More on enforcement attorneys and supervisory exams

by Ballard Spahr LLP
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The discussions at the ABA Consumer Financial Services Winter Meeting have reached biblical proportions (literally). The participants on yesterday’s CFPB Exams and Enforcement panel read from the New Testament on “ravening wolves in sheep’s clothing” (later clarified as NOT a reference to CFPB enforcement attorneys) and how the “wise man built his house upon a rock” (the rock being a strong compliance program).

The representatives from the CFPB on the panel were a bit more revelatory on one of industry’s main concerns and on which we have previously posted: the participation of enforcement attorneys in supervisory exams. The issue was recently raised by the CFPB’s Ombudsman, and we heard from the panel yesterday that the Ombudsman has requested that the CFPB not send enforcement attorneys on exams until the CFPB clarifies its policy. This request was not communicated in the Ombudsman’s report.

Kristen Donoghue from the Bureau’s Office of Enforcement first observed that, as an organizational matter, enforcement attorneys are housed with supervisory staff in the same division: Supervision, Enforcement, and Fair Lending. She indicated that such a structure naturally results in close collaboration, a feature of the Bureau that she said Enforcement Director Kent Markus has termed “obsessive collaboration.” Ms. Donoghue was careful to say that enforcement attorneys “support,” “help,” and “assist” supervisory staff in exams, thereby implying that enforcement attorneys play a subordinate role in exams.

Of course industry is not just concerned about how much enforcement attorneys participate in exams, but also about sharing of potentially privileged information received as part of exams with enforcement attorneys. When Alan Kaplinsky raised this possibility, Calvin Hagins in the CFPB’s Office of Supervision responded that the prudential regulators have long shared information with and sought participation from enforcement staff. Another panelist countered that the CFPB is the “new cop on the beat” and it has signaled it intends to break with some past practices. Indeed, the CFPB has a new mission and a broader mandate, so past regulatory practices cannot guarantee future practices.

A key objective of enforcement attorneys participating in exams, according to Ms. Donaghue, is to ensure consistency. The CFPB, as a “data-driven agency,” needs its attorneys to be familiar with products, players, and practices across the industry to ensure consistent enforcement efforts. Director Cordray has similarly spoken of the need to “cross-train” enforcement attorneys by participating in exams.

The CFPB representatives on yesterday’s panel sought to reassure industry that enforcement attorneys are not meant to send a message that there is a compliance problem. Such a position is consistent with the CFPB’s goal to have “gotcha-free” exams.

A final footnote: the CFPB representatives were questioned about the CFPB’s intentions regarding mystery shopping, particularly given the Bureau’s much-discussed job posting for investigators to inform the Bureau’s enforcement efforts. Both Ms. Donaghue and Mr. Hagins disclaimed any knowledge of the positions. In a subsequent panel, Chris Peterson, CFPB Senior Counsel for Enforcement Strategy, declined to comment on the Bureau’s mystery shopping plans, although he said that mystery shopping is another practice that the prudential regulators have done in the past.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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