Regulatory contracts needed to hold consumer financial bureau accountable

New leadership at the Consumer Financial Protection Bureau promises a whole new approach to running the agency. A new director will have the opportunity to swiftly implement a law-based approach to rule-making through rescinding guidance, changing enforcement priorities, and placing more rules through a more transparent notice and comment process. New leadership will be able to accomplish this objective in part because of the unprecedented independence and authority Congress placed in that agency.

But what’s to stop the next CFPB director from falling into politically motivated abuses of discretion? The same discretion afforded to the agency could once again be used to swing the agency’s priorities away from a rule of law approach, and away from clear guidance to help foster innovation in consumer finance. One tool the CFPB could use to cement interpretations of rules is the regulatory contract.

Consider the case of U.S. v. Winstar Corp. During the aftermath of the Savings & Loan (S&L) crisis, the Office of Thrift Supervision encouraged healthy thrifts to buy up distressed thrifts, and along the way they made promises to healthy thrifts in binding contracts about which accounting methods they could use in determining regulatory capital requirements.

Congress later changed the law, but the Supreme Court upheld the binding commitment by the Office of Thrift Supervision and awarded damages to the thrifts that relied on the promises of their regulator. This was a particularly strong case because Congress changed the law! The Supreme Court found in Winstar that the regulatory agency assumed the risk of subsequent legal change as an agent of the government in the contract.

The Supreme Court explicitly recognized the legitimacy of agency’s entering into binding contracts to accomplish regulatory objectives. Subsequent cases interpreting Winstar have been unwilling to second guess the elements of the contract, like offer, acceptance, or consideration, and instead err in favor of holding government agencies to their regulatory contracts.

The government is held to a high standard in regulatory contracts, and even when underlying promises are found to involve technical violations of law, the regulated party often wins anyway. The court reasons that the government is in a better position to interpret the law than the regulated party, and the government is held to a high standard of good faith dealing.

Read more of this The Hill op-ed by J.W. Verret by clicking here.

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