Viewpoint: Supervisory or Enforcement Action, Deputy Director Antonakes Explains How the CFPB Decides

By Barbara S. Mishkin, Ballard Spahr LLP*

In his prepared remarks for an appearance last month at the Exchequer Club, CFPB Deputy Director Steven Antonakes discussed the CFPB’s risk-based approach to supervision. (The Exchequer Club’s members include senior professionals from trade associations, federal regulatory agencies, law firms, congressional committees and national press.)

Deputy Director Antonakes commented on why “the traditional approach to supervision wouldn’t work at the bureau.” He explained that “visiting all of the banks and nonbanks under our jurisdiction on a set, regular schedule, as other federal agencies have in the past, would be impractical given their number, size and complexity as well as the relatively small size of our examination force.” He also stated that a “fixed-schedule approach would fail consumers by focusing precious resources on potentially less severe problems, when larger, more pressing consumer protection issues awaited their turn.”

He then explained the two key distinctions between the CFPB’s supervisory approach and that of the federal banking agencies. First, the CFPB focuses on risks to consumers rather than risks to institutions. Second, the CFPB conducts its examinations by product line rather than by using an institution-centric approach. Antonakes indicated that the CFPB’s product-line approach allows it to compare product lines across institutions, charters or licenses.

He then stated that the CFPB evaluates each product line “based on 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.” He also observed that the CFPB views certain markets, such as debt collection and mortgage servicing, as presenting higher risk.

The most interesting comments made by Antonakes concerned how the CFPB approaches the decision to take corrective action based on an examination. He indicated that in certain instances, where there are “more significant violations,” the CFPB refers matters to its action review committee. That committee determines whether a matter will be resolved through confidential supervisory action, such as a board resolution or memorandum of understanding, or through a public enforcement action. He also indicated that the CFPB’s examination team will make a recommendation to senior leadership in the Division of Supervision, Enforcement and Fair Lending whether supervisory or enforcement action is appropriate.

He explained that the CFPB uses a common set of factors to ensure determinations are made in a consistent fashion. He described these factors as generally falling into “one of three buckets: violation-focused factors; institution-focused factors; and policy-focused factors.” Violation-focused factors include the severity of the violation “in terms of the number of consumers affected, the magnitude of the harm and the nature of the violation,” whether the violation has ceased or is ongoing, and the importance of deterrence. He observed that if “we suspect a troubling practice is widespread, we may want to put the entire industry on notice through public enforcement actions.”

The CFPB’s institution-focused factors look at the regulated entity’s behavior after the violation occurred, particularly whether the entity has cooperated with the CFPB and its willingness and ability to comply on a going forward basis. Antonakes indicated that the balance may tilt in favor of supervisory action if an entity self-identified or self-corrected the violation, with a public enforcement action viewed as more appropriate when an entity has been unwilling to take corrective action or has repeatedly been cited by the CFPB or another regulator for similar conduct.

The CFPB’s policy-focused factors include how the CFPB has treated similar violations in the past, other CFPB activity related to the problematic conduct, and how the CFPB’s action fits into the agency’s broader priorities and goals.

Barbara Mishkin is Of Counsel at Ballard Spahr, where she focuses on consumer compliance. The federal laws with which Barbara has dealt extensively include the Consumer Financial Protection Act, Truth in Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act and Gramm-Leach-Bliley Act. She also has significant experience with state usury and lender licensing laws, as well as state laws prohibiting unfair and deceptive acts and practices. She may be reached at [email protected].

*Copyright © Ballard Spahr LLP. Reprinted with permission. Content is general information only, not legal advice or legal opinion based on any specific facts or circumstances.