The Consumer Financial Protection Bureau’s exams are an open book text, but does your organization have the book? Obviously, there are subjective elements to every exam. But we do recommend doing your homework.
Read Up on What to Expect
The first document you need is entitled “Debt Collection Examination Procedures,” October 24, 2012, available on the CFPB website. There are a number of different ways to use the manual, but a critical task is to take each requirement in the manual and inventory all the ways your bank can answer: How can we prove that we are meeting this? What tangible evidence exists that we can put in front of an examiner?
The second document is the general CFPB Supervision and Examination Manual, from October 1, 2012. The full text is now over 900 pages long, so we recommend that banks start with the Risk Assessment Template. At a minimum, banks should consider two sections:
Risk Assessment Template: We recommend that companies use this as a means of seeing the organization as the CFPB will. Where are the risk areas for potential consumer harm and how are you mitigating those risks?
Part II.A. Compliance Management Systems (CMS): This covers the process used to identify regulatory changes, assess their impact on your organization, incorporate the changes into your regular processes and monitor compliance on an on-going basis.
Catch Up on Current Events
It can be challenging to stay abreast of CFPB developments: We recommend that those responsible for managing the examination read up on as much public information as possible about what the CFPB has been doing, including:
- The CFPB website often has speeches and Congressional testimony from its leadership. This often is a good source of information on what the CFPB is emphasizing and their areas of focus.
- The CFPB publishes a document two to three times per year entitled “Supervisory Highlights,” which summarizes issues they have seen and actions they have taken during their routine examinations. The actions summarized here and presented anonymously provide insight into common issues at regulated entities.
- Websites from CFPB watchers: Several law firms maintain very good web sites that track and comment on CFPB related developments.
Get All Hands on Deck
Some organizations see regulatory exams as a legal matter, others as compliance. We recommend mustering all internal resources which can assist, regardless of their normal duties. In addition to legal and compliance, this could include internal audit and operations. It is important that the team that will participate in the examination is involved right from initial planning through final resolution. We have seen situations where upfront planning is handled by a single function, for example the legal department, and the actual examination is given to another department, say compliance. This can lead to a bad handoff, poor communication and other problems.
Clients sometime ask us who should be available to work with the examiners. You want your “go to” people available. This may skip official reporting lines—often times the nominal head of function may not be the most knowledgeable about daily processing or issue resolution. It is in all participants’ interest to efficiently clear any preliminary issues raised during the examination.
Do you have the kind of organization where people can raise their hand when they see a problem, or is it the kind where bad news is suppressed? One of the authors of this article worked at a bank where quality metrics where a very large component of operations management’s performance evaluation, so operations management fought every issue that the internal Quality Assurance and Quality Control functions raised. Subsequently, the high quality metrics were overstated and the bank was surprised at the number and severity of issues raised by their regulator. Don’t underestimate the power of an executive sitting down with personnel a few levels below him or her and asking, “What do you think could burn us with the examiners coming in?
Prepare Your People
Many of your organization’s resources participating in an examination are not individuals who routinely reach outside your organization. Few organizations would send a sales person out into the market to represent the company without preparation. However, we have observed an equivalent situation occur with unprepared resources have critical roles for examinations. Make sure that management prepares everyone who will participate.
While On Site
Anyone who has spent time as an auditor has experienced being put in dank, windowless basements. Have your organization treat the examiners like you would an important client that was coming in: have a welcome message in the lobby and have decent space for them. In short, they are human and like all humans are going to respond to any perceived disrespect.