On February 16, the CFPB issued revised rules updating its internal supervisory appeals process for institutions seeking to appeal a compliance rating or an adverse material finding. The updated rules open up new avenues for financial institutions to challenge supervisory evaluations and reflect a significant evolution from its 2015 updates.
Key Aspects of the Revised Rule:
- What may be appealed. In a significant departure from past practice, financial institutions are permitted to appeal any compliance rating, not just adverse ones (i.e., a rating of 3, 4, and 5). This is in addition to a company's appeal of the adverse supervisory finding.
- A change in the appeals committee. Under the Bureau's appeals process, a three-person appeals committee is formed for each appeal. Previously, such committees were comprised of one member of the staff of the Associate Director for Supervision, Enforcement, and Fair Lending, one representative from CFPB Supervision headquarters (in DC), and one representative from the CFPB Supervision Regional office. 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 and have relevant experience on the issues. (Notably, this could potentially include enforcement personnel.) The appeals committee will then advise the Supervision Director as to the appropriate action.
- Enhanced participation by a company's board of directors. An institution's board of directors must formally authorize the filing of an appeal. In addition, if an institution requests an oral presentation, a "member of the board or principal" must lead that presentation.
- More outcomes upon appeal. Under the previous process, a supervisory appeal could only uphold or rescind the underlying supervisory finding. Under the revised rules, the appealed matter can also be remanded to Supervision staff for a modified finding.
The revised rules are effective immediately upon publication in the Federal Register and applies to appeals pending as of its publication date.
Putting it into Practice: A majority of the CFPB's work is performed through Supervision which conducts examinations on the nations' depository and non-depository financial institutions that fall under its (ever-expanding) jurisdiction. A CFPB examination is often an arduous experience for a company, the results of which can lead to corrective action, continued oversight, and in some cases, an enforcement action. Typically, the CFPB appeals process has not been fruitful for companies. These new rules suggest that companies perhaps have more options to challenge adverse supervisory findings. Whether the process will lead to better results for institutions remains to be seen. It is still the case, however, that for all institutions subject to a CFPB examination, preventing negative findings through an effective and proactive management of the supervisory process is still the best strategy in preventing adverse outcomes.
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