peril.
Countless companies in a variety of industries are now subject to oversight by the CFPB. In the mortgage industry, the bureau has the authority to investigate companies to ensure compliance with federal law; it does not have authority to determine state law compliance. Notwithstanding its examination authority, the CFPB is a consumer-protection vehicle—no other governmental authority has an exclusive mandate to safeguard the interests of consumers. As a result, the bureau’s supervision priorities are aligned differently than federal banking authorities or state regulatory agencies. That does not mean, however, that the consumer protection focus of the CFPB will not bleed over so that other governmental entities increase their focus in these areas.
The CFPB aims to be different. It is unequivocally pro-consumer and its employees take pride in the fact that it is not a traditional governmental agency. The agency now considers financial products through a different
lens, one that does not exclusively evaluate whether a product is legal or compliant. Instead, the bureau considers whether products may be in the consumer’s best interest. Does this approach mean that the validity of entire products could be called into question by the CFPB? Absolutely. More fundamentally, however, it means that institutions will need to educate the bureau about the value of their offerings and, most importantly, ensure that their products provide a “value add” to consumers and that such benefit is commensurate with the compensation earned by the company. To the extent that companies cannot justify the worthiness of their products, it is not unreasonable to believe that the CFPB would act against those companies. CFPB action could result in significant monetary penalties, as evidenced by its recent settlement with Capital One.
The comprehensive and rapid embrace of technology by regulatory agencies, including the CFPB, will only serve to increase the burden on regulated entities. State regulatory agencies, through the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators, secured technology very early so that the agencies could perform loan-level data analysis. More recently, the CFPB similarly secured such technology so that it may evaluate mortgage loan compliance on a loan-level basis.
Historically, examiners have not made use of cutting-edge technology in order to conduct examinations or facilitate reviews of companies. The actions of the CFPB and the state regulatory agencies suggest that the past practices of examiners are just that—the ways of the past. In addition, the CSBS is rapidly culling data from Mortgage Call Reports that are submitted by non-depository institutions so that it can provide comprehensive data to regulatory agencies regarding the types of activities that are occurring in the industry. Such data will allow regulatory agencies to see changes in product trends and offerings, as well as identify those institutions that potentially conduct activities that pose more risk to consumers.
Of further note, governmental agencies across the spectrum are increasingly cooperating. For example, in early September 2012, a new complaint portal was announced whereby various governmental agencies, including various attorneys general, the CFPB, state regulatory agencies and federal agencies, will be able to access consumer complaints. Evidencing additional cooperation, multistate regulatory examinations performed on non-depository institutions have been scheduled in coordination with examinations by the CFPB. Such scheduling not only places an incredible burden on examined institutions, but cooperation between the examiners can only maximize the effectiveness of the examinations.
The expanded use of technology by examiners, combined with cooperation amongst regulatory agencies, means regulated institutions must respond. What type of response is appropriate?
First, play offense. Consider revisiting your existing compliance department. Is that department constantly defending itself, responding to examination requests and compliance challenges, or is there time to go on offense, allowing for comprehensive reviews of existing business practices and an ongoing discussion about the direction of the company. This may mean redeployment of existing resources or, more likely, adding additional resources. Investment in your company’s infrastructure now will pay dividends in the future.
Second, have business legal and compliance cooperate to identify areas of risk. After identifying those areas, implement plans to minimize that risk. Consider wholesale training of employees to ensure that a culture of risk minimization is accepted and embraced, particularly by sales professionals.
Third, scout the competition. What are your industry
Without a doubt, industry members are experiencing unparalleled challenges in the current regulatory environment. Those challenges must be met head-on now, lest agencies such as the CFPB respond with force in the future.