The Consumer Financial Protection Bureau (CFPB) recently announced that it plans to propose a series of rules regarding mortgage servicing during the summer of 2012 with the intention of finalizing them by January 2013. This announcement spotlights the special issues that the CFPB will face when it seeks to issue rules. It also points out the importance of public participation in the CFPB rulemaking process, as well as the potential for challenges to CFPB rules.
The Practical Takeaways of Cost-Benefit Requirements
As described more fully below, to the extent cost-benefit requirements apply:
- They provide a significant basis for commen-ters to impact a rulemaking process;
- They may subject the agency’s empirical analysis to scrutiny; and
- They may provide a basis to invalidate a proposed rule.
CFPB Rulemaking Rules of the Road
The CFPB, unlike the federal banking agencies (the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (the Prudential Regulators)), is subject to a statutory cost-benefit analysis requirement. A series of recent successful challenges to rule-makings by the Securities and Exchange Commis-sion (SEC) have been based on findings that the SEC did not satisfy its statutory cost-benefit analysis requirements. These cases have hig-hlighted the challenges that agencies face when their rulemakings are required to satisfy rigorous cost-benefit analysis principles.
The CFPB is also required to consult with federal regulators throughout its rulemaking process. If a federal regulator provides a written objection to all or part of a CFPB proposed rule, the CFPB is required to describe the objection and the basis for the CFPB’s decision in regard to the objection. Furthermore, an agency that is a voting member of the Financial Stability Oversight Council (FSOC) and that has been unable to resolve certain concerns about the impact of a CFPB final rule may petition the FSOC to set aside the CFPB’s rule. The approval of two-thirds of all voting FSOC members is required to achieve that result.
Cost-Benefit Analysis Requirements
The Dodd-Frank Act (DFA) mandates that the CFPB, in issuing a rule, consider “the potential benefits and costs to consumers and covered persons, 1 including the potential reduction of access by consumers to consumer financial products or services resulting from such rule.” The DFA also requires the CFPB to consider the impact of a proposed rule on covered persons and the impact on consumers in rural areas. 2
These statutory requirements should cause the CFPB to conduct and publish a detailed examination of the costs and benefits of its proposed regulatory approach, which may include an empirical analysis, and an explanation of why it did not take alternative regulatory approaches. Commenters should carefully review cost-benefit analyses and comment on any deficiencies therein to establish a record on the point for a possible judicial challenge.
Unlike the CFPB, the Prudential Regulators are not generally subject to statutory cost-benefit analysis requirements. In July 2011, however, the Obama Administration requested these agencies to comply with Executive Orders that call on federal departments to include cost-benefit analysis in the rulemaking proceedings. Unlike statutory requirements, Executive Orders raise different issues with regard to the creation of a third-party right of action that may be enforceable in court. It is notable that in October 2011 the Prudential Regulators included an extensive cost-benefit discussion in their proposed rule to implement the Volcker Rule. 3
In contrast, the SEC has had a series of rulemakings successfully challenged based on alleged failures to comply with statutory cost-benefit analysis requirements. Most recently, in July 2011, the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit), in Business Roundtable v. S.E.C., invalidated the SEC’s proxy access rule, finding that the SEC had acted arbitrarily and capriciously by failing to adequately assess the economic effects of the rule. 4(Dechert participated in this case by filing an amicus curiae brief.) In two prior decisions, the D.C. Circuit in 2005 and 2010 invalidated SEC rules due to inadequate costbenefit analysis. 5
The Commodity Futures Trading Commission (CFTC) is also subject to statutory cost-benefit analysis requirements in connection with its rulemaking activities. Two separate challenges to CFTC rules based on costbenefit analysis claims were filed in December 2011 and April 2012.
There is increasing recognition that rulemaking activity involves a series of choices that can significantly affect the enforceability of rules and their impact on the parties to which they directly apply, as well as on the broader public and economy. A recent issue of The Economist magazine focused on the challenges posed by the numerous new regulatory initiatives set in motion by the DFA and the beneficial role that costbenefit analysis could play in DFA-related rulemakings. 6 The Administration and Congress are showing increasing interest in encouraging federal regulators to incorporate rigorous cost-benefit analysis in their rulemaking proceedings.7
The CFPB’s rulemaking activities will have a significant impact on consumers and financial services firms. As there is increasing recognition that additional regula-tion has the potential to result in higher costs to consumers and reduced availability of financial prod-ucts and services, it seems likely that the cost-benefit analysis requirements for CFPB rulemakings will be a focus of close attention by regulators, financial services firms and consumer groups. Moreover, we also expect that the issue of whether the agency has conducted an adequate analysis of regulatory costs and benefits can be important even in cases where an agency may not be subject to an express statutory cost-benefit provision.