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A Non-Bank Lender’s View on CFPB Examinations

H. Burton Embry
Apr 07, 2014

If you are like me, you have read many articles written by attorneys regarding how to manage and prepare for a Consumer Financial Protection Bureau (CFPB) examination. However, the majority of these articles are written by outside counsel who don’t actually have to live with the examination or its results as you and I do. I would like to share with you some perspective from having been through a CFPB examination and provide you with some ideas to help with preparation and share some items to consider along the way. Those of you who know me are aware that I have spoken at numerous conferences and meetings around the country regarding CFPB examinations (as well as state examinations). I have discovered that significant misinformation exists about CFPB examinations. My company was among the initial group of companies to experience a CFPB examination at a time when very little was known about these exams and we didn’t know what to expect. While we are frequently examined at the state level, (and we receive examinations from HUD, VA, FHLMC, etc.), until now, non-bank mortgage lenders have not experienced examinations at the depth and level of a CFPB examination. States such as California, Washington, Massachusetts, Illinois and North Carolina do a very thorough and detailed examination; however, their examinations are not as thorough as a CFPB examination.  The CFPB examination is conducted based on your business model. Companies like mine who originate loans solely through a retail channel and service some loans will receive a different examination than a mortgage lender who conducts wholesale business and purchases loans through its correspondent channel. If you service loans, the CFPB will look closely at your servicing operation. Do you have affiliates? Expect the CFPB to look at them as well. The CFPB will do a thorough examination of all of your business activities. Having a very knowledgeable and experienced compliance staff is a must for a CFPB examination. Don’t expect to do well without it. Having an operations manager who also does compliance is not going to be satisfactory with the CFPB.  You should know that the CFPB does their homework on your company before they visit your office. They will have analyzed your company’s HMDA data for the last two reportable years; reviewed all of the complaints on the CFPB portal and spoken with state regulators in the states where you are licensed. They may also obtain copies of your company’s most recent state examinations, invite the states to join them on the examination and share the results. The above information might not be new for most of you considering how long the CFPB has been doing their examinations. However, there are some things that only someone who has been through an exam can share based on firsthand experience. First of all, don’t panic or freak out when you get a CFPB exam notification. There is no need to make like Paul Revere and run around the office yelling: “The CFPB is coming! The CFPB is coming!” You will likely find the CFPB examiners to be professional and down to earth. Their goal is not to find fault with your company. If you expect them to have a “gotcha” attitude, you will be disappointed. In our case, after we received notification that we had won the lottery and were chosen to receive a CFPB examination, we had a meeting with the CFPB Regional Director and the Supervisory Examiner/Field Manager in our corporate office to discuss the examination process. They did a great job of letting us know what to expect during the examination and that this was not a witch hunt of any kind and that they were not looking to put us out of business. They merely wanted to learn more about non-bank mortgage lenders. They also put us at ease when we inquired about having an attorney present during the process. They encouraged us to be transparent and not hide behind our attorneys. While acknowledging that this was ultimately our decision, they informed us that they would not have an attorney on-site initially and if that were to change, they would tell us in advance. They were true to their word and I believe that our decision not to have an attorney on-site was the right one for us. However, our attorney was on standby just in case. We really appreciated this visit. After the visit, our lead examiner, called the “examiner-in-charge or EIC, took over the process. Being somewhat local to us, she stopped by to meet us prior to the examination, look at our facility and give us some information about what she needed and what to expect during the examination. Once on-site, we found the examiners were very accommodating. All of the examiners encouraged us to ask questions and actively worked to alleviate our concerns. They assured us that the CFPB was not looking to put us out of business. In case you are not fortunate enough to get a pre-examination visit, here are a few things you can do to help yourself and the examiners. Have at least one “point” person, maybe two, based on the model and size of your business and the scope of the examination. Make sure the examiners know how to get in touch with each point person if they need more information or want to set up a meeting. Split the areas of responsibility if you have more than one point person. You may also find the examiners have a tendency to walk around the office and talk to people. Meet with your employees prior to the examination to review how they should conduct themselves and what to do if an examiner asks questions. That doesn’t mean that you don’t cooperate with the examiners or that employees should not be congenial, but you don’t want a careless employee talking about things that they don’t fully understand or trying to impress the examiners. Give the examiners plenty of room to work and as much privacy as possible. A large conference room works the best and you may need more than one. The conference room should have Internet connectivity and multiple phones. The examiners will tell you their specific needs. If possible, put them close to your Compliance Department or Legal Department—not next to your Underwriting or Sales Department.   Try not to be intimidated by having 10 or more examiners in your office or having to deal with multiple requests for information at the same time. The EIC will manage the examiners and help them stay on track. You will need to work closely with the EIC to ensure they have the information they need, schedule meetings, etc. Make sure to introduce the EIC to your executive management team before the examination starts. Have a “kick-off” meeting so that the EIC and examiners can learn about your company and ask questions. This gives you the opportunity to put your company in the best light and explain your business model. Also, give them a tour of your facility and discuss things like local restaurants and other amenities as most of the examiners will be visiting from out of town. One crucial thing that I learned is that administering the examination is more than a full-time job. While the examiners are on-site, the stress level can be very high. You must plan for other people to cover your normal job duties. Depending on the scope of the examination and size of the examination team, you will find yourself continually setting up and attending meetings, requesting additional information from other departments and clarifying information you just provided. During our exam, our director of compliance and I spent most of our normal business hours with the examiners and then used the evenings and weekends to catch up on our normal jobs. Adding to the fun, we had a state examination right in the middle of our CFPB examination. The state examiners actually worked from a nearby hotel because we were out of space. Talk about juggling multiple balls at one time! But the fact is, your business has to keep moving and you have to keep making and/or servicing loans while the examination is going on. This is the one area where I personally felt I did not adequately prepare. It was not the examiners fault. I wholly underestimated the amount of time we would spend with the examiners. I also recommend that you put your examination questionnaire information in a place where the examiners can easily access it electronically. They don’t want tons of paper. Setting up electronic access will allow them to work from home and perhaps not spend as much time in your office. We set up a password protected website and arranged the content based on the order of the information requested in the CFPB’s introductory letter. This allowed us to monitor the information that was provided for each question in the letter and to monitor and review the additional information that was asked for during the examination.  One question I get asked a lot at conferences and meetings is if there is a need to conduct a mock examination before the CFPB arrives. That is a difficult question to answer because it is fact dependent for each company. For example, how strong and experienced is your compliance staff? Do you have a lot of written policies and procedures? What is the culture of your organization as it relates to compliance? We did not do a mock exam but I know of some companies that did. To their credit, the CFPB has been very transparent on how they will conduct the examination and what they will review (view the CFPR Examination Manual here). I am not aware of any differences in examination results that can be directly attributed to conducting mock exams or not. At this point, there may be enough information out about these examinations and how they are conducted to save you the money of doing a mock examination. However, that decision really is fact dependent on your company. Another area where I get a lot of question is regarding the experience level of the examiners. Apparently a lot of you have heard that some of the examiners have little to no experience. In my personal experience, and based on what I have heard from others who have also had a CFPB examination, some examiners are more experienced than others. Most examination teams seem to be a mixed group when it comes to experience. That said, I give the examiners who examined us with little or no experience a lot of credit for being up front about their lack of experience and asking questions when necessary. While this contributed to the amount of time we spent with them, we were glad to answer their questions rather than having them make assumptions. You will also find that the strength and experience of your EIC will play an important role in how smoothly your examination goes, and, like examiners, some EICs are more experienced than others. I hope this information will be helpful if and when you get the call that “The CFPB is coming!” H. Burton Embry is senior vice president–enterprise risk management with Salt Lake City, Utah-based Primary Residential Mortgage Inc. (PRMI). He specializes in mortgage banking compliance and quality assurance and has more than 30 years of experience in mortgage banking compliance. He can be reached by e-mail at   
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