Re: use of guidance to supervised institutions and the public
Re: Request for Information Regarding the Bureau’s Use of Guidance and Implementation Support; Docket Number: CFPB–2018–0013
The Honorable J. Michael Mulvaney
Acting Director
Bureau of Consumer Financial Protection
1700 G Street, NW
Washington DC 20552
Dear Acting Director Mulvaney:
The American Bankers Association (ABA) appreciates the opportunity to provide information to assist the Bureau of Consumer Financial Protection (Bureau or BCFP) in assessing its use of guidance to supervised institutions and the public and to offer suggestions for improvement. We acknowledge and appreciate the Bureau’s initiative in seeking input on this critically important tool, which supports many of the Bureau’s objectives under the Dodd-Frank Act and enhances the ability of supervised institutions to maintain compliance with consumer protection standards.
ABA intends throughout the BCFP’s Request for Information (RFI) process to provide constructive feedback on the Bureau’s policies and procedures. ABA supports a regulatory and supervisory approach that is fair, transparent, and fully consistent with applicable law. Only in that environment can banks and other financial service providers deliver a variety of innovative financial products and services that benefit our customers and promote healthy markets. Moreover, our suggestions for promoting the appropriate beneficial role of regulatory guidance have broader application across the financial supervisory landscape. Thus, the Bureau’s RFI initiative offers an opportunity for the BCFP to take a leadership role in enhancing communication between supervisors and financial institutions.
We note several key principles that are fundamental to effective regulatory guidance:
ABA also offers these specific recommendations to improve the clarity and utility of the Bureau’s guidance and the process for developing it:
Effective compliance is an important tool for delivering innovative and beneficial financial products and services to bank customers. Guidance is useful inasmuch as it enhances compliance by providing insight into the thinking of supervisory personnel, often on highly technical topics. Supervised institutions generally find guidance valuable in understanding the nuances of regulatory standards as applied to complex or novel situations, facilitating innovation and product development within the scope of legal requirements. Depending on the format, guidance may respond to a specific situation at a particular institution, but if those specific responses are made publicly available with appropriate redactions to protect privacy and proprietary interests, it also can be valuable to the broader industry.
Viewed in this light, promulgation of guidance supports the Bureau’s execution of its mission to protect consumers and promote compliance as guidance operates prospectively to prevent consumer harm while enforcement sanctions past conduct believed to cause consumer harm. Guidance permits the broad and efficient dissemination of detailed agency views on a generalized basis. As discussed in more detail below, it is more useful—and fairer to regulated institutions—in promoting a broad common understanding of the appropriate approaches than can be gleaned from enforcement actions. In addition, guidance that is easily accessible to management and staff of financial institutions can reduce burdens on smaller institutions that would otherwise spend resources for extensive and sometimes highly technical advice from lawyers and consultants.
Because guidance is intended to assist regulated entities and the public with compliance, it is inappropriate to use it as a basis for enforcement actions and formal supervisory criticism. The Office of Management and Budget (OMB) has long concurred in the view that regulatory guidance as such should not be considered enforceable, a point emphasized in guidance issued earlier this year by the Department of Justice. Specifically, OMB has noted that an agency can issue guidance without compliance with formal notice-and-comment procedures but in doing so, it cannot thereafter treat the guidance as binding on private parties even though that guidance can bind its own staff’s actions. Significantly, OMB noted that guidance should make clear to the affected institutions that they “can use an alternative approach if the approach satisfies the requirements of the applicable statutes.”
Current agency practices use various types of guidance, though not all address legal requirements. Some guidance relates to agency interpretations of either statutes or the agency’s own regulations. Other guidance may relate to supervisors’ views concerning much broader standards, such as appropriate management of various types of risk. Guidance on such broad standards cannot be considered an agency’s legal interpretation of the statutes under which it operates. Accordingly, the agency should not treat guidance, which is intended to assist supervised institutions in achieving and enhancing compliance, as a requirement that binds institutions and provides the basis for enforcement actions. Even guidance that provides a formal indication of the agency’s interpretation of statues and regulations does not itself define a binding legal requirement on a supervised entity. The basis for enforcement actions should continue to be the applicable statutes, the regulations promulgated under them in accordance with the requirements of administrative law, and judicial interpretations of both.
Similarly, guidance should not serve as the basis for examiner criticism such as a Matter Requiring Attention (MRA) or other action against a bank. Most guidance is interpretive in nature to help clarify intent and is designed to provide assistance in applying regulations.
As noted above, while the Bureau can produce useful guidance without a formal notice-and-comment process, prior public notice and an opportunity for public comment as guidance is being developed will result in a better, more useful product. Moreover, when a specific issue has prompted the Bureau to consider issuing guidance, advance public notice and opportunity for comment may reveal related, but distinct, questions that the Bureau also should address, reducing the need for frequent revisions and updates. Advance notice also enhances the ability of supervised institutions to implement guidance (and lower the expense of doing so by providing a longer preparation period). The decision the Bureau must make is how to balance the need to issue something quickly or take the time to provide something that is more carefully, deliberately and thoroughly produced. That is why guidance must take a variety of forms.
Bankers also have noted that any guidance must be regularly updated. With the rapid changes taking place in financial markets and products today, it is vital that the Bureau ensure that guidance is current. There should be a regular program of review and, even if guidance does not need to be revised, there should be a mechanism in place to inform the public that the agency reaffirms that the guidance as current, perhaps by time-stamping the guidance as being reviewed as of a certain date.
Following these principles will benefit the Bureau, supervised institutions, and the public in important ways:
Of course, the issuance of guidance on which supervised institutions and the public will rely in these ways calls for a thorough internal process through which the Bureau can develop theappropriate substantive statements. Other financial supervisory agencies have developed such internal processes, and each agency takes the approach best aligned with its operating procedures and the types of issues it addresses. A question common to all agencies is how to balance appropriately the need for timely responses to institutions’ requests for information, or to changes in market conditions and practices, as well as to other circumstances that may call for guidance to be updated.
Fundamentally, guidance should be based on a dialogue among the regulatory agency, the affected industry, and the public. Over time, industry questions and concerns can better inform the agency about where there are gaps in regulations that need to be filled or when more formal guidance can better help the industry meet consumer needs. Moreover, as noted, there is a balancing act between the need to provide guidance quickly and the ability to take the time and be deliberative and comprehensive. The more specific the guidance is to a single transaction or individual scenario, the less need there is for extended public discussion while more formal and comprehensive guidance requires greater and more careful deliberation through public notice-and-comment. However, if something is going to be widely applicable and comprehensive, in order to be reliable, it clearly needs public notice and comment.
Currently, the Bureau uses disclaimers on “non-rule guidance” (i.e., compliance guides, rule summaries, and other quick reference materials) to emphasize that it is intended only to help understanding and implementation. However, the extent and breadth of the Bureau’s disclaimers appear to be unique. Other agencies, such as the Department of Justice, the Department of the Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) do not make similar use of disclaimers, certainly not to the extent that they have been used by the Bureau. Where many agencies have used disclaimers, and where they may be appropriate, are in response to certain types of specific inquiries. For example, the Federal Trade Commission will caution that the determination is limited to the facts as presented by the inquirer and may not have been approved by the entire Commission.
The broader and more extensive a disclaimer, the less worthwhile and useful is the guidance to which it applies. Fundamentally, disclaimers undermine the value of guidance. In fact, some bankers have said that, due to the disclaimers, they pay little or no attention to some Bureau guidance.
ABA recommends that the Bureau eliminate or significantly modify its use of disclaimers, recognizing that disclaimers undercut the reliability of the guidance provided. If used at all, disclaimers must be narrower and tailored to the specific guidance or information to which they relate. If the agency plans to issue guidance, the disclaimer should not cause the reader to question whether the guidance is binding on the Bureau. If the guidance is created to respond to a specific question or unique set of facts, then it would be appropriate to state that the response is designed based on the facts as represented and that if there is a change in circumstances, the surfacing of additional facts that have not been disclosed, or any misrepresentations, then that may affect the response from the agency.
Unlike substantive rules, which implement the provisions of a statute and which, by their nature, have the same force and effect of law, the Administrative Procedures Act (APA) also recognizes “interpretive rules” which explain an agency’s interpretation of the statutes and the rules it administers. The key is that these interpretive rules, sometimes issued in the form of Commentary or Official Interpretations, do not create new obligations on or rights for regulated entities. Moreover, the level of deference that courts give to these interpretive rules is less certain and more variable than that given to an actual substantive rule.
Overall, bankers have expressed a preference for the use of interpretive rules as the optimal form of guidance. Interpretive rules can provide banks with safe-harbor protection from civil liability for good faith reliance on the interpretation. Although bankers recognize that it can take time to develop an interpretive rule, the industry had become accustomed to the Official Commentaries developed by the Federal Reserve and found them particularly helpful. Most helpful is the use of examples in the Commentary. Official Commentary can also provide added flexibility to address changes in technology or products and services that were not contemplated when the regulation in question was issued.
While bankers generally believe that guidance in the form of Commentary or Official Interpretations is the ideal format, a close second choice is Frequently-Asked-Questions (FAQ). Perhaps one of the most recognized examples of this approach is the set of FAQs for the Community Reinvestment Act regulations. And, FAQs can be helpful especially when the answers to questions track or are indexed to the related regulatory text.
Bankers find it helpful when the Commentary, Official Interpretations, or FAQs are based on individual inquiries that the agency has received over time which demonstrate a need for guidance in the area, and then are issued after notice and comment. Lacking additional input from the comment process can create unintended consequences. For example, the Bureau issued the Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act guidance on March 21, 2013, without the benefit of public input. As a result, application of the guidance was the source of much controversy until Congress voted to disapprove the guidance under the Congressional Review Act. Notice and opportunity for comment likely would have avoided many of the problems associated with that guidance and would have informed the Bureau much better before taking action.
Responses to specific questions from individuals are designed to provide quick, informal assistance but, as a result, the function is of limited value beyond the individual inquiry. For example, the Bureau has emphasized that this informal assistance is not an official interpretation. Nevertheless, ABA believes that this guidance is a valuable resource, and, when the Bureau receives multiple inquiries on the same topic, it can help it prioritize the need for more formal guidance.
If responses are to be worthwhile, three elements are critical. First, inquiries should be acknowledged as soon as possible after receipt, preferably within 24 hours, and substantive responses should not be unduly delayed. Second, when a question is raised, the representative from the agency who responds to the question must be a subject matter expert in the issue. Third, the response should provide more information than merely parroting the language in the regulatory text. Frequently, questions can arise because of some issue of interpretation, questions about applicability, or unique circumstances that fit imperfectly within the parameters of the regulation. Having an agency representative simply repeat the regulation does not facilitate compliance.
Furthermore, when inquirers’ questions and responses are in written format, they provide a record that can be used to ensure consistency and possibly to determine whether additional guidance is needed to help the public understand the Bureau’s position on the subject. This need underscores the importance that the Bureau, in responding to an inquiry, provide a reference to a specific statutory or regulatory provision, which would also help the agency track back to which sections of a statute or regulation were generating the most questions or which needed additional clarification. Since this information can form the basis for the Bureau to develop more broadly applicable guidance after opportunity for notice and comment, the agency should monitor the inquiries and responses to identify patterns and similarities which merit development of more formal and more broadly applicable guidance.
One model that ABA encourages the Bureau to consider is the interpretive letters issued by the Office of the Comptroller of the Currency (OCC). These are advisory letters issued in response to specific inquiries that provide the inquiring institution with a binding interpretation of a specific facet of regulatory language. Such advisory letters offer two advantages for the agency: (1) they allow the agency to consider and discuss carefully the specific facts and arrive at a careful interpretation; and (2) they set a precedent that can be used for future decisions, ensuring consistency across the agency and for other institutions if the guidance is published on the agency website, similar to the format used by the OCC.
Another useful tool is the “no-action” letter process. The BCFP adopted the idea in a manner limited to inquiries about an innovative product, but we urge the Bureau to consider the approach taken by the Securities and Exchange Commission (SEC) staff. An institution that is uncertain whether an action would violate the federal securities law may request a "no-action" letter from the staff. Typically the institution will describe relevant facts and circumstances, offer views on the application of relevant laws and regulations, and request the staff’s confirmation that it would not recommend an enforcement action by the SEC. If the staff approves the request, it typically conditions its response on the facts and representations described in the request and notes that different facts and circumstances might lead to a different conclusion. The letter stops short of being a binding interpretation of applicable law, but it does reflect the staff’s current view of the appropriate enforcement posture in the circumstances.
While the no-action letter process is not a channel that produces guidance which is definitive in all respects, this “no-action” process offers several benefits:
In our comment to the RFI on Adopted Rules and New Rulemaking Authorities, ABA recommended changes to the Bureau’s existing no-action letter process. In addition, we encourage the Bureau to expand the no-action letter process to respond to specific questions about whether existing products or services violate any of the enumerated Federal consumer laws and regulations that the Dodd-Frank Act transferred to the Bureau.
Another source of guidance that could be particularly beneficial is the development of model forms, which are available but not mandatory, to ease the compliance burden on supervised institutions in handling many types of required disclosures. This approach is already reflected in a number of regulations, including Regulations B, E, P, and Z, which provide explicit safe harbors.
ABA also recommends improved examiner training about the appropriate role of guidance. ABAmembers report that guidance is too often applied by examiners as a mandate. This point was recently underscored by Congressman Blaine Luetkemeyer when he urged regulators to “issue and publish a clear statement affirming that agency statements—for example, guidance documents, supervisory letters or examination manuals—that have not gone through notice and comment rulemaking do not establish binding legal standards, and thus shall not be the basis of enforcement actions or supervisory directives...” The Congressman went on to state that failure to adhere to guidance should not serve as the basis for other adverse supervisory determinations, such as ratings downgrades, and that examiners should be held accountable when they misapply guidance.
Similarly, bankers report that examiners often will see a policy or practice at one bank and identify that bank’s practices and routines as a “best” or “leading” practice to be adopted by other institutions, ignoring any relevant differences in products, markets, strategic plans, and customers among institutions. A policy or procedure adopted by one bank should not serve as an expectation for other banks at the instruction of an examiner, based merely on observations during the supervisory process. In addition to the inherent unfairness of criticizing bank management on this basis, supervisors will inhibit innovation and the diversity of financial products and services, and may damage a bank’s strategic and competitive position that in fact may rest on doing something differently from what a competitor may do.
The Bureau offers a number of different regulatory implementation and compliance aids, such as compliance guides, rule summaries and other quick reference materials, as well as webinars. Our members generally find these aids helpful; however, we offer the following recommendations to improve their value.
Bankers find that the preambles to many of the Bureau’s regulations are extremely difficult to use. Frequently, key interpretations and explanations about a provision are buried in the Bureau’s lengthy and complex discussion of the comments received and data relied upon in support of the regulation. These critical interpretations are not highlighted, and there are no tools available to locate them in text that often spans hundreds of pages. Indexing, formatting, and elimination of redundancies would make the preamble easier to navigate and use as a compliance resource. Similarly, preambles fail to adhere to “plain-language” principles. In fact, much of it is presented in legalese or dense and convoluted text. ABA believes that the same expectations that apply to the industry when communicating with customers should apply to the information conveyed by the Bureau to the industry and the public in the preamble to a regulation.
While our members note that webinars can be a useful implementation aid, a webinar during which staff reads from a text that typically mirrors the regulatory text is of little value. The Bureau can add value by explaining the reasoning and foundation for the regulatory text and offering opportunities to respond to questions from listeners. New and different examples about how the statute or regulation should be applied are also helpful. The more opportunities there are to present realistic examples of a regulation in operation and for questions and discussion, the better that banks are able to understand and comply. Finally, published recordings and copies of the presentation materials and transcripts should be available after all webinars.
Bankers report that the Small Entity Compliance Guides provide useful summaries and overviews of regulations. They are presented in a simple-to-use and clear format, and they answer basic questions. Bankers also find the Small Entity Compliance Guides helpful for training staff. For the reasons discussed above, however, their value as guidance is undermined by the Bureau’s current disclaimers.
As discussed in ABA’s comment to the Request for Information Regarding the Bureau’s Supervision Program, our members find the quarterly publication of Supervisory Highlights helpful for understanding supervisory expectations and for educating bank staff and encouraging compliance. Understanding areas in which other financial institutions may be struggling and the Bureau’s concerns and priorities helps banks to focus compliance efforts and resources.
Indeed, our members would appreciate inclusion of additional information, including anonymized or redacted cases with detailed legal analysis, recognizing that confidentiality constraints may limit publication of some information. In addition, as noted in ABA’s comment to the RFI regarding the Bureau Enforcement Processes, the BCFP rarely uses Supervisory Highlights to explain why certain matters are resolved through supervision rather than enforcement. Providing an explanation of the Bureau’s approach to this critical issue would help industry understand how it can work constructively with the Bureau to resolve matters before they require an enforcement action.
We also recommend that the Bureau consider hosting forums to discuss Supervisory Highlights and permit bankers to ask questions and obtain further insight and guidance about supervisory concerns and solutions. Such forums might inform the BCFP about how to make the publication more useful.
Thank you for the opportunity to share ABA’s views on the Bureau’s guidance and implementation support. If you have any questions, please do not hesitate to contact the undersigned at [email protected] or (202) 663-5029.
Sincerely,
Robert G. Rowe, III
Vice President & Associate Chief Counsel, Regulatory Compliance