All Things FinReg


The Consumer Financial Protection Bureau (CFPB) on February 16 issued an internal process regulation—effective immediately upon publication in the Federal Register—updating and formalizing the steps that supervised institutions may take to appeal certain adverse supervisory findings and ratings. While there are minimal substantive changes, the regulation is informative in its acknowledgment of the significant centralization of authority under a single supervision director that the CFPB had previously not widely publicized.

Supervisory Appeals

A substantial part of the CFPB’s work is performed through the agency’s supervision team, which conducts recurring examinations of banks with more than $10 billion in assets as well as a number of defined “larger participants” in other markets, including mortgage servicing, auto lending, credit reporting, debt collection, and student loan servicing.

Individual companies may also be placed under examination authority based on the CFPB’s assessment of the company’s level of consumer protection risk. Examinations, the results of which are confidential by statute, yield compliance ratings, which have consequences for future oversight as well as specific and often detailed requirements to take corrective action, frequently through “matters requiring attention” (MRAs) or “matters requiring immediate attention” (MRIAs).

These MRAs and MRIAs effectively represent non-public supervisory criticisms of an institution’s practices but relate to conduct that falls short of referral for an enforcement action. Because these supervisory ratings and MRAs/MRIAs carry substantial consequences for supervised consumer financial services providers, the “supervisory appeal” process exists as a mechanism for companies to seek relief after the CFPB examination staff has formally issued a finding or rating. The process cannot, however, be used to appeal enforcement-related measures, such as an actual enforcement action or even supervisory referrals to CFPB Enforcement or another law enforcement or regulatory agency.

Formal Changes

The regulation makes four formal changes to the existing CFPB appeals process:

  • What may be appealed. The CFPB will now permit an institution to appeal any rating, not just “negative” ratings (i.e., a compliance rating of three, four, or five), in addition to continuing to permit the appeal of adverse supervisory findings.
  • Role of the board of directors. The institution’s board of directors must formally authorize the filing of an appeal, and the authorizing document must be provided as part of the appeal request. If the institution requests an oral presentation, a “member of the board or principal” must lead that oral presentation.
  • Composition of the appeals committee. A three-person appeals committee of the CFPB is constituted for each appeal. Previously, the CFPB appeals committee comprised one member of the staff of the associate director for supervision, enforcement, and fair lending (SEFL), one or more representatives from CFPB headquarters Supervision management, and one or more representatives from CFPB regional management. Under the revised rule, the supervision director will select any three CFPB managers to participate on a given appeals committee, so long as those managers did not participate in the underlying matter being appealed and have relevant experience on the issues raised by the appeal. The CFPB’s general counsel will also newly designate legal counsel to advise the appeals committee.
  • Appeal outcomes. Previously, the appeals committee could only uphold or rescind an underlying supervisory finding. Under the new rules, the appeals committee can also remand the finding to Supervision staff for consideration of a modified finding.

Consolidation of Supervision Authority

The principal subtext of the revised rule is that authority over CFPB examinations and their results is now firmly established under a single supervision director at CFPB headquarters in Washington, DC. This fact, which the CFPB has only obliquely acknowledged publicly, reflects the functional consolidation of powers above, below, and adjacent to the position of “assistant director for supervision policy.”

On its website, the CFPB’s organization chart shows the assistant director for supervision policy reporting to the SEFL associate director and adjacent to an assistant director for supervision examinations, to whom several regional directors report. As reflected in the prior appeals committee composition, elements of the supervision appeals process were previously vested in and carried out by each of these offices.

The position of “supervision director” does not currently exist. The CFPB, in a footnote to the Federal Register issuance, explains: “The position of ‘Supervision Director’ encompasses the combined positions of the Assistant Director for Supervision Policy and the Assistant Director for Supervision Examinations. Previously, these positions were occupied by the same individual, and the Bureau is in the process of consolidating these two positions into one Supervision Director position.”

The new “supervision director” envisioned by the rule will be substantially empowered to have the last word on examination issues, with fewer checks from the SEFL associate director—who previously appointed the appeal committee and whose direct staff was allocated one seat on each committee—or the regional offices, who were previously allocated one seat on each committee. While in practice this consolidation has occurred over a period of years, the CFPB’s public acknowledgment likely presages formal changes to the agency’s structure consistent with that fact.


Carefully Manage Examinations Before Problems Arise

For large banks and other companies that are already subject to CFPB examination authority, the promulgation of the regulation is a reminder that the CFPB’s supervision powers are substantial and the avenues for redress are limited (though not nonexistent). Preventing adverse findings through thoughtful, proactive management of the supervisory examination process before supervisory findings are issued remains the best strategy for avoiding negative outcomes.

Thoroughly Prepare Company Representatives Before Filing an Appeal

The unusual requirement for a member of the board of directors or “principal” (an undefined term in the rule) to “lead” any oral presentation regarding the appeal should be a critical consideration in the appeal strategy. Outside counsel should be sure that the designated person is well-prepared and understands the sensitivity and importance of this regulatory interaction.

CFPB Supervision Is a Powerful, Centralized Function

The consolidation of supervision decisions in CFPB headquarters reflects an acknowledgment of the current status more than a prospective change. While the new process may yield more predictable outcomes, it will also likely be more predictably tilted toward the agency’s policy-driven objectives from the CFPB’s central senior leadership than rooted in individual banks’ circumstances, to which regional leadership may have been more sensitive.

Prepare for Growing CFPB Examination Authority

As the CFPB proposes to widen the scope of its examination authority to non-bank technology companies that provide payment services and continues to designate additional companies subject to risk-based supervision, companies facing the prospect of CFPB examination should begin preparing for that scrutiny well in advance. Being well-prepared for supervision is not merely an exercise in avoiding enforcement referrals.

Managing the examination and supervisory process itself to avoid or minimize MRAs and MRIAs should be a key and equally important goal in the regulatory relations strategy of a supervised institution. Maintaining a constructive working dialogue and relationship with the examination team and with CFPB Supervision—including through use of qualified outside counsel at the appropriate stages—is a critical component of that strategy.