The Regulatory Process Is Broken
While every business in America has a hit list of specific regulations they want reformed, a larger and more consequential issue is the need to reform the regulatory process itself. Every day, businesses of all sizes are confronted with proposed regulations ostensibly mandated or authorized by federal law. In reality, Congressional statutes are so broadly written that they amount to little more than loosely worded directions to unelected regulators.
As if this wasn’t bad enough, regulators often issue so called “Guidance.” I say so called, because these interpretations have the look and feel of regulations, but they haven’t been vented though the Notice and Comment period required of regulations. The result is a mish mash of legal confusion, which has made a mockery of the Administrative Procedures Act. In addition to lobbying for reform of specific regulations, credit unions and all regulated entities have a vital interest in the reform of the regulatory process itself.
When is guidance Guidance?
“A central distinction in administrative law is between those agency pronouncements that amount to ‘substantive rules’ and those that are merely ‘interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice’” explained Judge Ronnie Abrams of the Southern District of New York explained earlier this year. “The former category of agency actions creates new obligations or rights, must be subjected to the Administrative Procedure Act’s notice-and-comment procedures and carries the force of law. The latter category — of interpretative rules and general policy statements—merely clarifies existing law, see id.; need not undergo notice and comment, and lack the force of law.” (Segarra v. Fed. Reserve of New York, No. 13 CIV. 7173 RA, 2014 WL 1660040, at *5 (S.D.N.Y. Apr. 23, 2014, citations omitted).
The problem is that this crucial distinction is becoming, and in some cases has already become, a distinction without a difference. Credit unions have experienced this trend first hand. For example, last December the NCUA issued a “supervisory Guidance: on indirect lending activities involving private student loans (LETTER NO.: 13-CU-15), the accompanying memo outlined the points of emphasis that examiners are to consider when evaluating these programs. An accompanying Letter to Credit Unions explains that “NCUA has developed the enclosed Supervisory Letter to clarify the agency’s supervisory expectations about direct and indirect PSL products [. I encourage you to review this letter and to contact your regional office or state supervisory authority if you have any questions on this subject.”
How many of you have examined this or similar NCUA guidance, concluded that NCUA’s suggested approach to compliance wasn’t the approach best suited for complying with the law and simply moved on to the next issue? My guess is that your examiner said you are mistaken in believing that guidance, in whatever form it takes, is not binding on your credit union. The problem is, that agencies have become increasingly enamored of Guidance’s, Q&A’s and letters to the institutions they regulate. After all, it is much easier and quicker to publish a document than go through the cumbersome process of publishing a proposed regulation reacting to comments, and then promulgating a final mandate.
A second area of regulatory abuse comes courtesy of agency interpretations designed specifically to reinterpret existing legal interpretations.
Under the Fair Labor Standards Act, exempt employees are entitled to fewer protections than are non-exempt employees. It’s a big deal and employers need a consistent regulatory backdrop against which to make employment decisions. But if you employ mortgage originators, how you should classify them depends largely on what political party controls the presidency. In 2006, the DOL reversed its prior interpretation and concluded that mortgage originators were exempt employees. In 2010, the DOL reinterpreted the law to once again classify originators as non-exempt. This term, the Supreme Court is mercifully hearing in a case in which it will decide whether or not the latest interpretation is, in fact, a rule change subject to the Administrative Procedures Act.
If this tendency towards reinterpreting law was limited to the DOL, no one would care. But the EEOC and the National Labor Relations Board, just to name two other agencies, have used this quasi-judicial process to clamp down on perceived discrimination against ex-convicts seeking employment and employers seeking to punish employers for comments they make on the Internet, respectively.
Increasingly, we are in a policy Neverland where the competing parties reinterpret laws so that they say what they think they should say and Presidents simply refuse to enforce laws they don’t like. In addition, regulators who are unrestrained by the regulations they are supposed to be interpreting are ideally suited to o replace your credit union’s judgments with their own This is why the overuse of the “safety and soundness” mantra is so pernicious.
Here are two changes that would go a long way towards ending regulatory overreach. First, let’s amend the Administrative Procedures Act so that even interpretations and guidance are categorically subject to notice and comment periods. Agencies could still issue Guidance, but stakeholders could weigh in on an agency’s logic and would know that additional regulation is coming.
Secondly, let’s limit in statute the amount of deference that courts can grant to agency interpretations of Congressional statutes. Congress would be forced to more carefully draft its legislation if it knew it couldn’t wait for agencies to give substance to laws. What a concept.
For example, whether you support or oppose the CFPB, there is something undemocratic about Congress empowering the CFPB to decide what a Qualified Mortgage is, and then criticizing the CFPB for the regulation it was charged with writing.
Reform of the Administrative Procedure Act may not sound all that exciting but it would give all credit unions a clearer more consistently applied regulatory framework. It would also help restore faith in our political system by making sure we remain a nation of laws, not regulatory whimsy. That is reform we can all get behind.