The shape of the new Consumer Financial Protection Bureau (CFPB) began to emerge yesterday as its chief architect Elizabeth Warren, Special Advisor to the Secretary of the Treasury, announced its approach to bank supervision.  Under the Dodd-Frank Wall Street Reform Act, the oversight of consumer protection at large banks has been consolidated from seven different regulatory agencies into the CFPB.   

The examination program, which will begin on July 21, will include 111 depository institutions each of which have total assets over $10 billion, their subsidiaries and affiliates.  These institutions collectively hold more than 80 percent of banking industry's assets.  

"The new consumer agency is here to make sure that markets work for American families, and our bank supervision program is a big part of that," Warren said. "Starting on July 21, we will be a cop on the beat - examining banks and protecting consumers."

CFPB will operate the examination program out of satellite offices in Chicago, New York, San Francisco, and Washington, DC.  The regionalization is designed to allow examiners to understand "the business practices and dynamics in different markets throughout the country," the Bureau's press release said.  It is anticipated that the examiners will spend much of their time working in the offices of depository institutions and other consumer financial services companies.

The CFPB will be acquiring over 100 staff members directly from the regulatory agencies that used to be responsible for the consumer protection function including the Federal Deposit Insurance Corporation, the Federal Reserve System, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision. The CFPB expects eventually to have several hundred examiners on board, coming from a variety of backgrounds, including state regulatory agencies and industry.  Whether new to consumer protection or experienced in that area, examiners will receive appropriate technical and professional training.

As currently designed, the supervision will consist of pre-examination review of information, data analysis, on-site examinations, and follow-up monitoring.  Most depository institutions will be examined on a periodic basis but the largest and most complex will be subject to year-found supervision that is "customized to reflect the consumer protection and fair lending risk profile of the organization."

CFPB examinations will consist of an assessment of the institutions internal ability to detect, prevent, and correct violations that may harm consumers both through a review of procedures and interviews with personnel.  Examiners will look at products and services specifically to identify consumer risk and the institutions compliance with requirements for developing, marketing, and managing those products through their lifetime.  Policies and procedures will be reviewed for compliance with fair lending guidelines and financial protection laws and regulations.  The Bureau says that the monitoring will be constructive and where necessary CFPB will seek corrective actions which can include a revision of programs and processes or other appropriate enforcement actions to address harm to consumers. Consumer information will be analyzed on an institution-centric basis, i.e. lending activities, fee structures, and marketing practices, and on a market level.  This will allow the Bureau to detect and address risks as they develop.  Institutions will generally be given advance notice of examinations and be kept up to date on their status.

The Bureau has already  begun reviewing information about the institutions it will be monitoring and over the next few weeks will complete this review, coordinate its efforts with federal and state regulatory agencies, finalize the examination and supervision plans and begin conducting the first round of on-site examinations.  The proposed Examination Manual for both banks and other financial services companies will be posted on CFPB's website and stakeholders including regulated institutions, state and federal agencies, consumer groups and the general public will be invited to provide feedback and make comments.  CFPB will also conduct informational roundtables with the depository institutions starting in early August.

While CFPB is transitioning into full operation, it is still without a permanent director.  Congressional Republicans have flatly stated that they will oppose any nominee for the position and have also threatened to eliminate funding for its operation.  President Obama has been under considerable pressure from progressive groups and from the blogosphere to name Warren to the position, possibly as a recess appointment, but has made little recent comments about the issue.  At the same time there is considerable organized activity in Massachusetts to draft Warren as a candidate for the Senate seat currently held by Scott Brown and she is said to be considering it.