Board Should Enhance Compliance with Small Entity Compliance Guide Requirements Contained in the Small Business Regulatory Enforcement Fairness Act of 1996

Introduction

Objective

The Office of Inspector General (OIG) assessed the Board of Governors of the Federal Reserve System's (Board's) compliance with the small entity compliance guide requirements of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended (SBREFA). We initiated this evaluation to determine the validity of an OIG Hotline complaint concerning the Board's compliance with these SBREFA requirements.

Background

Small Entity Compliance Guide Requirements 

SBREFA became law in 1996 and was later amended by the Small Business and Work Opportunity Act of 2007 to include specific requirements for small entity compliance guides.¹ Under section 212(a)(1) of SBREFA, an agency must create a compliance guide if a final regulatory flexibility analysis (FRFA) indicates that the rule would have a significant economic effect on a substantial number of small entities.² As part of the FRFA, an agency must include in the final rule a synopsis of the significant issues raised as a result of public comment and, among other things, describe the number of small entities affected by the rule.³ However, section 605(b) of the Regulatory Flexibility Act generally allows the agency head to certify in the Federal Register, as part of the proposed or final rule, that the final rule will not have a significant economic impact on a substantial number of small entities. If the agency head certifies that there is no significant impact, then an FRFA does not have to be performed and a compliance guide does not have to be created.

The Small Business and Work Opportunity Act of 2007 amended SBREFA to require an agency to satisfy the following small entity compliance guide requirements:

• Publish one or more guides to assist small entities in complying with the rule, and title such publications "small entity compliance guides."
• Publish any guides in an easily identified location on the agency's website.
• Distribute any guides to known industry contacts affected by the rule, such as small entities, associations, or industry leaders.
• Publish any guide on the same date as the date of publication of the final rule (or as soon as possible after that date), but no later than the effective date of the rule.
• Explain the actions a small entity should take to comply with a rule, including actions to (1) meet the requirements of a rule and (2) enable a small entity to know when such requirements have been satisfied.
• Use sufficiently plain language likely to be understood by affected small entities in accordance with the agency's sole discretion, taking into account the subject matter of the rule and the language of relevant statutes.

The 2007 amendments to SBREFA also created an annual congressional reporting requirement related to small entity compliance guides. To comply with this requirement, the agency head must submit to the Senate Committee on Small Business and Entrepreneurship, the House Committee on Small Business, and any other committee of relevant jurisdiction a report describing the agency's compliance with small entity compliance guide requirements. This annual reporting requirement became effective May 25, 2008.⁴

In accordance with SBREFA, the Board has published small entity compliance guides for 21 regulations. The Board's public website indicates that the purpose of the guides is to (1) encourage the effective participation of small businesses in the federal regulatory process, (2) simplify the language of federal regulations affecting small businesses, and (3) develop more accessible sources of information on the regulatory and reporting requirements for small businesses. Depending on the regulation's content, guides may contain links to required forms, Official Staff Interpretations, and contact information for additional questions.⁵

It is important to note that section 1061(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act generally transferred the authority to prescribe rules, issue orders, and produce guidance related to federal consumer financial laws from the Board to the Consumer Financial Protection Bureau (CFPB) on July 21, 2011.⁶ Therefore, rulemaking authority concerning federal consumer financial laws that may affect small entities has been transferred from the Board to the CFPB.⁷ Nevertheless, the Board retains rulemaking authority for specific consumer protection rules that might affect small entities, including the Community Reinvestment Act, the National Flood Insurance Act, one provision of the Electronic Fund Transfer Act, and two provisions of the Fair Credit Reporting Act.⁸

OIG Hotline Complaint 

On January 26, 2011, the OIG Hotline received an e-mail complaint concerning the Board's proposed rule related to loan originator compensation (74 Fed. Reg. 43,232 (Aug. 26, 2009)). The complaint outlined several concerns related to the Board's rulemaking process for the proposed rule. One of the concerns the complainant discussed with the Board's "regulatory staff" was that the Board did not adequately meet the small entity compliance guide requirements contained in SBREFA.

The complainant referred to concerns in two memorandums from the U.S. Small Business Administration's (SBA's) Office of Advocacy.⁹ In its first memorandum, dated January 13, 2011, the Office of Advocacy expressed concerns that the Board did not publish a compliance guide for Regulation Z, Truth in Lending. The Office of Advocacy noted that its concerns did not reflect the views of the SBA as a whole. The Board posted a compliance guide related to the loan originator compensation rule prior to the rule's effective date. Subsequently, the Office of Advocacy sent a memorandum that expressed concerns that the Board's compliance guide for Regulation Z "may not meet the requirements of SBREFA." In addition, the Office of Advocacy "[did] not believe that the guide ha[d] sufficient information to enable a small entity to know when the requirements [of the loan originator compensation rule] ha[d] been met."¹⁰ However, a Board official indicated that Board attorneys reviewed the compliance guide and concluded that the guide complied with SBREFA.

In response to the Hotline complaint and the complaint raised to the Board's regulatory staff, representatives from the Board's OIG met with the complainant. The OIG initiated this evaluation to assess the Board's compliance with SBREFA.

• 1. The Small Business and Work Opportunity Act of 2007 appears in the U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007 (Pub. L. No. 110-28, 121 Stat. 112, 204-05 (2007)).   Return to text
• 2. Under regulations issued by the U.S. Small Business Administration (SBA), an entity is considered small if it has $175 million or less in assets for banks and other depository institutions and $7 million or less in revenues for nonbank mortgage brokers.   Return to text
• 3. SBREFA defines "agency" as it appears in 5 U.S.C. § 551, which defines an agency as "each authority of the Government of the United States, whether or not it is within or subject to review by another agency, but does not include, (1) the Congress; (2) the courts of the United States; (3) the governments of the territories or possessions of the United States; (4) the government of the District of Columbia..."   Return to text
• 4. The reporting requirement became effective a year after the enactment of the Fair Minimum Wage Act of 2007.   Return to text
• 5. Generally, the Board issues interpretive guidance and commentary on its regulations through Official Staff Commentaries or Official Staff Interpretations.   Return to text
• 6. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, §1061(b), 124 Stat. 1376, 2036 (2010) (codified at 12 U.S.C. § 5581(b)).   Return to text
• 7. While our office is the Inspector General for the Board and the CFPB, the scope of this evaluation is limited to the Board's compliance with SBREFA. As part of this evaluation, we did not test the CFPB's compliance with SBREFA requirements for any rulemakings.   Return to text
• 8. Consumer protection rulemaking concerning most automobile dealers also remains with the Board.   Return to text
• 9. The Office of Advocacy is an independent office within the SBA. The memorandums are located in the "Newsroom" section of the Office of Advocacy's website and can be found at http://www.sba.gov/advocacy/808/13715.   Return to text
• 10. As an independent office within the SBA, the Office of Advocacy's views do not represent the views of the SBA.   Return to text