by Valerie L. Hletko and Sarah E. Hager
A centerpiece of CFPB supervision is service provider oversight but assigning roles is not always straightforward. A lack of clarity may lead to duplicative, simultaneous oversight. While there is substantial guidance as to the what in service provider oversight, there is little guidance as to the who. In this analysis, Valerie L. Hletko and Sarah E. Hager of BuckleySandler LLP offer a way out of the infinite oversight loop.
Prudential regulators have advised supervised banks for nearly 30 years about the need for careful diligence of their service providers, but the expectations of the Consumer Financial Protection Bureau ("CFPB" or the "Bureau") raise both the intensity of these warnings, and the stakes. Title X of the Dodd-Frank Wall Street Reform Act ("DFA") places under the supervisory authority of the CFPB any "covered person" involved in the provision of any consumer financial product or service. The CFPB Examination Manual views these business-to-business relationships through the lens of consumer experience rather than safety and soundness. Now, more than ever, CFPB-supervised institutions stand in the shoes of their service providers for purposes of evaluating regulatory, litigation, or compliance risk. Service provider oversight is now a centerpiece of CFPB supervision, but assigning roles is not always straightforward. CFPB Guidance issued in April 2012 sets forth expectations for oversight and imposes expensive and burdensome obligations on both sides of the table. A lack of clarity may lead to duplicative, simultaneous oversight. Specifically, an institution may consider itself to be the service receiver but may be considered by its contract partner to be the service provider—and vice versa—in connection with the same product or transaction. Moreover, an entity considered to be a service provider subject to oversight by one of its contract partners may find that another business partner views the nature of its function very differently. In short, while there is substantial guidance as to the what in service provider oversight, there is little guidance as to the who. In our view, consideration of both the evolution of the DFA's statutory language and its legislative history offers a way out of the infinite oversight loop. [footnotes omitted]
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Valerie l. Hletko is a Partner and Sarah E. Hager is a Regulatory Attorney with the Washington, D.C. office of BuckleySandler LLP. They represent financial services companies in connection with government enforcement proceedings, including those of the CFPB, in regulatory examinations, investigations, and litigation. The authors' e-mail addresses are email@example.com and firstname.lastname@example.org.