The CFPB Complies With Section 1100G of the Dodd-Frank Act, but Opportunities Exist for the CFPB to Enhance Its Process

Finding 1: RMR Could Benefit From Updated and Finalized Rulemaking Guidance

RMR has not updated or finalized its interim policies and procedures that guide each rulemaking team's analysis and ensure compliance with the requirements of section 1100G of the Dodd-Frank Act. Further, the interim guidance on conducting regulatory analysis affords considerable discretion to each rulemaking team, which has led to inconsistency among teams' approaches to rulemaking. While this discretion in the interim guidance does not appear to have been a contributing factor, we noted one instance of technical noncompliance with a statutory deadline. The Standards for Internal Control in the Federal Government, issued by the Comptroller General of the United States, provides the framework for internal control concerning an agency's policies and procedures. The Standards for Internal Control in the Federal Government states that management must continually assess and evaluate its internal controls to ensure that the control activities being used are effective and updated when necessary. According to RMR, because of the pace of change during the CFPB's first two years of operation, it has not updated or finalized the guidance documents. Updated and finalized guidance that reflects lessons learned from issuing proposed and final rules would (1) reduce variability and reinforce consistent and timely rulemaking activities and (2) support the agency's goal of achieving consistency and efficiency in its regulatory flexibility analysis approach.

Guidance Is Not Final and Has Resulted in Varying Approaches to Rulemaking

We believe that updated and finalized versions are warranted for RMR's two interim documents that govern the rulemaking process:

• Interim Guidance on Regulatory Analysis for Substantive Rulemakings under the Dodd-Frank Act
• Interim Guidance on the Small Business Review Panel Process under the Regulatory Flexibility Act, as amended by the Small Business Regulatory Enforcement Fairness Act and the Dodd-Frank Act

The division has used these interim documents for approximately two years. According to Standards for Internal Control in the Federal Government, agency management must ensure that control activities, such as policies, are effective and updated when necessary. RMR attributes the interim state of its guidance documents to the pace of change during the CFPB's first two years of operation. We believe that the agency currently has an opportunity to assess the lessons learned from issuing proposed and final rules over the last two years and issue updated, final guidance.

Further, the CFPB's interim guidance on regulatory analysis states that each rulemaking team has "substantial discretion" to develop its rulemaking process. As a result, staff may deviate from the provisions of the guidance after appropriate consultation with the Office of General Counsel and notice to RMR's Associate Director or Deputy Associate Director. 

We evaluated six rules, and our testing revealed the following two examples of inconsistent approaches to RMR's rulemaking:⁹

1. Variance in Documentation. The internal guidance states that in situations in which the agency would certify that the rule would not have a SISNOSE, the CFPB Director should be provided a memorandum that includes the factual basis for the recommendation to certify and a recommendation on whether a small business review panel should be convened. We found that for one rule regarding appraisals for higher-priced mortgage loans, the RMR rulemaking team recommended that the rule be certified as not having a SISNOSE at the proposed and final rulemaking stage. For the proposed rule certification, RMR provided the recommendation to the Director in a memorandum, consistent with the approach outlined in the interim guidance on regulatory analysis. For the final rule certification, however, the rulemaking team did not draft a formal memorandum to communicate the factual basis for certification to the Director. However, the Director performed a review of the final rule text, which included the factual basis and certification statement, prior to issuance into the Federal Register. The rulemaking team indicated that the factual basis for certification did not materially change between the proposed and final rule stages and, therefore, did not warrant a second formal certification memorandum. Nevertheless, the rulemaking team did not document its rationale for not issuing a formal certification memorandum to the Director during the final rulemaking stage.
2. Variance in Knowledge Transfer. During the scope of our evaluation, RMR reassigned staff to various teams, and rulemaking teams experienced turnover during our reporting period. In our discussions with RMR, we noted that rulemaking staff members who were reassigned used their discretion in transferring knowledge to remaining staff members; the transfer was informal and inconsistent because the guidance does not address how to transfer institutional knowledge when turnover occurs.

Guidance Should Reinforce the Importance of Compliance With Statutory Deadlines

Separate from the discretion afforded by the interim guidance on regulatory analysis, we found an isolated instance of technical noncompliance with a statutory reporting requirement previously contained in the RFA prior to the enactment of the Dodd-Frank Act. Our evaluation of the CFPB's rulemaking found that on May 9, 2012, the CFPB, the SBA Advocacy Counsel, and OMB's Office of Information and Regulatory Affairs convened a small business review panel for the Loan Originator Compensation Requirements Under the Truth In Lending Act rulemaking.¹⁰ Under the RFA, and reinforced by the CFPB's internal interim guidance, the interagency small business review panel should have issued a panel report within 60 days. Sixty days from May 9, 2012, was July 8, 2012, a Sunday. Using the computation requirements in Federal Rule of Civil Procedure 6(a), the 60-day period was extended to the end of the following day, Monday, July 9, 2012.¹¹ The interagency small business review panel issued the Small Business Review Panel report on Wednesday, July 11, 2012, two days after the statutory deadline. We understand that the panel missed the deadline because it conducted two additional conference calls with small entity representatives to solicit their feedback as part of the outreach process. These calls provided additional opportunities for the small entity representatives to understand certain aspects of the proposals under consideration, provide responses to representatives' questions, and provide additional comments.

Our evaluation testing covered every rule that the CFPB concluded would require a small business review panel. This missed deadline was an isolated instance. The small business review panel is an interagency effort, and we did not identify any consequences resulting from the missed deadline. While we understand and acknowledge the circumstances surrounding the missed deadline, including the benefits to be derived from additional feedback, we believe the CFPB exposes itself to potential criticism as a result of missing congressionally mandated deadlines. Therefore, as part of the effort to finalize the interim guidance on small business review panels, RMR should consider implementing preventive internal controls, such as a milestone tracking tool, that could minimize the risk of noncompliance with any statutory rulemaking requirement. Although the lack of such controls may not have contributed to the missed deadline, we believe it may be prudent to implement an internal control system that can track the progress toward meeting reporting deadlines. The agency should also consider implementing additional monitoring measures, such as regular reports on rulemaking milestones with distribution to the appropriate members of management and staff accountable for statutory rulemaking compliance.

Management Actions Taken

Following the completion of our fieldwork and during our report drafting phase, we were informed by CFPB officials that RMR had reevaluated its policies and procedures on regulatory analysis and the small business review panel process. RMR finalized and reissued Guidance on Regulatory Analysis for Substantive Rulemakings and Guidance on the Small Business Review Panel Process under the Regulatory Flexibility Act, as amended by the Small Business Regulatory Enforcement Fairness Act and the Dodd-Frank Act. Although we did not perform additional testing, we noted that the finalized guidance on regulatory analysis provides additional direction on the final rule certification memorandum process. We will review the updated materials as part of the follow-up process for our recommendations.

Recommendation

We recommend that the Associate Director of RMR

1. Finalize Interim Guidance on Regulatory Analysis for Substantive Rulemakings under the Dodd-Frank Act and Interim Guidance on the Small Business Review Panel Process under the Regulatory Flexibility Act, as amended by the Small Business Regulatory Enforcement Fairness Act and the Dodd-Frank Act based on lessons learned since the implementation of these two guidance documents. Among other things, the final documents should address

1. 1. procedures for certifying that a rule would not have a SISNOSE.
   2. knowledge sharing and transfer within rulemaking teams.
   3. the importance of meeting statutory deadlines.
   4. the implementation of preventative internal controls that could minimize the risk of noncompliance with statutory deadlines.
   5. measures for monitoring statutory rulemaking compliance.

Management's Response

The Associate Director of RMR concurred with this recommendation. In his response, the Associate Director noted that the CFPB currently has an opportunity to assess the lessons learned from issuing proposed and final rules over the last two years.

The Associate Director stated that since the conclusion of our fieldwork, RMR has reevaluated and reissued finalized versions of its internal policies and procedures on regulatory analysis and the small business review panel process. Among other things, the updated policies clarify the final rule certification memorandum process. The CFPB will continue to update and refine its internal guidance as necessary to clarify and address the specific items suggested in this report.

OIG Comment

We believe that the actions described by the Associate Director of RMR are responsive to our recommendation. We intend to follow up on RMR's actions to ensure that this recommendation is fully addressed.

• 9. See appendix B for details of the sample selected.  Return to text
• 10. Each agency participating in a small business review panel must sign the panel's report before it can be issued.   Return to text
• 11. Federal Rule of Civil Procedure 6(a) requires that for any statute that does not specify a method of computing time, the period of time is calculated by beginning on the day after the event that triggers the period and counting every day including intermediate Saturdays, Sundays, legal holidays, and the last day of the period. However, if the last day is a Saturday, Sunday, or legal holiday, Rule 6(a) provides that the period continues to run until the end of the next day that is not a Saturday, Sunday, or legal holiday.  Return to text