Seven Critical Steps to Prepare for a CFPB Examination

Transcription

1 Seven Critical Steps to Prepare for a CFPB Examination

2 1. This Is an Open-Book Test. Does Your Organization Have the Book? Obviously, we are being somewhat facetious. Subjectivity has a place in any regulatory exam. However, forewarned is forearmed. That s why we recommend that agencies obtain two critical documents. The first is entitled Debt Collection Examination Procedures (manual), October 24, 2012, which is available on the CFPB website. It is organized into 8 modules. There are a number of different ways to use the manual, but a critical task is to take each requirement in the manual and inventory all the ways your agency can answer, How can we prove that we are meeting this? We emphasize prove. What tangible evidence exists that that we can put in front of an examiner? An executive may trust his/her personnel 100% to do the right thing, but examiners are not paid to trust, they are paid to test. And in order to test, they need evidence something tangible that they can pick up and sample. The second document is the general CFPB Supervision and Examination Manual, October 1, The overall exam manual is designed for the broad range of industries covered by the CFPB. There have been a number of updates to the manual the full text is now over 900 pages long - so we recommend that agencies start with the Risk Assessment Template. At a minimum, banks should consider two sections: a. The Risk Assessment Template itself we recommend that agencies use this as a means of seeing your organization as the CFPB will where are the risk areas for potential consumer harm and how are you mitigating those risks? b. Part II. A. Compliance Management Systems (CMS) this is the section that covers the process used to identify regulatory changes, assess their impact on your organization, incorporate the changes into your regular processes, and monitor compliance on an on-going basis. Seven Critical Steps to Prepare for a CFPB Examination Baker Tilly Virchow Krause, LLP

3 2. Catch up on Current Events It can be challenging to stay abreast of CFPB developments the CFPB feels that matters that rise during an examination are private and has forceful about this topic. So, speaking with associates at other entities to learn from their experiences may not yield a great deal of information. We recommend that those responsible for managing the examination read up on as much public information as possible about what the CFPB has been doing and emphasizing. Here are some good places to start: The CFPB website often includes the text of speeches and Congressional testimony from its leadership. This is often a good source of information on what the CFPB is emphasizing and their areas of focus. The CFPB publishes a document 2-3 times a year entitled Supervisory Highlights which summarizes issues they have seen and actions they have taken during their routine examinations. This is the reverse of the publicized settlement and consent orders the actions summarized here and presented anonymously provide insight into common issues at regulated entities. Websites from CFPB watchers several law firms maintain very good web sites that track and comment on CFPB related developments. insidearm CFPB coverage. You can stay abreast of CFPB enforcement and public statements here. 3. Get All Hands on Deck Some organizations see regulatory exams as a legal matter. Others see it as strictly compliance. We recommend mustering all internal resources that can assist, regardless of their normal duties. In addition to legal and compliance, this could include internal audit and operations. It is important that the team that will participate in the examination, is involved right from initial planning through final resolution. We have seen situations where upfront planning is handled by a single function, the legal team for example, and the actual examination is given to compliance to manage. This can lead to a bad handoff, poor communication, and more. Clients sometime ask us who should be available to work with the examiners. In exams, youwant your go-to people involved. When an issue arises in a given department or area who do you go to for an answer or solution? This may skip official reporting lines often times the nominal head of function may not be the most knowledgeable about daily processing or issue resolution. It is in all participants interest to efficiently clear any preliminary issues raised during the examination. One organization we worked with brought in their Director of Investor Relations to assist with an examination. You wouldn t necessarily think of this person as belonging on an exam Seven Critical Steps to Prepare for a CFPB Examination Baker Tilly Virchow Krause, LLP

4 personnel short list, but their daily responsibilities, including handling challenging questions, thinking on their feet, etc., made them especially valuable in some examination situations. 4. Heal Thyself It is highly likely that any issues that regulators might raise are already known by people in your organization but they may be levels away from your executive suite. Do you have the kind of organization where people feel comfortable raising their hand when they see a problem, or is it the kind where bad news is suppressed? One of the authors worked at a bank where quality metrics where a very large component of operations management s performance evaluation. So, operations management fought every issue that the internal Quality Assurance and Quality Control functions raised. Subsequently, the high quality metrics were overstated and the bank was surprised at the number and severity of issues raised by their regulator. Don t underestimate the power of an executive sitting down with personnel a few levels below him or her and asking, What do you think could burn us with the examiners coming in? 5. Take the Consumer s View Businesses deal with all kinds of cycles the market cycle, interest rate cycle, or internal processes such as change management or executive succession cycles.take a look at your organization by tracing your interactions with consumers from end-to-end the consumer cycle. Often, banks can get a false sense of security from the fact that they have a series of policies and procedures. Sometimes it can be beneficial to have the organization take a step back and look at your consumer compliance efforts through a consumer lens: New Consumer Interaction Does your organization s marketing materials promise more than you deliver? Will a consumer-minded regulator see your materials as direct or honest or would the regulator interpret them as being overly optimistic or possibly deceptive? Ongoing servicing, complaint and dispute management Clearly the CFPB and other regulators have made strong statements on quality for areas such as mortgage servicing. Lately there has been considerable regulatory interest in complaint and dispute management. For example, are complaints and disputes logged, dealt with expeditiously?. The CFPB has created its own complaint portal. Are complaints against your organization appearing here? You need to know. Close out, final payment, etc. The CFPB and other regulator have taken a hard look at any product and service features that either automatically renew or expand consumers obligations. Is it absolutely clear to the consumer what they need to do to stop your organization s services? Seven Critical Steps to Prepare for a CFPB Examination Baker Tilly Virchow Krause, LLP

5 6. Prepare Your People Many of your staff who participate in an examination are not individuals who routinely interact with individuals outside your organization. Few organizations would send a sales person out into the market to represent the company without preparation. However, we have observed an similar situation occur when unprepared staff take on critical roles in examinations. Make sure that management prepares everyone who will participate in the exam. All such staff should: Understand their responsibilities, including the boundaries of their duties and where they should feel comfortable and where they should pull in others; Anticipate questions and challenges. Again, your insiders will know the areas of relative strengths and weaknesses so get ready for the inevitable challenges; Know the process for question input, processing and output; and Understand that it is acceptable to tell a regulator that they don t have an immediate answer in situations where they truly don t. An examination is not a time for improvisation 7. While on Site Examiners spend time in depressing spaces in in dank, windowless basements or cluttered, out-of-the-way meeting rooms. You might be increasing the chances of a bad exam outcome if you treat your examiner poorly. Make sure you treat the examiners like you would an important client. Post a welcome message in the lobby and set aside a pleasant space for them to work. In short, they are human and like all humans are going to respond to any perceived disrespect. Seven Critical Steps to Prepare for a CFPB Examination Baker Tilly Virchow Krause, LLP

6 About the Author Brian Lane is a Partner at Baker Tilly with decades of experience assisting financial service organizations with internal control, governance, and regulatory compliance issues. He can be reached at brian.lane@bakertilly.com. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments. Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International Baker Tilly Virchow Krause, LLP Seven Critical Steps to Prepare for a CFPB Examination Baker Tilly Virchow Krause, LLP