The Consumer Financial Protection Bureau (CFPB) recently released the first version of its Supervision and Examination Manual (Manual). Among its notable features are:

Focus on Risk to Consumers

The Manual states that the principle guiding the CFPB’s supervision efforts—along with being consistent and data-driven—will be evaluating risks to consumers. In short—and in accordance with its design—the CFPB will not be focusing on covered persons’ safety and soundness.

Impact of “Inherent Risk” on Evaluation of Overall Risk to Consumers

The Manual sets forth the table below:

As the table illustrates, the greater the “inherent risk” identified by the CFPB examiners, the stronger the covered person’s risk controls must be in order to avoid a problematic evaluation.

Inherent Risk to Consumers

The Manual states that inherent risk “includes factors that increase the potential for unfair, deceptive or abuse acts or practices, for discrimination, or for violations of other Federal consumer financial laws. It also includes factors that increase the compliance management challenges of a business and thereby increase the risk of such violations.

Selected Factors Contributing to Inherent Risk

The Manual includes a “template [that] provides a series of factors that bear on inherent risk” and directs examiners to “rate each relevant factor (low, moderate or high inherent risk . . . ).” For example, with respect to a particular product, these factors include, among others, whether:

  • “The profitability of [the] product is dependent upon penalty fees”
  • “The terms of the product are subject to change at the discretion of the entity, and the entity has frequently made changes in the terms.”
  • “Pricing structure . . . and other features and terms are combined in a manner that is likely to make the total costs of the product difficult for consumers to understand”
  • “Products are bundled in a way that may obscure relative costs”
  • “Consumers pay penalties to terminate a relationship, including forgoing money or benefits they would otherwise earn”
  • “Credit decision-makers have wide discretion over setting terms and features of products with inadequate policies and procedures addressing appropriate exercise of that discretion”
  • The product is marketed to “consumers with limited experience with financial products or services”
  • “Solicitation is conducted through active cross-selling . . . .”

The Manual has received temperate public responses from various commentators. Our view is that it is a highly significant document, in several respects. It not only indicates how the CFPB intends to perform examinations; it may also indicate future trends in other agencies’ examination procedures, as well as in CFPB regulation and enforcement, for example under Section 1031, which prohibits “unfair, deceptive or abusive acts or practices.” The implementation and revision of the Manual will thus be matters of great interest.