The CFPB Can Enhance Its Process for Notifying Prudential Regulators of Potential Material Violations

June 29, 2015

Memorandum

Introduction

Recently, the Offices of Inspector General (OIGs) for the prudential regulators¹ conducted a joint review of the coordination between the Consumer Financial Protection Bureau (CFPB) and the prudential regulators with respect to performing supervisory activities and avoiding duplication of regulatory oversight responsibilities on matters related to federal consumer financial laws and regulations.² The OIGs concluded that the CFPB and the prudential regulators were generally coordinating their regulatory oversight activities for federal consumer financial laws in a manner consistent with the provisions of a memorandum of understanding governing coordination activities and with the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).³ Nonetheless, the OIGs identified opportunities for enhanced coordination, including an opportunity for the CFPB to develop a standard process for notifying the prudential regulators of federal consumer financial law violations by institutions with $10 billion or less in total assets.

Finding: We Could Not Determine Whether the CFPB Consistently Complied With the Dodd-Frank Act's Requirement to Notify Prudential Regulators in Writing

We were unable to determine the frequency with which the CFPB identified potential material violations and shared them with prudential regulators and whether the CFPB consistently acted in accordance with section 1026(d) of the Dodd-Frank Act. Further, because the CFPB did not track written notifications and recommendations, we were not able to assess whether the relevant prudential regulator responded within 60 days of the recommendation as required by the Dodd-Frank Act.

During our analysis, we were unable to verify that the CFPB has been consistently complying with the requirements of section 1026(d) of the Dodd-Frank Act. Section 1026 of the Dodd-Frank Act applies to insured depository institutions and credit unions with total assets of $10 billion or less, which the law refers to as Other institutions. With limited exceptions, section 1026(d) provides that the prudential regulators retain enforcement authority pertaining to Other institutions. If the CFPB has reason to believe that such an institution violated a federal consumer financial law in a material manner, the CFPB is required to notify the relevant prudential regulator in writing and recommend appropriate action. Section 1026(d) also requires the relevant prudential regulator to respond in writing to the CFPB's recommendation within 60 days.

As part of the joint review, the CFPB provided documentation of instances in which the agency notified a prudential regulator of a potential material violation of federal consumer financial law. Specifically, the CFPB identified one instance of written notification and two instances of verbal notification.⁴ However, during our review, the CFPB did not have a policy to require the tracking of written notifications and recommendations sent to prudential regulators or the corresponding responses received from prudential regulators. The CFPB also did not have guidelines that outline the factors to be considered when assessing the materiality of a violation, detail any approvals necessary for such a determination, or describe when a written notification or recommendation is necessary.

We believe that the CFPB's current approach should be clarified and documented to help ensure that notifications about potential material violations are consistently provided to the prudential regulators and that evidence of compliance with the applicable requirements of the Dodd-Frank Act is maintained. Having guidelines and a tracking mechanism in place would help the CFPB ensure that it effectively shares information about potential material violations of federal consumer financial laws with the prudential regulators.

Recommendation

We recommend that the Deputy Director and Associate Director for Supervision, Enforcement, and Fair Lending 

1. Develop and implement a policy that 

1. 1. outlines the process for assessing the materiality of a violation and provides guidance on determining whether a written notification or recommendation is necessary.
   2. requires the tracking of written notifications and recommendations to the prudential regulators and the corresponding written responses received from them.

Management Actions Taken

After we discussed with CFPB officials the need for a policy addressing these written notifications, the CFPB finalized the Civil Referrals Incoming and Outgoing policy. The policy outlines an escalation and approval process that precedes a written notification and a tracking process for written notifications and recommendations. While written notifications are to be tracked in an existing CFPB database, the policy does not address the tracking of corresponding responses received from prudential regulators. We believe that such a process will allow the CFPB to monitor whether it is receiving timely responses (i.e., within 60 days) to its written notifications and to follow up with the relevant prudential regulator in the absence of a timely response.

Management's Response

In his response to a draft of our memorandum, which is included as an attachment, the Deputy Director and Associate Director for Supervision, Enforcement, and Fair Lending noted the CFPB's plans to enhance and revise its existing policy regarding incoming and outgoing civil referrals in order to ensure compliance with section 1026(d) of the Dodd-Frank Act. Specifically, the agency will require the tracking of written notifications and recommendations to the prudential regulators and the corresponding written responses received from the prudential regulators.

OIG Comment

In our opinion, the actions described by the Deputy Director and Associate Director for Supervision, Enforcement, and Fair Lending appear to be responsive to our recommendation. We plan to follow up on the CFPB's actions to ensure that this recommendation is fully addressed.

Closing

We appreciate the support and assistance of Supervision, Enforcement, and Fair Lending staff members throughout this review. Please contact me if you would like to discuss this memorandum or any related issues.

Attachment

Management's Response