The CFPB Can Improve the Efficiency and Effectiveness of Its Supervisory Activities

Finding 2: The CFPB Did Not Consistently Use Standard Compliance Rating Definitions

In two instances, the CFPB deviated from the specific language associated with the FFIEC’s standardized rating definitions for examination reports. The CFPB’s examination manual states, “THE CFPB ADOPTED THESE FFIEC-APPROVED DEFINITIONS; THEY MAY NOT BE EDITED.” (Emphasis in the original.) The CFPB examination manual includes templates to help examiners across the regions produce consistent reports of examinations and supervisory letters. The templates include guidance on the style and layout of the examination products as well as the use of standard rating definitions. A senior official noted that these deviations from the template were not detected due to an oversight in the review process conducted by the Office of Supervision Policy and the Office of Supervision Examinations. In our opinion, these deviations do not support the agency’s commitment to consistency in the examination process.

CFPB Staff Adjusted Standard Compliance Rating Definitions

In our review of eight sampled examination products, we found two instances in which CFPB staff edited the rating definitions in the report of examination templates to omit information and to add qualifying language to the assessment of discriminatory acts or practices.¹³ The FFIEC standardizes examination rating definitions for regulatory agencies to uniformly rate institutions’ compliance programs from 1 (strong) to 5 (in need of strongest supervisory attention). The FFIEC’s standard definition for a 3 rating states that “no discriminatory acts or practices are evidenced,” while a component of the FFIEC definition for a 4 rating states that “discriminatory acts or practices may be in evidence.”

The CFPB examination manual includes templates to help examiners across the regions produce consistent reports of examinations and supervisory letters. The templates include guidance on the style and layout of the examination products as well as some standardized language. Specifically, the templates for reports of examination include the FFIEC language defining consumer compliance ratings for examinations. The examination manual states, “THE CFPB ADOPTED THESE FFIEC-APPROVED DEFINITIONS; THEY MAY NOT BE EDITED.” (Emphasis in the original.)

In two CFPB reports of examination, however, we noted that the agency altered the FFIEC’s definition for a 3 rating to state that no “overt” discriminatory acts or practices are evidenced.¹⁴ In these two cases, the examinations included a review of the institutions’ compliance with the Equal Credit Opportunity Act. At one institution, the CFPB’s examination detected “significant weaknesses” in the fair lending program, including “several situations” that create the risk of violating the Equal Credit Opportunity Act. One specific risk of a fair lending violation involved the discretion afforded to customer service representatives to grant fee waivers. To control this risk, the CFPB required the institution to create policies and procedures that limit the discretion of customer service representatives to grant fee waivers. The report does 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. In this context, the adjustment to the standard definition of 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.

According to the CFPB, the second examination team that added the word “overt” to the rating definition copied the language from the aforementioned report, rather than from the CFPB’s report template. In our opinion, these deviations from the specific and unequivocal standards outlined in the guidance do not support the CFPB’s goal of executing its supervisory activities in a consistent manner.

Management Actions Taken

A senior official noted that these deviations from the template were not corrected due to an oversight in the report review process conducted by the Office of Supervision Policy and the Office of Supervision Examinations. The senior official stated that headquarters now specifically reviews reports for proper formatting and consistency with the template and other instructions.

Recommendations

We recommend that the Associate Director for SEFL

3. Initiate a review of all completed reports of examination to identify whether the alterations to the standard ratings definitions we found were isolated occurrences and determine the need to amend or adjust any previously issued ratings or reissue any reports. This review should include determining whether the two alterations, which we have discussed with the CFPB, warrant a ratings downgrade.
4. Reinforce for all employees responsible for drafting and issuing reports of examination the required rating definitions and their appropriate use in examination reports.
5. Enhance the effectiveness of internal review processes to ensure that all rating definitions are consistent with the standard FFIEC definitions.

Management's Response

Regarding recommendation 3, the Deputy Director and Associate Director for SEFL stated the following:

As suggested in the Report, we have conducted a comprehensive internal review of all completed reports of examination in order to determine the extent to which those reports contained modified ratings definitions that deviated from the standard definition. We have also reviewed the two instances of modified ratings definitions identified by OIG. As a result of that review, we have determined that no ratings adjustments are warranted.

Regarding recommendation 4, the Deputy Director and Associate Director for SEFL stated the following:

We have reinforced the appropriate use of ratings definitions through in-person meetings with headquarters staff and through written and telephone briefings with staff in the field.

Regarding recommendation 5, the Deputy Director and Associate Director for SEFL stated the following:

We are implementing additional internal review processes to ensure appropriate use of ratings definitions.

Management’s full response is included as appendix B.

OIG Comment

In our opinion, the actions described by the Deputy Director and Associate Director for SEFL appear to be responsive to our recommendations. We plan to follow up on the CFPB’s actions to ensure that each recommendation is fully addressed.

• 13. To assess adherence to the templates, we sampled one report of examination and one supervisory letter from each of the four regions, selecting a total of 8 of the 82 reports of examination and supervisory letters issued as of July 31, 2013. Of 82 issued products, 47 were supervisory letters that do not require a rating and 35 were reports of examination that do include a rating of the supervised institution.  Return to text
• 14. The FFIEC’s standard language for a 3 rating is as follows: “Is in a less than satisfactory compliance position. It is a cause for supervisory concern and requires more than normal supervision to remedy deficiencies. Violations may be numerous. In addition, previously identified practices resulting in violations may remain uncorrected. Overcharges, if present, involve a few consumers and are minimal in amount. There is no evidence of discriminatory acts or practices. Although management may have the ability to effectuate compliance, increased efforts are necessary. The numerous violations discovered are an indication that management has not devoted sufficient time and attention to consumer compliance. Operating procedures and controls have not proven effective and require strengthening. This may be accomplished by, among other things, designating a compliance officer and developing and implementing a comprehensive and effective compliance program. By identifying an institution with marginal compliance early, additional supervisory measures may be employed to eliminate violations and prevent further deterioration in the institution’s less-than-satisfactory compliance position.”  Return to text