When the Truth in Lending Act became law in 1969, the Federal Reserve Board soon thereafter promulgated its implementing regulation, Regulation Z.  For many years, the Fed would respond to questions about TILA and Reg. Z orally over the phone or in writing through the issuance of unofficial staff letters and, infrequently, official staff letters.  Although some commercial publications like CCH would publish excerpts from the staff letters, the letters were never published by the Fed in the Federal Register and the unofficial staff letters were sent only to the person asking the question.  

The unofficial staff letters were often treated by the courts as if they had no binding effect.  While the official staff letters were viewed as more worthy of deference than the unofficial staff letters, until the U.S. Supreme Court’s decision in Ford Motor Credit v. Milhollin which held that the official staff letters were controlling unless demonstrably irrational, courts varied in the level of deference they would give to even the official staff letters.

Writing letters to respond to the huge volume of inquiries absorbed an inordinate amount of Fed staff time.  After considerable debate within and outside the agency about how to deal with this problem, the Fed developed the idea of substituting an Official Staff Commentary for the staff letters and issuing annual (and sometimes semiannual) updates that would be proposed for comment and be binding to the same extent as Reg. Z. 

Although the Fed never officially voted to approve or disapprove the Official Staff Commentary, the Fed delegated to the Director of the Office of Community and Consumer Affairs the authority to issue Official Staff Commentary.  Creditors relying in good faith on the provisions of the Official Staff Commentary were given a complete defense to liability under Section 130(f) of TILA.  The Official Staff Commentary was widely accepted by the industry and consumer advocates because it provided the predictability and transparency that was lacking in the staff letters.  The Fed subsequently began using Official Staff Commentaries for the other consumer finance regulations that it was charged with interpreting.

As everyone knows, the Dodd-Frank Act became law on July 21, 2010 and one year thereafter, jurisdiction to interpret the Fed’s consumer finance regulations was transferred to the CFPB.  While most observers thought that the CFPB would continue the Fed’s tradition of issuing annual or semi-annual updates to the Official Staff Commentaries, that turned out not to be the case.  The CFPB dropped the tradition like a hot potato.  With the exception of new regulations issued by the CFPB for which the CFPB issued new or revised existing Official Staff Commentary, the CFPB has not made a single change to the Official Staff Commentaries that existed on July 21, 2011 when it assumed jurisdiction from the Fed over these regulations. 

I initially attributed that to the fact that the CFPB had a very full plate on July 21, 2011 when it became operational.  However, the fact that the non-use of the Official Staff Commentary has persisted for the 11 years of its existence suggests to me, cynic that I am, that the CFPB intentionally decided not to use the Official Staff Commentary because it would require them to first publish changes in proposed form for comment and to then deal with adverse comments.  Admittedly, it is much easier for the CFPB to issue “guidance” by fiat from the Director.  But doing that comes with a great cost – a lack of transparency and predictability and much less certainty that it will be binding.

So what has the CFPB been doing to interpret the regulations over which it has jurisdiction?  The CFPB has done a potpourri of things including no-action letters, bulletins, Compliance Assistance Sandbox orders, Circulars, advisory opinions, blogs, interpretations, guidance, changes to exam manuals, speeches, etc.  None of these communication methods involve seeking comments from the public.  As a result, they all suffer from a lack of predictability and transparency.  And courts are not required to defer to them as they would be if they were in the form of Official Staff Commentary.

As the old adage goes, if it (the use of Official Staff Commentaries) ain’t broke, don’t fix it!  We encourage the CFPB to jettison these haphazard and seemingly arbitrary attempts to interpret its regulations with a revivification of the Official Staff Commentaries.

As a starting point in this process, I urge Director Chopra to convene a meeting of outside experts in the fields of consumer financial services and administrative law to take a fresh look at the potpourri of media that the CFPB has been using to provide guidance and to recommend what it should do to best serve its stakeholders.  As part of that review, the experts should consider if Official Staff Commentaries should be used.  Perhaps, the meeting should be jointly sponsored by the CFPB and the Penn Program on Regulation at the University of Pennsylvania.  (Director Chopra recently spoke at a session sponsored by this Penn Program.)

If Director Chopra refuses to convene such a meeting, then I think it is time for Congress to intervene through holding a public hearing on this topic.

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