Joseph & Cohen Client Alert: Large and Small Lenders Alike Need Consumer Compliance Management

Does your banking or financial service business have an effective Compliance Management System (CMS) in place? A new report from the Consumer Financial Protection Bureau (CFPB) and recent litigation initiated by the New York Attorney General and the U.S. Department of Justice should cause bankers and other financial service businesses to reevaluate their CMS programs.

On August 21, 2013, the CFPB published its Supervisory Highlights report of 2013 underlining the critical need for compliance management systems for both banks and other financial service providers to effectively prevent violations of Federal and state consumer financial laws and mitigate harm to consumers.  Based on supervision reviews of banks and nonbanks between November 2012 and June 2013, the CFPB detailed three widespread mortgage-servicing problems affecting the industry: sloppy account transfers, poor payment processing and loss mitigation mistakes.

The agency asserts that these problems result from the myriad of operational and communication inefficiencies that arise from not having efficient consumer compliance program in place.   While the CFPB recognizes the unique and complex structures of institutions, and it does not advocate a particular CMS standard, the agency does expect compliance programs to integrate with the institution’s overall business strategy and operations to allow for preventative and proactive action before consumers are affected.

The CFPB supervises depository institutions with assets of $10 billion and greater, however, the issue of compliance management is relevant to all banks and nonbanks regardless of size as other state and Federal financial institutions regulators tend to follow the lead of the CFPB.    For institutions that have previously only been regulated at the state level, it is particularly important to implement a compliance management system as state regulators are becoming increasingly vigilant.  For example, recently the New York Attorney General, Eric Schneiderman, sued Western Sky Financial, a major online payday lender for illegal lending, enforcing usurious loan contracts and deceptive acts and practices.  Western Sky was forced to shut down its operations as of September 3rd.

The CFPB’s review of various financial institutions focused on mortgage servicing problems and the NY State Attorney General targeted payday lenders.  However, the trend for more aggressive enforcement at the state and federal level will not be limited to these niches.

Money transmitters and money service businesses are similar niche businesses that are also likely to be closely scrutinized.  Additionally, Bitcoin and other virtual currency exchanges and businesses will continue to be tightly examined by the department of financial institutions at the state level, FinCEN, the Federal money transmitter regulator, and the U.S. Department of Justice.  As an illustration, the California Department of Financial Institutions recently targeted certain Bitcoin operators and U.S. authorities indicted the founders of Liberty Reserve, an offshore virtual currency company, for money laundering.

We believe that the identification by the CFPB that many banks and non-bank financial institutions have deficient consumer compliance management systems and other recent state and federal actions against payday lenders and money transmitters is a harbinger of the need for robust compliance management systems for a broad range of lenders and money service businesses, some of which we have highlighted above.

Depository institutions and other financial institutions including money transmitters, money service businesses and payday lenders should review their current consumer compliance management systems and reshape them proactively to improve their systems.   Some of the deficiencies noted by the CFPB should be considered by both large and small financial service companies.  The deficiencies included:

  • Missing a comprehensive consumer compliance program: The CFPB found that often individual branches of a business were looking out for relevant federal laws without an overarching system in place at the company. This creates a lack of consistency in following the laws across products and across locations. The result can be erratic treatment of consumer problems. It can also mean that root causes of regulatory violations go undetected.
  • Lacking formal policies and procedures: Not having formal, written documents that both detail consumer compliance responsibilities and instruct employees on the appropriate methods for executing these responsibilities can lead to inconsistencies, sloppy recordkeeping, and ultimately, consumer harm because nobody at the institution is clearly responsible to make sure laws are being followed.
  • Forgoing independent consumer compliance audits: Independent audits are a good way for a company to routinely conduct quality-control checks on its operations. A compliance audit program provides a board of directors or its designated committees with information about whether policies and standards are being implemented. Without such a program, it is difficult to recognize any significant deficiencies in an institution’s compliance management system.

For these reasons, smaller institutions should consider these CFPB findings to improve their own CMS, as it is our expectation that state and federal regulators with jurisdiction over smaller entities will begin enforcing consumer protection laws in a manner that could mirror enforcement actions and suits by FinCEN, the U.S. Department of Justice, the CFPB and the States of New York and California.  In many cases, financial service organizations will need to integrate a thorough understanding of the organization’s unique legal and regulatory requirements, at both the state and federal level, when structuring a compliance management system that is appropriate for each organization.  Joseph & Cohen is uniquely qualified to assist such financial service organizations.

A good system ensures that employees know about their responsibilities, creates structures for reviewing operations, and takes corrective actions when needed. A good system also lessens consumer risks, reduces the potential for violations and helps protect against reputational risks.

Joseph & Cohen, Professional Corporation, is a Financial Services and Litigation Boutique headquartered in San Francisco that emphasizes complex banking, corporate and transactional matters, regulatory and bank enforcement defense, securities, M & A, bankruptcy and insolvency, employment and commercial and executive employment litigation services.  Joseph & Cohen is known for sophisticated expertise, extraordinary commitment to clients, relationship-based services, and a range of specialized skills typically found only in the largest American law firms.

For additional information about Joseph & Cohen, Professional Corporation, please visit our website at or contact:

Jonathan Joseph at 415-817-9250 or; or

Kenneth Sayre-Peterson at 415-817-9200 or

94 thoughts on “Joseph & Cohen Client Alert: Large and Small Lenders Alike Need Consumer Compliance Management”

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