Interim Guidance Says 2-for-1 Regulation Rule Doesn't Apply to CFPB

On January 30, The White House issued an Executive Order stating that for every new regulation proposed, two old ones must be proposed for elimination. That Order was thin on details and left many questions, including: how is a regulation defined, and does the Order apply to independent agencies such as the Consumer Financial Protection Bureau (CFPB)?

A few days later, on February 2, a new White House Memorandum was released, titled “Interim Guidance Implementing Section 2 of the Executive Order of January 30, 2017, Titled “Reducing Regulation and Controlling Regulatory Costs.”

Written in the form of a “Q&A,” this memo offers some clarification. Regarding which new regulations are covered, it says,

The EO’s requirements for Fiscal Year 2017 apply only to those significant regulatory actions, as defined in Section 3(f) of Executive Order 12866, an agency issues between noon on January 20 and September 30, 2017. This includes significant final regulations for which agencies issued a Notice of Proposed Rulemaking before noon on January 20, 2017. [Emphasis added]

As it relates to debt collection rulemaking, a Notice of Proposed Rulemaking (NPR) has not yet been issued, and given that the next anticipated step is a SBREFA hearing for first party rules, it seems unlikely we would see a NPR prior to September 30.

In any event, the next question addressed in the memo is “Do Section 2’s requirements apply to significant regulatory actions of independent agencies?” The answer, in short, is no. Here is the guidance:

No, the requirements of Section 2 apply only to those agencies required to submit significant regulatory actions to OIRA for review under EO 12866. Nevertheless, we encourage independent regulatory agencies to identify existing regulations that, if repealed or revised, would achieve cost savings that would fully offset the costs of new significant regulatory actions.

It seems unlikely that, under current leadership, the CFPB would follow this encouragement. After all, the CFPB has only been around for a few years – based on the numbers, making any more new rules would essentially require wiping out everything they’ve already done.

Of additional interest in the Memo is the answer to the question, “How should costs be measured?” The answer, “Costs should be measured as the opportunity cost to society. OMB Circlular A-4 defines this concept.”

The 48-page OMB Circular A-4 was released by the George W. Bush White House on September 17, 2003. According to that document,

To evaluate properly the benefits and costs of regulations and their alternatives, you will need to do the following:

• Explain how the actions required by the rule are linked to the expected benefits. For example, indicate how additional safety equipment will reduce safety risks. A similar analysis should be done for each of the alternatives.
• Identify a baseline. Benefits and costs are defined in comparison with a clearly stated alternative. This normally will be a no-action baseline: what the world will be like if the proposed rule is not adopted. Comparisons to a next best alternative are also especially useful.
• Identify the expected undesirable side-effects and ancillary benefits of the proposed regulatory action and the alternatives. These should be added to the direct benefits and costs as appropriate.

With this information, you should be able to assess quantitatively the benefits and costs of the proposed rule and its alternatives. A complete regulatory analysis includes a discussion of non-quantified as well as quantified benefits and costs. A non-quantified outcome is a benefit or cost that has not been quantified or monetized in the analysis. When there are important nonmonetary values at stake, you should also identify them in your analysis so policymakers can compare them with the monetary benefits and costs. When your analysis is complete, you should present a summary of the benefit and cost estimates for each alternative, including the qualitative and non-monetized factors affected by the rule, so that readers can evaluate them.

As you design, execute, and write your regulatory analysis, you should seek out the opinions of those who will be affected by the regulation as well as the views of those individuals and organizations who may not be affected but have special knowledge or insight into the regulatory issues. Consultation can be useful in ensuring that your analysis addresses all of the relevant issues and that you have access to all pertinent data. Early consultation can be especially helpful. You should not limit consultation to the final stages of your analytical efforts.

You will find that you cannot conduct a good regulatory analysis according to a formula. Conducting high-quality analysis requires competent professional judgment. Different regulations may call for different emphases in the analysis, depending on the nature and complexity of the regulatory issues and the sensitivity of the benefit and cost estimates to the key assumptions.

A good analysis is transparent. It should be possible for a qualified third party reading the report to see clearly how you arrived at your estimates and conclusions. For transparency=s sake, you should state in your report what assumptions were used, such as the time horizon for the analysis and the discount rates applied to future benefits and costs. It is usually necessary to provide a sensitivity analysis to reveal whether, and to what extent, the results of the analysis are sensitive to plausible changes in the main assumptions and numeric inputs.

A good analysis provides specific references to all sources of data, appendices with documentation of models (where necessary), and the results of formal sensitivity and other uncertainty analyses. Your analysis should also have an executive summary, including a standardized accounting statement.

The document suggests considering whether alternatives to Federal regulation would be preferable, such as antitrust enforcement, consumer-initiated litigation in the product liability system, administrative compensation systems, or regulation at the state or local level. Nonetheless, a nearly 30-page description of “Developing Benefit and Cost Estimates” is provided.

Sound like reasonable guidelines for rulemaking? Well, according to a 2014 report by the Congressional Research Service, nevermind, the CFPB isn't subject to OMB Circular A-4 either. This, too, is a lengthy document. Here is the paragraph related to the CFPB:

Section 1022(b)(2)(A) of the Dodd-Frank Act (12 U.S.C. §5512) establishes certain “standards of rulemaking” for CFPB. Specifically, it states that the Bureau shall consider—(i) 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 such rule; and (ii) the impact of proposed rules on covered persons, as described in section 1026, and the impact on consumers in rural areas.

Therefore, CFPB, like the other banking agencies, appears to be required to “consider” costs and benefits before issuing its rules, but is not specifically required to prepare detailed cost-benefit analyses to accomplish that goal. [Emphasis added]

By the way, the February 2, 2017 memo stated, “Comments on this interim guidance should be provided to reducingregulation@omb.eop.gov by February 10, 2017.” That was a quick turnaround.