In one of many last-minute actions likely to be challenged by Democrats, the Consumer Financial Protection Bureau (CFPB or Bureau) issued a final rule “codifying” the September 2018 Interagency Statement (2018 Statement). That statement made clear that supervisory guidance “does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance.” In this update, we tell you why that matters and offer thoughts on whether Democrats (whether in CFPB leadership or in Congress) will abide by these principles or attempt immediately to nullify them.
What Happened
During the Obama administration, there was significant industry concern about the use of both informal supervisory guidance and enforcement as a substitute for formal regulation. The Trump administration moved quickly in 2017, with the backing of Congress and federal banking agencies, to attempt to fix the perceived problem. This included taking the unusual step of employing the federal Congressional Review Act to nullify various CFPB regulatory efforts, including its 2013 informal guidance on indirect auto lending.
The Congressional Review Act is a powerful oversight tool but, until recently, a rarely used one. It allows Congress to overturn recently promulgated regulations by joint resolution signed by the president. No regulations were overturned from the end of 2001 to 2016, but during the Trump years, Congress did so an incredible 16 times in the first 14 months of his presidency.
Trump-appointed regulators took similar steps to address perceived abuses in informal regulation. The 2018 Statement was intended to provide some reassurance that financial regulators would no longer pursue regulated entities for violations of statements made in supervisory guidance.
Announcing final action just before the transition to Rohit Chopra as director, the CFPB has now formally codified the principles of the 2018 Statement into a final rule “binding on the Bureau” and “without substantive change” from the prior statement. That said, the codified rule drops a few sentences from the statement. See Rule at p.6 n.11. The noninclusion of these sentences is not intended “to indicate a change in supervisory policy” from either the statement or preexisting law and practice.
The full text of the codified statement is only about two pages, viewable at the end of the linked PDF (pp. 27-29), and is worth reviewing in full.
While the 2018 Statement was made on behalf of the CFPB along with the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA) and the Office of the Comptroller of the Currency (OCC), the new codified rule is binding only on the CFPB.
Why It Matters
If the final rule survives, the change is an important one. Of course, regulated entities will still listen with attentive ears to any statement of policy from the CFPB, whether formal or informal and whether or not it carries the force of law. And of course, supervisory guidance will continue to be extremely influential in the regulated industries and nothing codified here will change that. But the ability to avoid penalties for violation of these guidelines removes an important disincentive to those entities that choose to ignore such guidance.
Just as Republicans wielded the Congressional Review Act to undo Obama-era regulation, many expect Democrats to return the favor. This is especially true at the CFPB, which, in its early years, repeatedly employed supervisory guidance as a cudgel against perceived bad actors. But if the rule survives, the current formulation will provide important protections against abuse at the agency level and can serve as a guidepost on the generally understood limited force of supervisory guidance.