How agencies use guidance to flout congressional safeguards on rulemaking.
By Virginia O’Neill
Banks of all sizes are facing a regulatory tsunami — a wall of proposed and newly finalized rules impacting every aspect of bank operations whose cumulative impacts have been unexplored or ignored by the banking agencies. Following a major rewrite of the Community Reinvestment Act rules and expansive new rules mandating data collection for small business lending, regulators are poised to finalize still more regulations on capital, debit card interchange, climate risk disclosure, overdraft services, nonsufficient funds fees, credit card late fees, bank custody services, and customer access to transaction account data. One regulator has even proposed to rein in a fee it acknowledges does not exist. Bank lending, basic banking services like deposit and checking accounts, and bank payments will all be squeezed leading to higher prices and fewer choices for bank customers.
There is good reason for public concern about this explosion of rulemaking. As ABA recently noted in a letter to President Biden, implementing each of these regulations on its own will create challenges for banks in serving their customers. Taken together, these uncoordinated regulations have the potential to significantly disrupt retail and commercial banking, negatively impacting the economy and the customers banks serve.
As daunting as this tsunami of new regulations is, it tells only part of the story about the tools regulators are using to advance their policy agendas. There is another, less visible wave under the surface that allows agencies to wield considerable power over highly regulated businesses. This tool is agency “guidance.” Regrettably, the Consumer Financial Protection Bureau and the banking agencies have advanced a substantial portion of their policy agendas through a barrage of blog posts, bulletins, circulars, policy statements, advisory opinions, and financial institution letters.
While the banking industry welcomes guidance that helps banks understand and more efficiently comply with legal requirements, all too often, agencies announce as “guidance” what is in practice a “legislative rule” that Congress requires to go through notice-and-comment rulemaking. In the most egregious cases, agencies have issued guidance that actually exceeds the legal authority Congress provided.
When Congress enacted the Administrative Procedure Act, it decided not only that agency actions must be consistent with the laws they implement, but also that actions that bind the public — legislative rules — may only be issued after an agency publishes the text of a proposed rule, seeks public input and evaluates costs and benefits. In the case of the CFPB, it also must consider the rule’s impact on small businesses, including community banks and small credit unions. These are fundamental good-government measures that provide transparency into agencies’ decision-making, afford the opportunity for public participation, and generate better-informed public policy.
But the banking agencies and the CFPB too often skip these administrative safeguards, effectively end-running the APA. Agencies may say they are issuing guidance, but many of these documents are, in reality, binding rules. These documents typically come without warning, and because they are not called rules, they typically receive little attention from the media or the public. But the impact on banks, their customers and the economy can be profound. Regulators’ misuse of guidance creates unnecessary confusion for banks, undermines the legitimacy of the regulatory process, and violates congressionally established guardrails in the APA. In addition, the misuse of guidance contributes to regulatory instability — the “pendulum swings” of regulatory policy that occur every four to eight years when a change in administration occurs. Unlike regulations, which require an APA rulemaking to change or rescind, there are no procedural guardrails on the process for issuing or rescinding guidance. And compliance with these policy swings consumes banks’ time and resources, diverting them from serving customers and from innovation.
Today, the American Bankers Association is issuing a white paper that describes a better path forward for the agencies. We also are sending comment letters to the Federal Deposit Insurance Corporation and the CFPB to offer (unsolicited) comments on recently issued “guidance” that we believe would benefit from public input. These include comments on the FDIC’s supervisory guidance on multiple re-presentment NSF fees, the CFPB’s advisory opinion on customer information requests, the CFPB’s advisory opinion on the application of RESPA to digital mortgage comparison shopping platforms, the CFPB’s circular on adverse action notification requirements, and the CFPB and Department of Justice’s joint statement on immigration status and Regulation B.
To make guidance more effective and more compliant with the law, our white paper recommends that the agencies adopt formal written procedures governing the development, issuance, and use of guidance documents. These procedures would help ensure that agencies act within their authority, abide by the APA’s guardrails for agency action, and issue guidance that is effective and durable.
We hope the agencies give our recommendations strong consideration. If they do, they will see enhanced bank compliance and increased public confidence in the regulatory process. Sounds like a win all around.
Virginia O’Neill is EVP for regulatory compliance and policy at ABA.
ABA Viewpoint is the source for analysis, commentary and perspective from the American Bankers Association on the policy issues shaping banking today and into the future. Click here to view all posts in this series.