Panel Spotlight: Has the CFPB Offered Simpler Rules of the Road? Successes and Challenges with the CFPB’s Rulemaking and Non-Rulemaking Efforts During the Biden Administration

At the 2024 Winter Meeting, the Consumer Financial Services Committee presented a panel focused on the Consumer Financial Protection Bureau’s (“CFPB””) non-rulemaking efforts: “Has the CFPB Offered Simpler Rules of the Road? Successes and Challenges with the CFPB’s Rulemaking and Non-Rulemaking Efforts During the Biden Administration.” Kitty Ryan, John Coleman, and Michael Guerrero served as panelists, and Lucy Bartholomew moderated the panel.

The panel explored the CFPB’s use of regulatory guidance documents during the tenure of Director Rohit Chopra. The CFPB, much like other federal financial regulatory agencies, has long relied on the use of regulatory guidance to shape industry change. Under Director Chopra, however, certain guidance documents that the CFPB has promulgated have attracted significant attention and criticism from the industry. This article summarizes four key discussions that took place during the panel: (i) recent non-rulemaking guidance; (ii) notice and comment implications for non-rulemaking guidance; (iii) types of non-rulemaking guidance and recent industry challenge; and (iv) the volume of non-rulemaking guidance and best practices for agencies.

Recent Non-Rulemaking Guidance

The panelists began by highlighting a recent non-rulemaking effort that they found particularly impactful to the consumer financial services industry. Michael began by pointing to the CFPB’s public letter to the California Department of Financial Protection and Innovation regarding proposed rules to regulate earned wage access products. He discussed how the CFPB’s letter took positions not previously articulated by the CFPB and noted how this was surprising in light of the continued scrutiny of the CFPB for failing to have a clear position in connection with earned wage access products, despite the CFPB’s prior promises to issue clarifications.

Kitty discussed the CFPB’s Circular on adverse action notification requirements and the proper use of the CFPB’s sample forms provided in Regulation B. She explained that the Circular seems to conflict with Regulation B’s official commentary, which states that a creditor must provide the principal reasons for declining to extend credit but need not explain how or why those reasons led to denial. In contrast, the Circular states that when using complex algorithms, a creditor must affirmatively explain its decision. The CFPB stated that a creditor could not, for example, provide the reason “shopping behavior,” without more information, including the establishment type and the goods purchased. Kitty stated that the Circular has caused confusion and discourages innovation in credit underwriting.

Finally, John discussed the CFPB’s guidance interpreting section 1034 of the Consumer Financial Protection Act, a provision that requires large banks and credit unions to comply in a timely manner with “a consumer request for information in the control or possession of” the institution, including supporting written documentation. The guidance interprets this provision as not just requiring these institutions to respond to consumer requests for information about their accounts (subject to certain exceptions), but also states that large banks and credit unions cannot “impose conditions or requirements on consumers’ information requests that unreasonably impeded consumers’ ability to request and receive information.” In this regard, the CFPB believes that, as a general matter, “requiring a consumer to pay a fee or charge to request” information is prohibited because “even a small fee” would “unreasonably impede” a consumer’s request. The CFPB further believes that poor customer service in the form of long wait times, unresponsive chatbots, etc., could unreasonably impede consumers’ requests for information regarding their accounts. John pointed out that the CFPB’s interpretation is debatable and could also raise complications for institutions that the CFPB did not consider or address. He suggested that the CFPB avoid these situations by adopting “rulemaking lite” procedures, such as opportunities to comment on proposed guidance.

Notice-and-Comment and Implications for Non-Rulemaking Guidance

During the panel, Kitty explored the notice-and-comment process and implications for non-rulemaking guidance. She explained that by issuing guidance instead of engaging in rulemaking, the CFPB avoids the notice-and-comment process set forth in the Administrative Procedure Act for legislative rules. Congress decided that before an agency can bind the public, it must publish the text of a proposed rule, seek public input, and evaluate costs and benefits. The Dodd-Frank Act also imposes specific interagency consultation requirements on the CFPB. For example, the CFPB must consult with appropriate prudential regulators during rulemakings to ensure consistency with prudential, market, or systemic objectives administered by those agencies. For rules on unfair, deceptive, or abusive acts or practices (“UDAAPs”), the CFPB must consult with the Federal Trade Commission to avoid duplication or conflict between the two agencies’ rules.

In addition, the CFPB is subject to two other significant procedural requirements when it engages in rulemaking. First, under the Small Business Regulatory Enforcement Fairness Act (“SBREFA”), the CFPB is one of only three federal agencies that must engage in a small entity review panel for rules that will have a significant economic impact on a substantial number of small entities. Specifically, the CFPB must convene a panel comprised of representatives from the CFPB, the Small Business Administration’s Office of Advocacy, and the Office of Management and Budget’s Office of Information and Regulatory Affairs. The panel must share an outline of the proposed rule under consideration with a representative cross section of affected small entities to obtain advice and recommendations on the proposal. The panel is required to prepare a report on its findings and make this report part of the rulemaking record. The CFPB typically releases a SBREFA panel report, and any written comments from the small entity representatives, to the public before-- or at the same time-- that it publishes a proposed rule for comment.

Second, section 1022 of the Dodd Frank Act requires the CFPB to consider, when issuing a rule, the potential benefits and costs to consumers and covered persons, including the potential reduction of access by consumers to consumer financial products or services resulting from the rule. The CFPB also must consider the impact of proposed rules on depository institutions and credit unions with $10 billion or less in assets and on consumers in rural areas. The CFPB publishes an initial 1022 analysis with its notice of proposed rulemaking and a final analysis with a final rule. These analyses typically set forth detailed estimates of the costs of a rule. When the CFPB chooses to issue non-rulemaking guidance, such as a Circular or Advisory Opinion, it circumvents these significant procedural requirements, effectively short-circuiting the notice-and-comment process contemplated by the law.

Types of Non-Rulemaking Guidance and Recent Industry Pushback

John provided an overview of the types of non-rulemaking guidance the CFPB has issued, including recent examples of industry pushback to this guidance. Under Director Chopra, the CFPB has issued non-binding legal guidance in a variety of forms and with a number of labels, including interpretive rules, policy statements, compliance bulletins, circulars, and small entity guides. It has also used other types of publications that, while not officially labeled “guidance,” certainly serve that purpose. This later category consists of everything from Supervisory Highlights publications, the Examination Manual, and amicus briefs, to less formal publications such as speeches, blog posts, research reports, and social media posts. Whatever the form and label, these publications share a few essential characteristics. They articulate the CFPB’s position on matters of federal consumer financial law; they typically do not provide regulated institutions with an opportunity to provide feedback regarding the practical implications of the CFPB’s legal position; and, while they are not formally binding, they carry an implied threat of enforcement that will often cause regulated institutions to come into compliance with the CFPB’s views, even if the institutions believe the agency’s interpretation is wrong or ill-advised.

Frustration with this state of affairs has caused the industry to seek recourse in the courts. For example, industry trade associations sued the CFPB over amendments to its Examination Manual for Unfair, Deceptive, and Abusive Acts or Practices. The Eastern District of Texas rejected the CFPB’s arguments that the claims were not “final agency action” subject to judicial review and, on the merits of the legal question, sided with the industry. This case is on appeal to the Fifth Circuit, but, if the district court’s judgment is upheld, legal challenges to supposedly non-binding guidance may be become far more frequent.

The CFPB could attempt to address industry’s concerns in a more constructive matter. It has, at least on occasion, offered the public opportunities to provide feedback on non-binding interpretive guidance. While there is no evidence as of yet that it will consider that feedback and revise the guidance, a commitment to consider and respond to feedback—in a manner similar to notice-and-comment rulemaking but less formalized—would likely result in both better guidance and less litigation.

Volume of Non-Rulemaking Guidance and Best Practices for Agencies

Michael shared insights on the volume of non-rulemaking guidance and its potential impact to the industry. In 2022, Director Chopra published a blog titled “Rethinking the Approach to Regulations” where he indicated that the CFPB intended to move away from “unnecessarily complex guidance” and instead issue simpler and clearer to understand rules that aim to “strengthen[] the compliance posture of all market participants, not just those with the most market power or resources.” In light of this, Michael provided some additional information on the frequency and type of guidance issued by the CFPB. Since Director Chopra assumed his role in October 2021, the CFPB has issued both rules and non-rule guidance at a significantly increased rate. In 2023, there were six proposed significant rules, up from two each in 2022 and 2021. Non-rulemaking guidance increased more drastically:

• Advisory Opinions: In 2021, the CFPB only issued one advisory opinion. There were four in 2022 and three in 2023.
• Compliance Circulars: There were no compliance circulars in 2021. In 2022, the CFPB issued three compliance circulars and seven more in 2023.
• Supervisory Guidance: 2021 is an outlier for supervisory guidance. There were eleven pieces of supervisory guidance issued in 2021, but they predominantly related to Covid-19 related issues. There were six issuances of supervisory guidance in 2022 and two issuances in 2023.
• Reports: The CFPB issued 47, 54, and 52 reports in 2021, 2022, and 2023, respectively.
• Enforcement Actions: Because the actions that the CFPB takes in connection with its enforcement authority are a barometer of its compliance expectations, the panel included this item as a form of non-rulemaking guidance. Enforcement actions increased from 18 in 2021 to 20 in 2022 and 29 in 2023.

While Director Chopra indicated that the CFPB’s intent was to make it easier for smaller industry participants to comply with consumer financial law and regulation, it has in fact become more difficult. Increased guidance is not necessarily the issue; however, guidance delivered through unpredictable and differing forms is problematic. It has become challenging to track the guidance issued by the CFPB. Instead of having a clear avenue through which expectations are communicated, the industry must follow the CFPB’s blogs, public statements, publications, advisory opinions, reports, circulars, letters to state regulators, and enforcement actions—substantive positions or indications of expectations, have appeared in each of these over the past couple of years. For example, the CFPB’s report on Chatbots in Consumer Finance included a fair amount UDAAP related guidance and Buy Now, Pay Later reports clearly identified practices that the CFPB found concerning. When an industry’s primary federal regulator makes a public statement about an industry practice or product, it has to be taken seriously. The industry has been put in a position where it must hunt for this guidance.

Given the uptick in guidance from the CFPB and the banking regulators, the American Bankers Association issued a Whitepaper on Effective Agency Guidance to help agencies issue guidance that complies with agencies’ legal requirements while providing useful advice and information to regulated entities. The agencies’ misuse of guidance creates unnecessary confusion for regulated entities, often deprives the industry of fair notice, and undermines the legitimacy of the regulatory process. The paper recommends that federal bank regulators adopt written procedures governing the development, issuance, and use of guidance, which will maximize the utility of future guidance documents. Further, the paper urges each agency to publish—after soliciting public comment—a mandatory process that will govern the issuance of “significant” guidance documents, which shall include public notice of a draft of the proposed guidance and a reasonable opportunity to comment before an agency issues a final document.