The Consumer Bankers Association has released a new white paper, “The Case For Regulation Through Rulemaking & Guidance,” that advocates for the CFPB to use rulemaking and informal written guidance in lieu of attempting to create new industry regulatory standards through enforcement. Attorneys from Ballard Spahr’s Consumer Financial Services Group assisted CBA in preparing the white paper.
The white paper forcefully makes the case for why rulemaking and informal written guidance are more effective tools than enforcement for the Bureau to use to create new standards and expectations for industry. Key arguments made by CBA include:
- Consent orders do not clearly communicate the Bureau’s regulatory expectations to industry for reasons that include uncertainty as to whether a consent order’s provisions are specific to the facts of an enforcement target’s conduct and that they are heavily negotiated. As a result, consent orders often create industry confusion because industry members are forced to guess which parts have general applicability and which are target-specific.
- By attempting to change long-standing regulatory interpretations through litigating enforcement actions, the Bureau runs the risk that it will lose control of the message absorbed by industry or will fail to establish a standard. As an example, the CFPB ultimately failed to modify HUD’s controlling interpretation of a RESPA issue through its enforcement action against PHH Corporation and the litigation caused unnecessary disruption to industry practice.
- The Bureau’s attempt to establish a new regulatory standard for the automobile finance industry through enforcement actions challenging dealer participation practices created an uneven playing field among competitors and also ultimately failed to change industry practice.
- Rulemaking and informal written guidance can address general industry practices and variations and make clear how the Bureau will apply the law to those practices. As a result, they can lead to quicker and wider change than enforcement because industry participants have less room for uncertainty about the Bureau’s expectations. Also, rulemaking allows the Bureau to begin shaping industry behavior very early in the rulemaking process through an advance notice of proposed rulemaking, a notice of proposed rulemaking, a SBREFA outline, and other tools such as requests for information.
- Informal written guidance can be used to provide transparency to the entire market regarding best practices, even it does not carry the force of law. Notice and comment rulemaking, however, should be the preferred course of action when new standards are being set, or industry-wide conduct is at issue, because it provides the greatest amount of information to the Bureau and the greatest opportunity for all stakeholders—including consumers—to provide input.
- Many examples exist of clear and effective Bureau rulemaking and written informal guidance, namely the Qualified Mortgage Rule, the TILA/RESPA Integrated Disclosure Rule, the Remittance Rule, Supervisory Highlights, and the statement on providing financial products and services to LEP consumers.