Mortgage originators and other companies regulated by the Consumer Financial Protection Bureau have found the examination process inefficient and an unjustifiably burdensome, according to a letter sent by David Hirschmann, president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, to CFPB Director Richard Cordray in February.
Hirschmann reports that while several companies have had good experiences with individual examiners, the majority of businesses have said the examination process is confusing, unnecessarily duplicative, inconsistent and open-ended. “In fact, the ‘process’ is difficult to discern,” he said.
The Bureau must improve its training of supervisors, Hirschmann said. “Businesses consistently report that the Bureau’s examination teams have little authority to make decisions—the Bureau’s examiners must obtain permission from Washington before making even the most minor decisions,” he said. In fact, based on reports from financial companies, Hirschmann said the Bureau has lost seasoned supervisors because they were frustrated with their lack of authority in the field.
Hirschmann believes this lack of autonomy comes from the uneven experience and quality of examination teams. “A number of companies report both frequent turnover in supervision staff and insufficient training, resulting in dramatically different competency levels among members of supervision teams,” he said. “Staff hired from other regulatory agencies’ examination programs have generally exhibited an understanding of the nature of the examination process, while those without such experience appear to have been provided with little effective training…”
The Bureau also has no consistent approach to exams, Hirschmann said. He noted the following disparities:
- Examiners have no organized process for conducting the various categories of examinations. They commonly make follow-up requests at random and of significantly different scope depending on the examination team.
- Some companies receive a multi-year schedule of examination plans, while others have had their requests for such a schedule rejected.
- Some companies receive the quarterly “closing letters” which provides the basis for the year-end closing letter. Others do not receive such letters.
- Some companies are provided with the equivalent of an “organization chart” for their examination team, which details their responsibilities. Others have been denied this information.
- Bureau examination teams coordinated exams with other supervisory regulators for some companies. But, more often, multiple agencies were on site, making duplicative requests, and even competing with one another for information.
The Bureau also has carried on examinations with no seeming end in sight. “A large number of businesses have been subject to examinations that are still open after a year or more. In many cases, there are no outstanding requests for information—but the company is told that the examination is not yet closed,” Hirschmann wrote.
Speaking of banks, Hirschmann said that prudential regulators allow banks to review the exam’s closing letter for purely factual errors. “The Bureau’s examiners do not provide an opportunity for the examined entity to identify factual errors before the draft of the closing letter is sent to Washington for approval. And once the letter is approved, the examination team refuses to correct even clear factual mistakes − requiring companies to invoke the complex examination review system in order to correct even the most obvious of errors,” he said.
Hirschmann also raised concerns about the presence of Bureau attorneys at examinations, a practice which is now under review by the Office of the Inspector General of the Federal Reserve. “[This is a practice which] undermines the non-adversarial nature of the examination process,” he said. “[It] appears to send the message that a principal purpose of the examination process is to gather information for use in bringing enforcement actions.”
Numerous companies also have reported that the Bureau has used the examination process as a data gathering initiative rather than a compliance exam. As opposed to requests for targeted data in line with the objectives of the exam, the Bureau has asked for huge volumes of data which have required companies to reformat and resort data to meet the “unfocused and overly inclusive” parameters of the Bureau, Hirschmann said. “Bureau personnel have indicated that the Bureau plans to use this information to enhance its understanding of the financial services marketplace,” he added.
Hirschmann pointed to documents requested of PHH Corporation in an investigation of the mortgage company as an example of an abuse of the Bureau’s power to request information. In addition to 30 other broadly worded requests, the CFPB demanded more than a decade’s worth of documentation when it opened its investigation of the company in May, 2012. The demand included:
- All documents relating to the selection of mortgage insurance providers or allocation of business among mortgage insurance providers by PHH Corp.
- All documents relating to the policies and procedures for communicating to consumers the selection of a mortgage insurance provider
- All documents relating to the underwriting or pricing of mortgage insurance reinsurance.
Despite PHH Corporation’s petition to reduce the burden of the information request, the Bureau continued its formidable demand. And, while PHH Corp made an attempt to resist in court, the company was ultimately forced to comply. “Your rejection of PHH’s challenge to the breadth of this request is troubling, because it effectively gives carte blanche to Bureau investigators to impose huge financial burdens on companies at the outset of an investigation,” Hirschmann said.
Aside from PHH Corporation, the U.S. Chamber’s letter does not list the type of financial institutions which have reported the burdensome nature of the CFPB’s examinations.