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From Banking and Finance Law Daily, February 18, 2015

Risk-based examinations benefit consumers, CFPB’s Anotankes says

By Colleen M. Svelnis, J.D.

A speech by Steven Antonakes, Deputy Director of the Consumer Financial Protection Bureau, at The Exchequer Club in Washington, D.C., centered on the Bureau’s risk-focused supervision program. Antonakes, who also leads the Division of Supervision, Enforcement, and Fair Lending, said in his remarks that consumers benefit from a healthy, competitive, and diversified financial services system through greater access to credit and competitive pricing.”

Consumer focused. Before the creation of the CFPB under the Dodd-Frank Act, authority for administering and enforcing the various federal consumer financial laws was shared across seven federal agencies, with no single agency primarily focused on protecting the everyday users of financial products and services. Antonakes said, “In the lead up to the mortgage crisis, I witnessed the alarming proliferation of high-risk products and deteriorating underwriting practices which ultimately led to one of the worst economic periods since the Great Depression.”

Antonakes said that the mission of the Bureau is to protect consumers by “promoting a consumer financial services marketplace where consumers can understand the costs, benefits, and risks of the financial decisions that they make. Consumers should be able to make these decisions in a marketplace free from unfair, deceptive, or abusive acts or practices—whether they are applying for a mortgage, choosing a credit card, repaying a student loan, cashing a paycheck, or sending money to family members overseas.”

According to Antonakes, there are two key factors in how the Bureau approaches its work.

  1. Focus is on risk to consumers rather than risks to institutions.

  2. Examinations are conducted by product line rather than an institution-centric approach.

Supervisory authority. Antonakes discussed how the Bureau has supervisory authority over the following institutions:

  • banks, thrifts, and credit unions with assets over $10 billion, as well as their affiliates;

  • nonbank mortgage originators and servicers, payday lenders, and private student lenders of all sizes;

  • the larger participants of other markets, including debt collectors, consumer reporting agencies, student loan servicers, and foreign money transmitters; and

  • a recent proposed rule would include nonbank auto lenders as well.

The banks, thrifts, and credit unions account for $12.5 trillion in assets or nearly 80 percent of the nation’s banking market. Additionally, the nonbank markets add over 15,000 unique institutions to the Bureau’s portfolio of large depository institutions.

Prioritization. According to Antonakes, the Bureau prioritizes its supervisory responsibilities by taking institutions and breaking them down into their distinct product lines. Each distinct product line at an institution is referred to as an “institutional product line.”

Each is then evaluated on the following:

  • potential for consumer harm related to a particular market;

  • the size of the product market;

  • the supervised entity’s market share; and

  • risks inherent to the supervised entity’s operations and offering of financial consumer products within that market.

Risk assessment. The Bureau assesses risks to the consumer at two levels: the market level and the institution level.

Antonakes said that, at the market-wide level, the Bureau assesses the risk to the consumer from the products and practices being followed in a particular market. According to Antonakes, the Bureau views some markets, like the market for mortgage servicing where the principal business relationship is between two companies, the debt collection market, and credit reporting agencies, as higher risk. The Bureau also considers the relative product market size in the overall consumer finance marketplace, Antonakes said.

At the institution level, the Bureau recognizes that some institutions’ business models within a market are more harmful to consumers than others. So the Bureau starts with an institution’s market share within an individual product line, prioritizing relatively larger players with a more dominant presence given their ability to impact more consumers than relatively small players.

The Bureau also considers field and market intelligence, which includes both qualitative and quantitative factors for each institutional product line, such as the strength of compliance management systems, the existence of other regulatory actions, findings from prior exams, metrics gathered from public reports, and the number and severity of consumer complaints.

Finally, Antonakes said the Bureau supplements general field and market intelligence with fair-lending-focused information to ensure that it appropriately identifies and prioritizes fair lending risks.

Review results. At the conclusion of the review period, Antonakes described how an institution will receive a “roll-up examination report,” which includes the overall Federal Financial Institutions Examination Council compliance rating based upon the results of the examinations conducted during the review period. For less complex or smaller entities, a supervisory plan will include an appropriately scoped single point-in-time examination that will result in a single examination report and assigned compliance rating, said Antonakes.

Violations. An action review committee reviews whether a matter should result in confidential supervisory action or a public enforcement action. The Bureau considers the following factors:

  • violation-focused factors;

  • institution-focused factors; and

  • policy-focused factors.

Based upon the severity of examination findings, Antonakes said that a field team makes a recommendation to the senior leaders within the Division of Supervision, Enforcement, and Fair Lending as to whether supervisory or enforcement action is appropriate.

MainStory: TopStory BankingOperations CFPB DoddFrankAct EnforcementActions

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