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Federal Reserve Board Revises Guidance For Examiners On Loan Sampling
On April 18, the Federal Reserve Board issued SR 14-4 which updates the Federal Reserve’s loan sampling expectations for state member bank and credit extending nonbank subsidiaries of banking organizations with $10-$50 billion in total consolidated assets. Depending on the structure and size of subsidiary state member banks, the guidance permits examiners to apply the guidance applicable to smaller state member banks when a bank’s subsidiary’s total assets are below $10 billion. The guidance (i) details the loan sampling methodology to be employed by Reserve Banks during the supervisory process; (ii) calls for documentation of loan sample selection methods in scoping memoranda and in the confidential section of the report of examination; and (iii) outlines expectations for following up on examinations with adverse findings. The guidance supersedes the examiner loan sampling expectations described in SR 94-13, “Loan Review Requirements for On-site Examinations.”
SEC Announces Cybersecurity Examination Initiative
On April 15, the SEC’s Office of Compliance Inspections and Examinations announced that it will be conducting cybersecurity examinations of more than 50 registered broker-dealers and registered investment advisers. The examinations will assess each firm’s cybersecurity preparedness and collect information about the industry’s recent experiences with certain types of cyber threats. Specifically, examiners will focus on (i) cybersecurity governance; (ii) identification and assessment of cybersecurity risks; (iii) protection of networks and information; (iv) risks associated with remote customer access and funds transfer requests; (v) risks associated with vendors and other third parties; (vi) detection of unauthorized activity; and (vii) and experiences with certain cybersecurity threats. The SEC included with the announcement a sample document and information request it plans to use in this examination initiative.
Federal Reserve OIG Criticizes CFPB's Supervision Program
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.
FDIC Releases Interagency Mortgage Examination Procedures
On February 25, the FDIC issued FIL-9-2014 to notify supervised institutions of new consumer compliance examination procedures for the mortgage rules issued pursuant to the Dodd-Frank Act, that took effect nearly two months ago. FDIC examiners will use the revised interagency procedures to evaluate institutions' compliance with the new mortgage rules. The FDIC states that during initial compliance examinations, FDIC examiners will expect institutions to be familiar with the mortgage rules' requirements and have a plan for implementing the requirements. Those plans should contain “clear timeframes and benchmarks” for updating compliance management systems and relevant compliance programs. “FDIC examiners will consider the overall compliance efforts of an institution and take into account progress the institution has made in implementing its plan.”
SEC Examinations To Target Never-Before Examined Investment Advisers
On February 20, the SEC’s Office of Compliance Inspections and Examinations (OCIE) launched a previously-announced initiative directed at investment advisers that have never been examined, focusing on those that have been registered with the SEC for three or more years. OCIE plans to conduct examinations of a “significant percentage” of advisers that have not been examined since they registered with the SEC. The examinations will focus on compliance programs, filings and disclosure, marketing, portfolio management, and safekeeping of client assets. The SEC plans to host regional meetings for investment advisers to learn more about the examination process.
OCC Updates Mortgage Handbook, Retirement Plan Products Handbook
On February 7, the OCC issued an updated Mortgage Banking booklet of the Comptroller's Handbook. The revised booklet (i) provides updated guidance to examiners and bankers on assessing the quantity of risk associated with mortgage banking and the quality of mortgage banking risk management; (ii) makes wholesale changes to the functional areas of production, secondary marketing, servicing, and mortgage servicing rights; and (iii) addresses recent CFPB amendments to Regulation X and Regulation Z, as well as other Dodd-Frank related statutory and regulatory changes. The updated booklet replaces a similarly titled booklet issued in March 1996, as well as Section 750 (Mortgage Banking) issued in November 2008 as part of the former OTS Examination Handbook. On February 12, the OCC issued a revised Retirement Plan Products and Services booklet of the Comptroller’s Handbook that (i) updates examination procedures and groups them by risk; (ii) updates references and adds a list of abbreviations; (iii) adds references to recent significant U.S. Department of Labor regulations and policy issuances; (iv) adds a discussion of Bank Secrecy Act/anti-money laundering and Regulation R; and (v) adds a discussion of board and senior management responsibilities regarding oversight of risk management.
CFPB Publicly Announces Changes to Exam Reports, Identifies Mortgage Servicing Exam Findings
On January 30, the CFPB issued a new Supervisory Highlights report. The report publicly announces changes to the CFPB’s examination reports and supervisory letters. Beginning in January 2014 the CFPB is changing the format of the Examination Reports and Supervisory Letters (collectively referred to as reports) that it sends to supervised entities after conducting compliance reviews. The changes to the report templates aim to: (i) facilitate drafting by examiners; (ii) simplify reports and reduce repetition; and (iii) facilitate follow-up reporting by supervised entities about actions they take to address compliance management weaknesses or legal violations found at CFPB reviews.
The primary template changes include:
- Elimination of Recommendations. Any recommendations for improving currently satisfactory processes will be provided orally when examiners are on-site.
- Elimination of the list of CFPB team members participating in a review. Reports will continue to be signed by the Examiner in Charge and provide regional management contact information.
- Creation of a single section in the report that includes all of the items that the CFPB expects the entity to address when the review identifies violations of law or weaknesses in compliance management. This entire section will be referred to as “Matters Requiring Attention,” regardless of whether the CFPB is requiring specific attention by an entity’s Board of Directors. The CFPB will no longer include additional “Required Corrective Actions.” The entity receiving the report will be expected to furnish periodic progress reports to the CFPB about all Matters Requiring Attention. The frequency of reporting will be tailored to the specific matters in a report.
The report also provides “supervisory observations,” which are limited to mortgage servicing. In a section on non-public supervisory actions the report states recent supervisory activities have resulted in at least $2.6 million in remediation to consumers, and that these non-public supervisory actions generally have been the product of CFPB examinations, either through examiner findings or self-reported violations during an exam.
CFPB Proposes To Supervise Larger Nonbank International Money Transmitters
On January 23, the CFPB proposed a rule that would allow the agency to supervise nonbank “larger participants” in the international money transfer market. The proposed rule defines “larger participant” to include any entity that provides one million or more international money transfers annually, which the CFPB estimates will extend oversight to roughly 25 of the largest providers in the market. Providers that do not meet the million-transfer threshold may still be subject to the CFPB’s supervisory authority if the Bureau has reasonable cause to determine they pose risk to consumers. Although the CFPB proposes to use aggregate annual international money transfers as the criterion for establishing which entities are “larger participants” of the international money transfer market, the CFPB also considered and has requested comment on use of annual receipts from international money transfers and annual transmitted dollar volume as potential alternatives.
The CFPB suggests that examinations of such providers will focus on compliance with the Remittance Rule—particularly with respect to new requirements addressing disclosures, cancellation options, and error corrections—and that the agency will “coordinate [examinations] with appropriate State regulatory authorities.” The CFPB released examination procedures for use in assessing compliance with the remittance transfer requirements last year.
Dodd-Frank granted the CFPB authority to supervise “larger participants” in the consumer financial space, as defined by rule. The agency has already finalized similar rules covering “larger participants” in student loan servicing, debt collection, and consumer reporting markets. The proposal, if finalized, would be the fourth larger-participant rule adopted by the CFPB.
A CFPB factsheet on the proposal is available here. The CFPB will accept comments for 60 days from publication of the proposed rule in the Federal Register.
SEC National Examination Program Outlines 2014 Priorities
On January 9, the SEC National Examination Program (NEP) published its examination priorities for 2014. The NEP’s market-wide priorities include (i) fraud detection and prevention; (ii) corporate governance and enterprise risk management; (iii) technology controls; (iv) issues posed by the convergence of broker-dealer and investment adviser businesses and by new rules and regulations; and (v) retirement investments and rollovers. The NEP also identifies priorities for specific program areas, including (i) investment advisers and investment companies; (ii) broker-dealers; (iii) clearing and transfer agents; (iv) market oversight program areas; and (v) clearance and settlement. For example, for the investment advisers and investment companies program area, the NEP plans to focus on certain emerging risks including (i) advisers who have never been previously examined, including new private fund advisers, (ii) wrap fee programs, (iii) quantitative trading models, and (iv) payments by advisers and funds to entities that distribute mutual funds.
Second Annual CFPB Ombudsman Report Recommends Exam Changes
On December 3, the CFPB Ombudsman’s Office submitted its second annual report to the Director of the CFPB. The report contains an update on the systemic recommendations made last year and new recommendations stemming from the Ombudsman’s review of (i) how the CFPB shares information, (ii) caller experience with the CFPB contact center, and (iii) the supervisory examination process. The Ombudsman’s recommendations relate primarily to further standardizing and clarifying what a financial entity may expect throughout the examination lifecycle and to ensuring industry and consumer access to CFPB information in a consistent and timely manner. According to the Ombudsman, the Bureau was receptive to all suggestions and feedback.
Specifically, the Ombudsman recommended that the CFPB cite to the examination manual in written communications to examinees; describe at the onset what the financial entity can expect to receive at the end of the examination process; provide updates on examination status at regular intervals after the onsite portion of examinations; and better inform financial entities about the methods available for elevating examination concerns. The Ombudsman also recommended that the CFPB add a digest to all updates to consumerfinance.gov, along with more user-friendly subscription “sign up” options; maintain a public events calendar and announce events with consistent minimal lead time; make basic information about the CFPB speaker request process more accessible; and explain to consumers contacting the CFPB contact center that providing an email address will result in consumer complaint notifications solely via email.
In addition, the report summarizes and identifies trends in the individual inquiries submitted to the Ombudsman during the review period. The majority of inquiries related to the consumer-complaint process, and more than half of the consumer complaints received concerned mortgages. The report also addresses growth within the Ombudsman’s Office since last year and the Ombudsman’s external outreach efforts and internal dialogue with CFPB leaders across divisions and offices.