Federal Reserve OIG Criticizes CFPB's Supervision Program

CFPB Examination Nonbank Supervision Bank Supervision

On April 1, the Federal Reserve Board’s Office of Inspector General (OIG), which also is responsible for auditing the CFPB, issued a report that is critical of the CFPB’s supervisory activities and recommends that the CFPB take specific actions to strengthen its supervision program. The report shares concerns raised by entities having been through the examination process.

The report covers the CFPB’s supervisory activities from July 2011 through July 2013, including 82 completed examinations (excluding baseline reviews), which yielded 35 reports of examination and 47 supervisory letters. Of those 82 completed examinations, 63 were of depository institutions, and 19 were of nondepository institutions.

Among the findings, the OIG concludes that:

• The CFPB failed to meet reporting timelines. CFPB staff routinely failed to meet internal timeliness requirements for submitting draft examination products to headquarters. These failures resulted in a “significant number of examinations outstanding for longer than 90 days,” which the OIG believes creates unacceptable uncertainty for supervised institutions.
• The CFPB failed to consistently use standard compliance rating definitions. In two out of eight examinations sampled, CFPB staff edited standard ratings definitions to omit information and add qualifying language, including in one ECOA examination report altering the FFIEC’s definition for a 3 rating to state that no “overt” discriminatory acts or practices were identified. In that instance, examiners flagged as a potential fair lending violation the discretion accorded the institution’s customer service representatives to grant fee waivers. The CFPB required the institution to create policies and procedures that limit the discretion of customer service representatives to grant fee waivers, but the examination 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 concluded that “inserting the word ‘overt’ creates 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.” The report states that the CFPB has since reviewed examination ratings and determined that adjustments were not necessary.
• The CFPB failed to timely record examination milestones. The report states that the CFPB has not adopted a requirement for the timely recording of examination data. To assess timeliness, the OIG used seven days as a standard. The OIG found that at least 25% of examination milestones were not recorded within seven days, and that in eight instances, examination milestones were not recorded for more than 200 days after their occurrence. In addition, CFPB staff entered dates before the milestone occurred 109 times.
• The CFPB’s examination reporting policy is not current. The report states that the CFPB has not updated its examination reporting policy since the CFPB reorganized its supervision offices in December 2012. In addition, the policy does not reflect the CFPB’s current definition for the “completion of field work”, which is a key milestone because it initiates the reporting process. Notably, a senior CFPB official advised the OIG that the CFPB is still determining the most effective process for reviewing examination reports.
• The CFPB and prudential regulators can improve coordination. The report notes that the CFPB and prudential regulators do not formally share supervisory actions documented outside of an examination report, which excludes prudential regulators from commenting on other supervisory actions. The OIG notes that only 19% of closed examinations of depository institutions resulted in reports of examination, and that of the CFPB’s examinations of depository institutions that resulted in a matter requiring attention, only 30% were documented in reports of examination. The remaining 70% were documented in supervisory letters or baseline reviews and, therefore, were not formally shared with the prudential regulators. Further, for institutions subject to continuous monitoring, the CFPB states that it shares findings with the prudential regulator at the end of the examination cycle. The OIG observes, however, that as of July 2013, none of the continuous full-scope examinations had been finalized or shared with the prudential regulators. The OIG believes that the CFPB’s current approach increases the risk that regulators will not receive important supervisory information and increases the likelihood of duplication of efforts and other inefficiencies.

The OIG also found that (i) the CFPB did not consistently retain evidence of required communication with prudential regulators; (ii) the CFPB regions use different and inconsistent practices for scheduling examination staff and do not track examination staff hours; and (iii) the CFPB has not finalized its examiner commissioning program.

The report states that since the OIG completed its field work in October 2013, the CFPB has assured the OIG that it has taken steps to address certain of the findings, including streamlining the report review process and reducing the number of examination reports that have not been issued. The OIG plans to conduct follow-up activities to assess whether the CFPB’s subsequent actions address the OIG’s findings and recommendations.