What Happened

On February 16, 2024, the Consumer Financial Protection Bureau (CFPB) issued a procedural rule revising its supervisory appeals process for the first time since 2015. This Rule makes several important changes:

  1. Under the Rule, any CFPB manager who did not participate in the underlying supervisory matter and who is familiar with the topic may be assigned to a supervisory appeals committee, rather than only managers in the Supervision division, as had been the case previously. The Supervision Director will select three managers to serve on the appeals committee, which will, in turn, advise the Supervision Director on the appropriate resolution of the appeal. Legal counsel designated by the General Counsel will advise the committee as needed.
  2. The Rule expands the possible outcomes of a supervisory appeal. Under prior processes, a supervisory appeal could only be resolved by upholding or rescinding the appealed finding. Under the Rule, in addition to these remedies, the appealed matter may be remanded to Supervision staff for consideration of a modified finding.
  3. The Rule provides that supervised entities may appeal any CFPB compliance rating or underlying adverse finding, rather than only adverse, i.e., 3, 4 or 5, ratings and associated findings. The Rule also leaves unchanged an entity's right to appeal adverse findings, i.e., those resulting in a Matter Requiring Attention, conveyed in a supervisory letter.

The Rule continues to restrict appeals to one per issue and to protect the confidentiality of the supervisory appeals process.

Why It's Important

The largest depository institutions and thousands of non-depository consumer financial services providers are subject to the Bureau's supervisory jurisdiction. The Supervision division is more than three times as large as its Enforcement section. The supervisory process is designed to ensure a candid, open and fulsome exchange of information and analysis between the CFPB and the supervised entity. Supervision is the CFPB's best tool to prevent consumer harm, rapidly deliver consumer redress when harm does occur and eliminate practices that have caused harm. The Rule demonstrates the CFPB is interested in ensuring that the supervisory process remains robust and useful to both itself and the entities that it regulates.

Supervision is effective only if there is an ongoing and open dialogue with the CFPB, and the Rule restates the CFPB's prior position that it will take steps to ensure that an appeal will not negatively impact its supervisory relationship with the appealing entity. By eliminating the "all or nothing" aspect of its prior appeals process, and by expanding the issues that are subject to supervisory appeal, the Rule demonstrates the CFPB's commitment to a robust supervisory process and increases opportunities to resolve issues outside of the inherently adversarial setting of an enforcement investigation.

One note of caution, however. By expanding the pool of CFPB managers eligible to serve on a supervisory appeals committee, the Rule introduces the possibility that managers in the Enforcement division will participate in supervisory appeals. While there is certainly not an impermeable barrier between the CFPB's supervision and enforcement functions, most supervisory activity is initially confined to personnel in the Supervision division. The Rule increases the chance that Enforcement personnel will become involved at an earlier stage, and supervised entities should be cognizant of this as they consider their appeal options.

What to Do

It is crucial that supervised entities be fully engaged and attentive to examiner requests before and during a supervisory examination. Supervised entities should answer questions in "real time" and should discuss adverse matters with examiners before the exam concludes. The Rule makes clear that the CFPB expects supervised entities to present information supporting their positions to the exam team itself. As a result, supervisory appeals that contain new information not presented to the original exam team are not likely to be well received.

Finally, as it becomes clear that a satisfactory resolution may not be reached with the exam team, the supervised entity should immediately begin considering and preparing for the possibility of a supervisory appeal. An appeal must be filed within 30 days of transmittal of the adverse finding, and it must contain a complete brief in support of the entity's position together with a document from the entity's board or principal that the appeal has been authorized.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.