In testimony before the House Committee on Small Business, U.S. Government Accountability Office (“GAO”) Director of Financial Markets and Community Investment Michael Clements shared the results of a new study identifying deficiencies in reviews conducted by financial regulators.
The reviews were conducted pursuant to the Regulatory Flexibility Act (“RFA”) and the Economic Growth and Regulatory Paperwork Reduction Act (“EGRPRA”). RFA requires federal agencies to analyze the impact of proposed and final rules on small entities and consider potential alternatives to rules that would have a significant economic impact. The EGRPRA requires financial regulators to conduct periodic retrospective rule reviews.
The GAO identified three areas in which rules were particularly burdensome for small entities:
- Data-reporting requirements related to loan applicants and loan terms;
- Transaction reporting and customer due diligence requirements under anti-money laundering regulations; and
- Disclosures of mortgage loan fees and terms to consumers.
The GAO found that the regulators should improve their RFA reviews. Specifically, the GAO identified deficiencies in (i) the sufficiency of certifications concerning the economic impact of rules, (ii) consideration of potential compliance costs, (iii) the disclosure of data sources and methodologies for estimating economic effects, and (iv) the adequacy of policies and procedures for RFA analyses. Among the regulators requiring improvement were the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the FDIC, the SEC, the CFTC, and the Consumer Financial Protection Bureau (“CFPB”).
As to EGRPRA reviews, the GAO observed that since the CFPB is not included in the statute mandating the review process, many important mortgage regulations were not assessed. The GAO determined that several regulators failed to (i) conduct or report on quantitative analyses relevant to reviewed rules, and (ii) consider the cumulative effects of regulations (i.e., overlapping or duplicative burdens).
Lofchie Comment: The findings contained in this GAO study are unsurprising. Generally, regulators do an insufficient job of evaluating the costs of the rules that they impose. Regulators have little incentive to find that their rules are costly or provide limited benefit. Further, political concerns produce more pressure to adopt new rules than to evaluate and remove unnecessary or deficient ones. The CFPB may be viewed as the poster child for that. The question is whether this type of behavior can be changed over the long term. It would seem unlikely that periodic GAO reviews are sufficient in this regard, particularly in the absence of any enforcement mechanism.