Former CFPB Director argues that businesses often prefer clear prescriptive rules over general standards.
For Thomas Hobbes, life for humans in the state of nature, before government imposed order, was “nasty, brutish, and short.” So nasty that, for their own self-interest, individuals agreed to give up absolute liberty in exchange for a society ruled by a sovereign authority.
Political theory has evolved since 1691, but the basic idea has remained the same: At a minimum, society needs a certain number of rules to be created—and then enforced—if it is to function and prosper well.
That same theme was reflected in a recent lecture at the University of Pennsylvania Law School featuring Richard Cordray, the first Director of the Consumer Financial Protection Bureau (CFPB). Cordray argued that a certain amount of regulation is needed for businesses to prosper in today’s society.
Perhaps it is little surprise that the head of a regulatory agency would find regulation to be good for business. But what might be more surprising is that Cordray found, when heading the CFPB, that many businesses actually solicited regulations from the agency. Businesses often wanted detailed and specific regulations.
These businesses wanted regulations because they were already constrained by statutes passed by the U.S. Congress—but the statutes were usually worded in broad language. To make statutes clearer and more specific, they must be interpreted either by agencies through regulations or by courts in resolving individual lawsuits. But unlike most agency regulations, judgments made by courts often rely on general standards and do not necessarily provide much clarity or specificity.
Although judgments made by courts might afford greater latitude of business activity, decisions made by a regulatory agency provide greater clarity, efficiency, consistency, and expertise, Cordray argued.
Cordray illustrated this point with debt collection law, which, based on just the statue, is generally sparse and even ambiguous.
When the U.S. Congress passed the Fair Debt Collection Practices Act (FDCPA) in 1977, it failed to give any administrative agency authority to write rules to interpret and apply the statute. As questions have arisen over what the FDCPA means, they have needed to be litigated. As a consequence, debt collection law is largely judge-made law.
In the case of Henson v. Santander, for example, the U.S. Supreme Court addressed whether the FDCPA applies to debt buyers. When Congress passed the FDCPA, only two types of debt collectors existed: originators and third-party debt collectors. Years later, a third kind of debt collector emerged—the debt buyer.
A debt buyer purchases debt from an originator and then collects on those debts just like a third-party debt collector, except that a buyer actually owns the debt. Is a debt buyer, then, more like an originator—not covered by the FDCPA? Or is it more like a third-party debt collector—covered by the FDCPA?
The only way debt buyers could get an answer was to pursue litigation, which is expensive and time consuming. Moreover, as the question gave rise to multiple lawsuits around the country, different courts gave different answers at different times.
What should debt buyers do in the meantime? Which court should they listen to? How could they avoid an enforcement action? How could they plan for their future?
Ultimately, the Supreme Court became the arbiter of the legal question concerning debt buyers, even though, as Cordray emphasized, the Court had no prior experience or skill in the debt collection industry.
With no expertise in the industry to rely on, the Court turned to generic tools of statutory construction, treating the issue largely as a language puzzle. But it did not know the consequences of solving the puzzle one way versus another.
Even when the Supreme Court does step in, as it did in Henson, it often fails to resolve key issues clearly. Lower courts are then forced to reinterpret the Supreme Court’s decision, which perpetuates the cycle of litigation and exacerbates the uncertainty for business.
By contrast, if Congress had given a regulatory agency the authority to answer the question presented in Henson, the agency could have initiated the rulemaking process just as soon as debt buyers emerged on the scene. Businesses would not have needed to spend money litigating the issue and time waiting for eventual clarity from the courts.
The agency would have been able to have engaged in a notice-and-comment process to write a regulation applicable to all debt buyers. It would have been able to bring to this task its extensive knowledge of the industry, not just of general principles of statutory interpretation. Perhaps most importantly, the agency would have been able to decide the answer definitively by issuing a binding, nationally applicable regulation.
The lack of rulemaking power under the FDCPA changed in 2010 when Congress adopted the Dodd-Frank Wall Street Reform and Consumer Protection Act. This more recent law amended the FDCPA, creating the CFPB and allowing this new agency to “prescribe rules with respect to the collection of debts by debt collectors.”
Cordray said that, for many questions, businesses do not care as much about what answer they get so long as they get an answer. With a clear answer, they gain certainty and can then make their business plans with the law in mind.
“This is not to say that regulation is an unalloyed good, or that additional regulation is always good for business,” Cordray emphasized. “But it is also not the case that less regulation is always good for business—often it is not, and often businesses will admit that.”
Cordray’s lecture was organized by the Institute for Law and Economics at the University of Pennsylvania Law School and it was co-sponsored by the Leo Model Foundation Government Service and Public Affairs Initiative and the Penn Program on Regulation.