Small Biz 'Fairness' Law Revolutionizing Consumer Regulatory Landscape

WASHINGTON — A statute long relegated to the environmental regulatory landscape is transforming the way consumer financial regulations are implemented.

For years, the Small Business Regulatory Enforcement Fairness Act had applied only to the Environmental Protection Agency and, more recently, to the Occupational Safety and Health Administration, or OSHA.

The Dodd-Frank Act extended the law to the Consumer Financial Protection Bureau, requiring for the first time that a financial regulator meet with small institutions before proposing any rule that would significantly impact them.

"It's a revolutionary way, certainly in this space, for regulations to be developed," said Richard Eckman, a consumer financial lawyer with the law firm Pepper Hamilton. "The main attraction and the reason SBREFA is special is it gives the small business a unique opportunity to interact with an agency at an early stage of its thinking and help shape the rule."

"So by the time it's proposed, it already has embedded in it the best input the agency can get in how to tailor the rule to minimize the impact on small business."

Still, the process remains a bit of a mystery to many in the financial industry who are waiting to see the extent to which SBREFA influences the fledgling agency's rules. Some industry observers have raised concerns that CFPB is rushing the process to meet deadlines, while consumer advocates say the bureau's critics are trying to drag out the implementation of important rules.

"It's fairly clear that the financial interests behind these complaints don't support CFPB's efforts to put strong consumer protection rules on the books," said Travis Plunkett, legislative director for the Consumer Federation of America. "So in a situation like that, the goal is delay, delay, delay."

Under the SBREFA statute, CFPB must convene a panel with representatives from the Small Business Administration's chief counsel for advocacy and the Office of Management and Budget's Office of Information and Regulatory Affairs when it believes a rule will have a significant impact on small businesses.

The three agencies select about 15 to 20 small businesses — mostly banks and financial services providers — representing the industries that might be impacted. The bureau provides an outline of the proposal it is considering, and a list of questions it is specifically interested in addressing with the participants.

The group is invited to meet with the panel in Washington, and each is allowed to bring a lawyer or advocate from a trade association, although that person is not allowed to speak during the meeting.

The agency has held three such meetings — lasting about eight hours each — with three different groups of small businesses: one on a proposal to merge the disclosures under the Truth in Lending Act and Real Estate Settlement Procedures Act, one on mortgage servicing rules, and one on mortgage loan originator compensation.

So far, the feedback has been largely positive.

"I think overall it went very well," said Randy McElwee of the $183 million-asset Security Savings Bank in Monmonth, Ill. "I was impressed with the high level of attendees from the CFPB, all the way up to [CFPB Director] Richard Cordray being there in the morning."

"I felt that there was a good effort on their part to show that they truly were interested in listening and learning to allow them to make better decisions about where they go from here."

The meetings are conducted largely in question-and-answer format, with questions hewing closely to the topics outlined in the advance materials.

After each meeting, the panel — including representatives from CFPB, SBA and OMB — has 60 days to prepare a report outlining the feedback it received. During that time, participants also have seven to 10 days to submit additional written comments.

The report, which is published as part of the formal proposed rule, will also explain the panel's findings and recommendations for tailoring the rule to minimize the impact on small businesses.

Both sides are anxious to see the extent to which the agency incorporates the small business feedback into its final proposal.

"People can judge by the reports, and I think what they will find is that the reports reflect a great degree of diligence on the panel's part … to get as much feedback as we reasonably can," Dan Sokolov, CFPB's deputy associate director for research, markets and regulation, said in an interview last week. "And people can also judge — and I think they will judge favorably, but we'll see — that we are responsive to those reports and the recommendations in them, and the feedback that they contain."

Sokolov said the bureau can't promise to include every recommendation from the panel, but "you will see us often following those recommendations."

In some ways, the process is remarkably open, said Richard Riese, a senior vice president at the American Bankers Association and head of the ABA's Center for Regulatory Compliance. The bureau has provided details aplenty about the rules it is considering, and to a greater extent than EPA or OSHA has previously done.

But in other ways the agency is more guarded, for example, only notifying the small business participants a few weeks before the panel meets, Riese said.

Ron Haynie, executive vice president of mortgage services for the Independent Community Bankers of America, said the preparation required in such a short amount of time makes it difficult for some small entities to participate, even if they wanted to.

"When people can participate by teleconference, it's not the same because the dynamic that's there when people are in the room just makes it a better experience for everyone."

Riese noted that the agency also keeps the names of participants private, even from each other and from the trade groups that recommended them.

"It makes it difficult to have much of an interactive process because you meet once and that appears to be it," he said. "It's certainly not the kind of interactive approach that has characterized the use of the SBREFA process in the EPA rulemaking situation, where there tends to be a longer ramp up ahead of the panel meeting."

Indeed, the bureau is forging its own path when it comes to complying with the statute, said Jane Luxton, Eckman's partner at Pepper Hamilton and an environmental lawyer who has studied the SBREFA process since it began in 1996.

Luxton said a typical EPA panel will prepare for anywhere from two to eight months before meeting with small business representatives, and its guidelines call for creating a dialogue with participants before the panel meets.

The EPA also puts out its initial thinking on a proposal, gets feedback from the participants, meets with the SBA and OMB, then sends out a second document to be discussed at the meeting.

"All of those earlier steps were skipped in the CFPB process, so they're really only giving them one bite at the apple for materials that only were prepared by CFPB," Luxton said. "So that too is another way this is all being rushed."

Complaints that the process is rushed don't come as any surprise to consumer advocates.

When lawmakers first proposed an amendment to add the bureau to SBREFA, the industry openly referred to it as the "speed bump amendment," intended to slow down the rulemaking process.

Plunkett said the bureau's supporters view the statute as an unnecessary impediment to consumer protection — Dodd-Frank already requires the agency to carefully consider the impact of pending regulations — that would delay the rulemaking process by up to nine months.

"It would give the financial services industry even more time than they already have to kill strong regulatory proposals," Plunkett said.

Sokolov said much of the timing depends on the statutory requirements the bureau faces in implementing several important rules. The TILA/RESPA proposal must be finalized by July 21, while a handful of other proposals are scheduled to take effect in January.

If the bureau were to delay the formal rulemaking process, its goal of providing guidance before a statute takes effect would be put in jeopardy, Sokolov said.

"What we're providing is as much time as we can for this pre-proposal input for small financial services providers panel, consistent with meting that goal," he said. "It's important to remember that after we issue the proposal, there's a whole other round of input … through formal comments on the record."

He also said the bureau intends to review the SBREFA process and consider possible changes after it tackles the slew of mortgage-related rules set to take effect next year.

In the meantime, the bureau will make small adjustments as it goes.

"As an agency we have a culture of doing lessons learned, looking back and seeing how we can do better," he said. "That's kind of wired into us."