The financial industry has shown support for the prudential regulators’ recent joint statement detailing plans to more clearly distinguish between regulatory guidance and rules, but some experts see a quandary in that fact.
Garris Horn Managing Member Richard Horn told Dodd Frank Update that the industry’s support for the idea of ensuring that guidance does not have the force and effect of a rule could prove to be a double-edged sword.
“It’s beneficial for the agencies to clarify the legal effect of their supervisory guidance,” Horn said. “But there is a tension between what the industry wants, in terms of the amount of guidance with ‘bright lines,’ or clear rules of the road, and the fact that they want it to be authoritative. If an agency has to issue bright lines through authoritative guidance, it involves more formal agency procedures – such as an interpretive rule, a notice-and-comment process to add commentary, or some other more formal procedure – which takes a lot more time.
“If all such agency guidance had to be authoritative, that would certainly limit the amount of guidance that an agency could provide, and how quickly it could be issued. So those things are at odds, really.”
Interest in upping the amount of available guidance has been especially evident since the implementation of major rules promulgated by the Consumer Financial Protection Bureau (CFPB), Horn noted, particularly Qualified Mortgage (QM) standards and TILA-RESPA Integrated Disclosure (TRID) requirements. Some notably confusing aspects of those rules, he pointed out, include Appendix Q’s standards for calculating income, and issues pertaining to construction-to-permanent lending under TRID.
“The industry was clamoring for more guidance to entirely new questions that gave them bright line standards for how to comply,” Horn said. “In terms of the quantity, and the need for it to be issued quickly to keep business moving, it would be difficult for it to be anything but informal. So, there’s a benefit to having guidance from the agency, even if it’s informal, because it gets industry answers to these new questions, the clear rules of the road.
“But at the same time, there are problems with informal guidance, as it does not carry the same weight of a rule. The bureau always has a disclaimer attached saying that it is not an official rule interpretation and does not represented the bureau’s official position. This could limit the weight the courts give the informal guidance. There is also a potential risk that the bureau gives informal guidance without the benefit of public input, interpreting rules differently from how industry had originally implemented them, which could create risk.”
Horn said that for these reasons, there is always a push and pull between formal and informal guidance – such as the industry having a positive reaction to the prudential regulators’ stated intention to streamline guidance and make it less specific, after previous instances where industry participants sought more guidance and more detailed guidance.
Buckley Sandler Partner Ben Olson noted that the agencies still have discretion to enforce their rule interpretations, regardless of what interpretations industry participants glean from guidance.
“The interagency statement is helpful in clarifying that financial service providers should focus on complying with statutes and regulations, not supervisory guidance,” Olson told Dodd Frank Update. “However, the agencies remain free to cite entities for conduct that is inconsistent with the agencies’ interpretation of the statutes and regulations.”
The agencies’ interest in limiting supervisory non-authoritative guidance, which would not have to go through a formal rulemaking process, also may have been intended to create a line of demarcation from rules that would be subject to congressional review, Horn said.
He referenced the Government Accountability Office’s (GAO) stance on previous guidance issued by the CFPB regulating auto lending in December. The GAO determined that the guidance had the force and effect of a rule and, because it had not gone through a notice-and-comment period and was not published in the Federal Register until after the office’s determination, it became eligible for repeal via the Congressional Review Act, and ultimately was nullified.
Horn also questioned how this statement affects the bureau’s reliance on policy statements issued by former agencies that governed its enumerated consumer statutes, such as HUD’s policy statements regarding RESPA Section 8, in spite of a prior statement that it would apply them. Horn said, “for example, the bureau has relied on and cited HUD’s ABA (affiliated business arrangements) policy statement in its past enforcement, and a question arises about the bureau’s stance on whether industry must comply with these policy statements going forward.”
Horn pointed out that language in the case of PHH Corp. v. CFPB, the three-judge panel’s opinion on the due process issues involving the bureau, could be helpful to the industry in arguing whether informal guidance protects them from liability.
“That opinion basically said that an agency pronouncement about the legality of conduct does not need to be subject to notice-and-comment rulemaking, or the like, to trigger due process protection.” Horn explained. “It put some weight behind informal guidance in the form of a ‘widely disseminated’ letter, such as the letter from the Department of Housing and Urban Development that was the subject of the case, which may provide some comfort to the industry relying on informal guidance.”