Last April, the Consumer Financial Protection Bureau issued this Bulletin cautioning supervised banks and certain non-depository financial services companies that they must have “an effective process for managing the risks of service provider relationships”. Like many regulatory requirements, the Bulletin has given birth to both a new industry and unintended consequences.
The new industry is third-party risk management. This is a screening service provided to financial service firms that are looking to retain third party service providers. The unintended consequence is the practice of these third-party risk managers charging fees to the service providers for placement on approved vendor lists.
Earlier this week, the Department of Corporations issued its own Bulletin warning that it will be looking closely at the business arrangements of its licensees under the California’s lending and escrow laws that involve third-party risk management companies. The Bulletin identifies the following potential issues:
The Escrow Law’s prohibition on paying referral fees (Cal. Fin. Code § 17420);
Buyer’s Choice Act, Cal. Civ. Code § 1103.22 et seq. (AB 957 (Chap. 264, Stats. 2009));
Prohibitions on kickbacks under the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. § 2607(a); and
Unfair business practices (Cal. Bus. & Prof. Code § 17200).
The CFPB’s use of a bulletin to announce its “expectations” is questionable. The Administrative Procedure Act requires that agency rules generally be adopted by notice (publication in the Federal Register) and an opportunity for public comment. 5 U.S.C. § 553. In addition, agencies are required to “separately state and currently publish in the Federal Register for the guidance of the public”, among other things, “substantive rules of general applicability adopted as authorized by law, and statements of general policy or interpretations of general applicability formulated and adopted by the agency”. 5 U.S.C. § 552(a)(1)(D).
What happens if the agency doesn’t publish as required? I expect that many would be surprised that the statute provides:
“Except to the extent that a person has actual and timely notice of the terms thereof, a person may not in any manner be required to resort to, or be adversely affected by, a matter required to be published in the Federal Register and not so published.”
In fact, Congress included this provision as a carrot for agencies to publish:
“An added incentive for agencies to publish the necessary details about their official activities in the Federal Register is the provision that no person shall be ‘adversely affected’ by material required to be published — or incorporated by reference — in the Federal Register but not so published.”
H. R. Rep. No. 1497, 89th Cong., 2d Sess., 7 (1966). See S. Rep. No. 813, 89th Cong., 1st Sess., 6 (1965); S. Rep. No. 1219, 88th Cong., 2d Sess., 12 (1964). [Note as I've said many times, this blog isn't legal advice and don't read this post as permission to ignore the CFPB or any other agency.]
A Tautology, Really?
Yesterday, Professor Stephen Bainbridge posted a blog entry entitled “Memo to Bebchuk and Fried: They say your theory is a tautology“. He then quotes from a forthcoming paper by Stefan Winter and Philip Michels,The Managerial Power Approach – A Tautology Revisited. Professors Winter and Michel don’t mince any words:
The positive association between power and pay follows already and only from the very definition of “power” and therefore cannot be empirically tested. This leads to the conclusion that the core statement of the managerial power approach is nothing more than a tautology.
I won’t wade into this debate amongst heavyweight academics, but I was puzzled by the use of the word “tautology” which is derived from two Greek words,ταὐτός (same) and λόγος (word). I don’t think it is correct to say that a theory is a tautology since there is no redundancy (“theory” is, after all, one word). I suppose what they mean is that the Professor Bebchuk’s and Fried’s theory is like a Möbius Strip – it appears to have two components (power and pay) but it really has one (power).