Jane Luxton

Jane Luxton

When Congress created the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) in 2010, it made the Bureau subject to a special provision in the Small Business Regulatory Enforcement Fairness Act (“SBREFA”), which applies to only two other federal agencies.

This action obligates the Bureau to fulfill an extra regulatory duty before it can issue a proposed rule that substantially affects small businesses.  The SBREFA process involves significant time and effort, requiring the Bureau to lay out the rule’s impact on small businesses, consider the input provided by small entity representatives, respond to their comments in a written report, and seriously assess any alternatives they suggest.  Not only does this put the Bureau to the test in setting forth and explaining its proposed approach, but the small business input is part of the formal administrative rulemaking record, and can be used in any legal challenge that dissatisfied parties may bring once the rule is finalized.

The SBREFA process is complicated and its workings may be of limited interest outside of administrative law practitioners, but it is a very important tool – and one of the few available – for financial service providers the CFPB has targeted for rulemaking.  Here are four reasons why:

  • SBREFA offers an “extra bite at the apple.”  Normally the first opportunity the regulated community has to provide comments that are part of the administrative record is when an agency issues a notice of proposed rulemaking.  When SBREFA applies, however, the selected small entity representatives have an extra chance to comment on the record, in the pre-proposal timeframe before the rule is fully developed and alternatives are still being considered.
  • The SBREFA process forces the CFPB to identify and explain the regulatory approach or approaches it is considering taking, including specifying the economic impacts these measures will have on small businesses.  While the CFPB often meets with interested parties, many have questioned these meetings’ effectiveness in accomplishing change, particularly without any means to hold the Bureau accountable.  In contrast, the SBREFA process is unique in compelling the Bureau to show its hand while the rule is still in the formative stage and requiring the Bureau to consider and respond to focused input.
  • Three federal agencies make up a SBREFA panel:  the CFPB, the Office of Advocacy (“Advocacy”) of the Small Business Administration, and the Office of Information and Regulatory Affairs of the Office of Management and Budget.  Advocacy’s role is to serve as a champion of small business in regulatory proceedings undertaken by other agencies, and comments it has submitted in rulemakings have pressured those agencies to make changes or risk adverse inferences in follow-on court litigation.  In one noteworthy case, a federal judge quoted Advocacy criticism in striking down an agency rule, calling the office the “watchdog” of administrative law requirements relating to small business.  Advocacy has shown itself willing to submit tough, critical comments in recent CFPB rulemakings.
  • The SBREFA process has produced changes in agency rule proposals.  In some cases, the differences have been small, but in others significant modifications have resulted.  Advocacy credits SBREFA review for saving billions of dollars in costs to regulated entities.

Using the SBREFA process effectively depends upon good planning and development of credible data.  For example, in the recently published CFPB Outline of Proposals Under Consideration and Alternatives Considered for the SBREFA panel on payday, vehicle title, and similar loans (March 26, 2015), the CFPB provided no actual economic impact data based on small business-sourced numbers, relying instead on extrapolations from large entity information obtained during the supervisory process.

While these calculations were shocking enough (revenue reductions ranging from 60% to 84%), it was plain that any small lender data would have to be collected and submitted by commenters.  Obviously, developing this kind of analysis and other litigation-worthy research can only succeed with careful planning and considerable lead time.  Similarly, identifying the best candidates to serve as small entity representatives for the SBREFA process and other strategy and planning considerations require investments of time and effort well in advance of the expected convening date for the panel.

Financial service providers that expect to be targeted for CFPB rulemaking should begin now to plan an effective SBREFA strategy.  Through its recognition of the importance of considering adverse impacts on small business early in the process, SBREFA offers great potential to educate the CFPB, propose less burdensome alternatives, improve the Bureau’s proposal, and place data and other evidence in the administrative record.  The most effective use of these SBREFA tools requires advance planning and well thought-out strategy development and, as with many complicated but worthwhile undertakings, starting sooner rather than later is the best course.

Jane C. Luxton is a Member of Clark Hill PLC’s Washington, DC office.  She has extensive experience with administrative law issues, including the Small Business Regulatory Enforcement Fairness Act (“SBREFA”).  She is actively advising clients on SBREFA and other matters in the consumer financial services market.  

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