simple step to compliance | how dodd-frank impacts internal controls

How Dodd-Frank Impacts Internal Controls Simple Step to Compliance

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As of January 2014, companies with more than $10 million in annual receipts from consumer debt collection activities will be subject to oversight and examination from the Consumer Financial Protection Bureau (CFPB), a new agency established by the Dodd Frank Wall Street Reform and Consumer Protection Act. Examiners from the CFPB will evaluate the internal controls and policies of these companies to ensure compliance with applicable federal laws designed to protect consumers and ensure they are treated fairly. The added oversight by this new agency will undoubtedly create a more burdensome regulatory environment for consumer debt collection institutions. A readiness assessment of internal controls that addresses compliance policies and procedures and overall governance and is conducted by an independent auditor prior to supervisory action from the CFPB provides assurance of compliance with applicable laws and regulations. This white paper will explore the advantages of using an independent audit firm as a trusted advisor to conduct a risk assessment and report on the internal controls that the CFPB requires being in place and operating consistently and effectively.

Questions?Visit our website at auditwerx.com for more information,or call us at 866-292-7951 to speak with one of our specialists.

REGULATION UPDATE | CREDIT AND COLLECTIONS INDUSTRY

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Market DriversThe consumer debt collection industry has always been heavily scrutinized and regulated to protect consumers. However, the changes resulting from Dodd Frank are mission-critical for companies with collection activities of more than $10 million and important for all consumer debt collectors, as they give federal regulators a tool to more closely monitor the oversight of a company’s internal control environment.


Dodd-Frank Financial Reform The CFPB has supervisory authority over many different types of institutions—including banks and non-banks that buy defaulted debt or collect proceeds for themselves, companies that collect defaulted debt owned by other companies for a fee, and debt collection attorneys who collect proceeds through litigation.

Other Financial RegulationsConsumer debt collection companies must comply with many laws including the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, the Graham-Leach-Bliley Act, the Electronic Fund Transfer Act, and the Equal Credit Opportunity Act. These laws are designed to safeguard sensitive financial information and protect consumers from unfair and discriminatory actions and adherence to each requires a well-designed and effective internal control environment.




Other Financial Regulations (continued)

An examination by the CFPB will require time and resources and likely disrupt business activities. To prepare for these impending examinations, management and boards of directors now face the challenge of ensuring that the company’s internal controls, policies, and procedures address the most up-to-date rules and regulations, that those controls are designed properly, and that they are operating effectively. During the examination process, examiners will assess potential risks to consumers and debt collectors’ compliance with federal consumer financial laws, concentrating on evaluating if debt collectors:

• provide required disclosures to the consumer by identifying themselves as a collection agency and properly disclosing the amount of debt owed.

• provide accurate information in pursuit of consumer debt collection, ensuring they are attempting to collect debt that consumers owe and have not already paid.

• provide a consumer complaint and dispute resolution process focusing on whether complaints highlight violations of federal consumer financial law.

• communicate civilly and honestly with consumers, not harassing or deceiving consumers in pursuit of debt collection.

At the end of the process, compliance concerns could result in civil penalties and/or an enforcement action against the collection company to comply with federal consumer financial law. These actions could be avoided by assessing the company’s compliance programs and readiness.


The Challenges of Insufficient Internal Controls


Because consumer debt collection companies handle sensitive consumer financial information, it is critical to maintain sufficient internal controls and policies, including those regarding oversight, compliance programs, information sharing, and privacy procedures.


OversightEffective oversight by the board of directors and management is the key to creating a successful control environment. These teams set the tone at the top—that the company is ethical, committed to abiding by the law, and eager to address any compliance issues or complaints that arise. Institutions without proper oversight risk creating unclear expectations in employees and customers, incomplete or ineffective polices and procedures, and exposure to corrective action or litigation.

Compliance ProgramsManagement and boards of directors must ensure there is a well-designed and well-communicated compliance program in place. They must also ensure there is a chief compliance officer who owns the compliance process, creates policies and procedures, and verifies that employees meet compliance obligations. These actions will clearly demonstrate a commitment to addressing rules and regulations. Companies that do not have policies and procedures in place for a robust compliance program risk corrective action and fines from the CFPB.



Respect for the privacy of consumer financial information is of paramount importance for companies involved in consumer debt collection activities. It is an underlying principle in many of the internal controls necessary for compliance with CFPB and other federal regulations. Companies that do not have effective controls addressing protection of consumer financial data risk improper disclosure of information that can result in lack of consumer trust, damage to the company brand, litigation, and corrective action or fines.


Privacy and SecurityAdditional regulated internal controls also include those pertaining to training employees in compliance issues, ongoing monitoring and reporting of internal control activities, and responses to and resolution of consumer complaints. Each of these represents areas of additional risk and exposure for companies that do not maintain effective compliance policies, procedures, and controls.

Fortunately, there is a way to ensure companies have the proper controls in place and reduce exposure to risk.

“To identify acts or practices that

materially increase the risk of

violations of Federal

consumer financial laws in

connection with debt collection.”

- CFPB examination objective


The Solution: An Independent Compliance Audit


A compliance analysis by an independent auditor enables companies to get a review of their policies and procedures from an objective standpoint. This includes identifying gaps in existing policies and procedures and potentially exposing risks the company may not even know about. Independent, third-party auditors become trusted advisors because they have experience, the tools to conduct the examination, and in-depth knowledge of internal controls and best practices. When this assessment is conducted in advance of an examination by the CFPB, it demonstrates investigative readiness and a proactive compliance mindset in the event examiners uncover a compliance related issue.


Important BenefitsThere are significant benefits when consumer debt collection companies use an independent auditor to conduct a review of internal controls, including:

• Assuring management and board of directors of compliance with CFPB and other financial regulations by identifying effective and efficient internal controls and procedures.

• Improving the ability of the board of directors and management to meet CFPB supervisory requirements by identifying gaps in policies and internal controls in time to take corrective action.



Finding the right independent audit firm to conduct an examination of internal controls relevant to CFPB and to become a trusted advisor is not an easy task. Here are a few things to look for:


What to Look for in a Solution Provider

Process and approachSeek an audit firm that specializes in examining internal controls, understands best practices, and has a trusted and proven process for conducting readiness assessments.

ExperienceThe right audit firm to conduct this examination employs auditors with years of auditing experience, as well as hands-on experience in the consumer debt collection industry.

IndependenceLook for an audit firm that is independent and shares best practices, but does not create the controls that are analyzed and reviewed.

Reporting CapabilityThe ideal audit firm creates a written assessment report that identifies areas of compliance with regulations, identifies risks, and offers recommendations for corrective action.


Auditwerx Advantage


Auditwerx is a leading Certified Public Accountant and Chartered Accountant firm specializing in compliance analysis and assessment reporting. Since 2005, our experienced professionals have been trusted business advisors to consumer debt collection companies, as well as a broad array of private service organizations. We are dedicated to ensuring that our clients’ systems and internal controls are in compliance and aligned with the appropriate standards.


Proven process and approach.

Our 5-step audit process is designed to deliver personalized results.

1. Scope out the project and determine areas of risk.2. Gather and analyze documentation and artifacts.3. Perform on-site inspection and review of controls.4. Conduct risk assessment and recommend mitigation

strategy.5. Provide readiness assessment report.

Auditwerx’s financial, operational, IT, and compliance experts have been delivering service organization controls examinations to consumer debt collection companies and other service organizations exclusively since 2005.

Experience




We begin the engagement with a consultation to understand your auditing needs, work closely with you through the process, and are committed to minimizing disruption to your business.

Our compliance analysis reviews the exact controls and attributes CFPB examiners will review during their assessment to fully prepare you for the examination.

Our history of serving consumer debt collection clients means we have a deep understanding of market, business, and operational risks in the industry, which enables our teams to better assess risk exposure and advise a mitigation strategy.

Be prepared before you receive notice of a pending examination from the Consumer Financial Protection Bureau. To begin the first step toward ensuring your internal controls meet regulatory requirements, please call 866-576-7454 or email [email protected].

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