This client alert has been updated from its original form to address the GAO opinion issued on Dec. 5, 2017.
On December 5, the Government Accountability Office (GAO) essentially invalidated the CFPB’s auto lending guidance by finding that it constitutes a “rule” for purposes of the Congressional Review Act (CRA). As a rule, the guidance was required to be submitted to Congress for review and possible disapproval before it could take effect. This legal action by the GAO was initiated by an inquiry from the office of Senator Pat Toomey (R-PA). In his March 2017 letter to the GAO, Senator Toomey questioned the CRA rule status of both the Interagency Guidance on Leveraged Lending (IGLL), issued by the federal banking agencies, and the CFPB auto lending guidance. In separate opinions issued two months apart, the GAO found both bodies of guidance failed to follow the requirements of the CRA. These opinions could have far-reaching ramifications for all federal agency guidance — not just agency guidance directed to financial institutions — dating all the way back to 1996, when the CRA was enacted.
The Congressional Review Act
The CRA has made headlines throughout 2017. Just days before the most recent action by the GAO, on December 1, a bipartisan bill was introduced in the House of Representatives by Representative Dennis Ross (R-FL), and co-sponsored by Representatives Henry Cuellar (D-TX), Tom Graves (R-GA), Alcee Hastings (D-FL), Collin Peterson (D-MN) and Steve Stivers (R-OH), to nullify the CFPB’s recently issued short-term lending rule on CRA grounds (see our analysis of the short-term lending rule here.)
While Congress can nullify a rule or regulation by enacting overriding legislation, the CRA gives Congress a faster and simpler means of accomplishing the same result. The CRA was enacted in 1996, but before the Trump administration it was only used to disapprove a single rule — a workplace standard proposed by OSHA. In 2017, however, the CRA has been used to invalidate 15 proposed rules.
The CRA requires every proposed “rule,” as that term is defined for purposes of the CRA, to be submitted to Congress for review. The actual process for disapproving a rule begins when a resolution for that purpose is introduced in either congressional chamber. The resolution for disapproval must be introduced within 60 days of date on which Congress received a copy of the rule, and can pass with a simple majority. Once signed by the president, the resolution voids the proposed rule and prevents the subject agency from reissuing a substantially similar rule. This situation recently occurred when the CRA was used to overturn the CFPB’s Arbitration Rule (see our analysis here.)
In the case of the IGLL, which is designed to assist financial institutions in providing leveraged lending to creditworthy borrowers in a safe-and- sound manner, the GAO found the guidance to be a rule in a recent opinion letter. In doing so, it rejected the federal banking agencies’ arguments that the IGLL falls outside the CRA’s coverage as a “general statement of policy.” The banking agencies noted that the CRA definition of “rule” adopts the definition in the Administrative Procedures Act (APA) and cited numerous cases, including U.S. Supreme Court decisions, for the position that agency guidance is not a rule under the APA.
The GAO distinguished the authority cited by the banking agencies on the basis that the issue before the courts in the subject cases “was not whether a general statement of policy was a rule under [the] APA, but whether an agency action was subject to judicial review [because it] . . . should have been promulgated in accordance with the APA notice and rulemaking requirements.” The GAO further noted that the U.S. Supreme Court has interpreted the APA definition of “rule” to encompass agency statements of general policy.
Ultimately, the GAO concluded that (1) the IGLL “is a general statement of policy designed to assist financial institutions” and (2) as a statement of policy that “explains the types of actions that concern the Agencies and that might motivate them to initiate a supervisory action,” the IGLL represents a rule for purposes of the CRA. The GAO expressly rejected the position that guidance cannot constitute a rule if it “does not establish legally binding standards, is not certain or final, and does not substantially affect the rights or obligations of third parties.” Those factors, the GAO noted, are relevant for purposes of determining whether a given rule should have been issued under the notice and comment requirements of the APA, but are not determinative of whether the agency pronouncement amounts to a rule. In short, just because an agency pronouncement is not subject to notice and comment does not mean that the agency’s promulgation is not a rule for purposes of the CRA.
The latest GAO opinion construing the CFPB auto lending guidance rests on the same rationale that was used in finding the IGLL to be a rule. The auto lending guidance has been widely criticized since its issuance in March 2013, which happens to be the same month and year the IGLL was issued. The auto lending guidance has been relied upon by the CFPB to hold lenders indirectly responsible for discriminatory actions by auto dealers in the pricing of consumer auto loans. Although the CFPB could respond to the GAO’s action by submitting the auto lending guidance to Congress now ― more than 4 ½ years after it was issued — that action is extremely unlikely under acting CFPB director Mulvaney.
Implications of the GAO Findings
The CRA provides that a rule must be presented to Congress before it “can take effect.” Therefore, in finding that agency statements of general policy are subject to the CRA, the GAO has called into question all agency guidance. Because issuing informal guidance is a routine practice of all federal agencies, the possibilities for future challenges are virtually boundless. Theoretically, all agency guidance dating back to 1996 could be challenged.
For example, CFPB Bulletin 2013-07 (Prohibition of Unfair, Deceptive, or Abusive Acts or Practices in the Collection of Consumer Debts) provides a “non-exhaustive list of examples of conduct related to the collection of consumer debt [that] could constitute UDAAPs” if engaged in by creditors. The listed practices are expressly prohibited for third-party collectors under the Fair Debt Collections Practices Act, which exempts first-party creditors. Consistent with the GAO’s opinion, Bulletin 2013-07 created rules because it identifies acts or practices that may prompt CFPB enforcement action. Yet, like the IGLL, the bulletin was not submitted to Congress for CRA review.
Impact on Regulators
The financial services industry may view the prospect of having Congress review all agency guidance as a welcome development. However, as a result of the GAO’s action, federal agencies could effectively lose one of their most important mechanisms for informing supervised entities what is expected of them. If an agency chooses to forgo submitting proposed guidance to Congress, that guidance will be deemed ineffective if it is subsequently found to be have established rules. On the other hand, if the agency submits guidance for CRA review, the agency will run the dual risks of immediate disapproval and being barred from issuing any similar rule. As a result, agencies may turn to formal enforcement actions as an alternative to issuing guidance, which is how the Cordray-run CFPB primarily operated. Moreover, by placing the “rule” status of agency guidance in the spotlight, the GAO opinion could prompt an increase in private lawsuits challenging the legitimacy of agency guidance under the APA’s notice and comment requirements.
- The GAO’s finding that the IGLL and the CFPB auto lending guidance amount to “rules” under the CRA calls into question the validity of a vast body of existing bank regulatory guidance — dating back 21 years — in the form of bulletins, opinions and policy statements. Hence, we could be looking at the tip of the iceberg.
- The GAO’s opinion presents to federal agencies a “choice between two evils” — either submitting their guidance to Congress for potential nullification or risking a later finding deeming the guidance a “rule” for CRA purposes and thereby ineffective.
- If it becomes routine for agencies to submit their proposed guidance to Congress for CRA purposes, Congress will have a much stronger hand in shaping agency policy, and agency independence will be weakened in equal measure.
- By highlighting the rule status of agency guidance, the GAO opinion could have the ancillary effect of increasing private lawsuits challenging the legitimacy of agency guidance under the APA’s notice and comment requirements.
- The new bipartisan bill introduced by Representative Dennis Ross may kill the CFPB’s short-term lending rule, although given the difficulties in passing the arbitration CRA override in the Senate, this may prove difficult. However, the CRA will continue to be a prominent tool in the congressional arsenal of reigning in bureaucratic rulemaking.
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.
Compliments of Pepper Hamilton LLP, a member of the EACCNY