Legal Counsel to theFinancial Services Industry

The CFPB: How to Prepare for an Examination

Jeffrey P. NaimonJonice Gray TuckerLori J. Sommerfield

July 26, 2012

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Changes to CFPB leadership and staffing update Overview of examination process Preparation for CFPB examinations What to expect during and after the exam CFPB enforcement proceedings in focus Status of key CFPB rulemakings

Presentation Overview

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CFPB Leadership Changes

On June 19, 2012, the CFPB announced several changes to its executive leadership team

Supervision Division– Steve Antonakes: Promoted to Associate Director of Supervision– Paul Sanford: Now Acting Assistant Director of Large Bank

Supervision Office of General Counsel

– Meredith Fuchs: Promoted to General Counsel– Len Kennedy: Former General Counsel; now Senior Advisor and

Counselor to Director Cordray Ombudsman

– Wendy Kamenshine: Promoted from acting to permanent Ombudsman

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CFPB Staffing Update

The CFPB continues to increase its staffing: – As of December 2011, the CFPB had more than 750 employees– As of June 2012, it had more than 900 employees

The Bureau plans to increase staffing to a total of 1500 employees over next two years

CFPB is planning to significantly increase its Supervision, Enforcement and Fair Lending & Equal Opportunity staff and budget

– Currently, over half of CFPB staff is focused on examination and enforcement; this trend is expected to continue:

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Examinations:Purpose & Principles

Purpose of CFPB compliance examinations– Assess compliance with federal consumer financial laws– Obtain information about compliance activities, systems, and

procedures– Evaluate risks posed to consumers and markets by consumer

financial products and services CFPB examination principles

– Focus on consumers– Data-driven– Consistency

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Types of examinations– Scheduled reviews– Target reviews– Horizontal reviews– Product or line of business-specific reviews (e.g., mortgage

servicing, credit cards, etc.) Fair lending and UDAAP exams will be part of every

CFPB compliance examination going forward

Examinations:Types of Exams

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The CFPB Examination Cycle

Pre-examination/scoping Examination (offsite and

onsite) Communicate conclusions

and required corrective action

Monitoring

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Notice– Institutions will “generally” be notified in advance of examination

Non-banks– Identified for examination on the basis of risks to consumers– Examinations will be coordinated with state and federal

prudential regulators Banks

– Will develop regular examination schedule based on: Assessment of risks to consumers Requirements that CFPB coordinate examinations of large

depository institutions and affiliates and conduct “simultaneous” examinations of depository institutions, as well as coordinating examinations with State regulators

Examinations: Scheduling

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Examinations: Compliance Management System

CFPB expectations concerning financial institutions’ Compliance Management Systems

– Framework “Top-down” approach should span from Board of Directors to

employees performing routine business functions Ensure sufficient compliance staffing and budget to manage risks Must be well-documented Monitoring and testing necessary

– Policies and procedures Consider conducting a gap analysis under attorney-client privilege Tailored to the institution

– Consumer complaint management

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Examinations: Experience to Date

Several trends have emerged during recent CFPB examinations

– Enforcement attorneys attend examination meetings and are involved in all aspects of the examination process

– Most of the examination process occurs onsite Where is the Bureau focusing its attention?

– Mortgage servicing and mortgage lending– Credit cards– Auto lending (direct and indirect)

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Examinations:General Preparation

Preparing for a CFPB Examination– Potential for voluminous, business-line-specific informational,

document, and data requests– Responses to the CFPB should be centrally managed by a

Regulatory Relationship Manager (“RRM”) or outside counsel– Important that responses are internally consistent and consistent

with current policies, procedures, and practices – Should have internal action plan for handling issues relating to

requests for production of attorney-client privileged or confidential documents

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Privilege Issues

Prepare for privilege issues that will arise with production of attorney-client privileged or confidential documents

– The Dodd-Frank Act did not include a provision protecting the privileged nature of materials shared with the CFPB in the way that privileged materials disclosed to the federal banking regulators are protected under 12 U.S.C.§1828(x)

– Since early 2012, the Bureau has taken the position that privileged materials must be disclosed to the CFPB subject to its supervisory authority

– On July 5, 2012, the CFPB issued a final rule based on this legal argument that goes into effect on August 6, 2012

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Privilege Issues (cont.)

Several bills have been introduced to address protection of privileged materials provided to the CFPB

Even though bills amending§1828(x) to include the CFPB within the statute’s scope have broad bipartisan support, Congress has failed to enact legislation making this legislative fix

Most recent bill, S. 3394, was introduced on July 17, 2012 by Senate Banking Committee Chairman

– Combines H.R. 6125, introduced earlier in 2012, and another House bill directed at ATM fee disclosures

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Examinations: Pre-Exam Process

Prepare the premises– How will the CFPB gain access to physical buildings?– What office space will be made available to the CFPB?– How will the institution protect information security for documents

and data provided to CFPB examiners? Prepare the staff who will interface with CFPB examiners Manage information flow through the RRM or outside

counsel Maintain control over documents that will be disclosed to

the CFPB Prepare as if prudential regulators and state banking

agencies may join in the CFPB examination

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Examinations: Pre-Exam Communications

CFPB will typically schedule an initial teleconference to clarify scope of the exam, responsibilities, resources, and document control

– Likely that the agenda will be provided by CFPB in advance Critical for financial institution to explain the business

model to the CFPB and work to set appropriate expectations

CFPB may schedule a preliminary “meet and greet” between its examiners and the financial institution in advance of the on-site portion of exam

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Examinations: Onsite Exam Process

Prepare for examiners’ arrival– Expectations regarding composition of the team and examiner

behavior Coordinate with CFPB to schedule a kick-off meeting

with presentations by executive and senior management Manage CFPB expectations regarding information and

data requests during the examination– Respond promptly through the RRM– If prompt response is not possible, be up-front about feasible

timeframe

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Examinations:Exit Meeting and Response

Exit Meeting: Once the onsite part of the exam concludes, the examiners will hold an exit meeting to orally share their preliminary findings with management

Exam Report: Following the exit meeting, the CFPB will evaluate the information collected and prepare a written examination report, which will contain the examiners’ findings and an exam rating

Exam Response: After reviewing the report, the institution must respond

– Several options to address unfavorable ratings (e.g., deal with examiners, regional offices, and then Ombudsman)

– Management will need to coordinate and prepare a written, timely response and corrective action plan

– The institution may also be required to pay civil fines or provide customer remediation

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CFPB Enforcement Authority

Investigations– Authorized to conduct investigations into potential violations of

consumer financial laws– May be conducted jointly with other regulators– May include subpoenas or civil investigative demands for testimony,

responses to written questions, documents, or other materials Administrative enforcement actions & civil actions in Federal

District Court– Relief sought may include: rescission of contracts, refund of money,

return of real property, monetary damages, civil monetary penalties, public notification of the violation, and limits on activities, among other forms of relief

CFPB has no criminal enforcement authority– Required to refer evidence of criminal activity to DOJ

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Enforcement: New Final Rules

On June 29, the CFPB enacted new final rules and interim final rules governing its enforcement activities– Investigations – Final rule issued on June 6, 2012 (77 Fed. Reg.

39108, June 29, 2012) – Rules of Practice for Adjudication Proceedings – Final rule

issued on June 6, 2012 (77 Fed. Reg. 39083, June 29, 2012) Includes “general rules” governing deadlines, filing of papers and

appearances– State Official Notification Rule – Final rule issued on June 6, 2012

(77 Fed. Reg. 39116, June 29, 2012) – Equal Access to Justice Act (“EAJA”) Implementation Rule –

Interim final rule with request for public comment issued on June 6, 2012 (77 Fed. Reg. 39117, June 29, 2012); notice and comment period ends on August 28, 2012

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Final rules relating to investigations describe the procedures for investigations pursuant to§1052 of the Dodd-Frank Act

– Rules drawn from procedures used by the FTC, SEC, and other prudential regulators

– Rules address: Notification of purpose Investigational hearings Rights of witnesses in investigations Civil Investigative Demands (CIDs) and Noncompliance with CIDs

Enforcement: Investigations

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Enforcement: Civil Investigative Demands

Under the new final rules, CIDs may be issued by the CFPB Director, the Assistant Director of the Office of Enforcement, or a Deputy Assistant Director of the Office of Enforcement

The CFPB may demand production of documentary materials, tangible things, written reports, answers to questions, or testimony

Responses must be made under oath or sworn certificate Under the interim final rules, CFPB must meet and confer with

CID recipients within 10 days of issuing the demand to discuss the recipient’s response

Recipients may petition for an order modifying or setting aside a CID

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Enforcement: Investigative Hearings

Hearings are under oath or affirmation and stenographically reported– Becomes part of record of investigation– Other means of recording may be authorized

Exclude all persons from the room except:– Person being examined– His or her counsel– The officer before whom the testimony is being taken– Any investigator or representative of an agency with which the Bureau is engaged in a

joint investigation– Person transcribing the testimony

Counsel may advise witness not to answer a question and state on the record the reason for refusal

– May not otherwise interrupt– May request at the end of the examination that the witness be allowed to clarify an

answer– The Bureau investigator may grant or deny request in his or her sole discretion– Under the final interim rules, the CFPB may seek to disbar an attorney deemed to

have engaged in “disorderly, dilatory, obstructionist, or contumacious conduct, or contemptuous language during an investigational hearing”

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Notice and Opportunity to Respond and Advise (“NORA”) − CFPB Bulletin 2011-04

– CFPB’s Office of Enforcement may give notice to the individual or entity subject to the investigation and may offer an opportunity to submit a written response prior to initiating an enforcement action

– Response must be submitted within 14 calendar days with a40-page limit

– Any factual assertions must be made under oath by someone with personal knowledge of the facts

– Submissions may be discoverable by third parties

Enforcement: NORA

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Status of Key Rulemakings

CFPB’s Fall 2011 Agency Rule List submitted to the Office of Management and Budget, the Bureau listed several rules that it intended to publish before the end of July 2012

How did the Bureau do? – Final rule on ability to repay for qualified mortgages – on 6/5/12, the

CFPB reopened the comment period on the Fed’s proposed rule, which closed on 7/9/12; final rule expected by year-end 2012

– Proposed rule integrating TILA and RESPA disclosures – proposed rule issued on 7/9/12; comment period closes 9/7/12 and 11/6/12

– Proposed rules to define the scope of the CFPB’s non-bank supervision program – proposed rule issued 5/25/12; comment period closed 7/24/12

– Interagency mortgage servicing standards – under development; final rule expected by 1/21/13

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Status of Key Rulemakings (cont.)

Status of additional key rules– Proposed rules implementing loan originator compensation law,

data reporting requirements, restrictions on high-cost loans, maintenance of escrow accounts, and other servicing practices CFPB issued proposed rules to address high-cost loans on 7/9/12 While the Federal Reserve Board issued rules to address escrow

accounts on 2/23/11, the CFPB has yet to do so Proposals under development for loan originator compensation, data

reporting, and appraisal requirements– Rule to define “larger market participants” in certain financial

product and service markets, including debt collection and consumer reporting Proposed rule published on 2/17/12; comment period closed on 4/17/12 Final rule relating to “larger consumer reporting agencies” released on

7/16/12; effective 9/30/12 Final rule on “larger debt collection agencies” expected fall of 2012

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Questions?

Jeffrey P. Naimonjnaimon@buckleysandler.com

Jonice Gray Tuckerjtucker@buckleysandler.com

Lori J. Sommerfieldlsommerfield@buckleysandler.com

www.buckleysandler.com202-349-8000