Ensuring Balanced Financial Regulation

Photo of a business personCongress passed the Dodd-Frank Act 8 years ago in response to the worst financial crisis in more than 75 years. In May of this year, Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act. Both the new law and the Dodd-Frank Act authorized or directed federal agencies to issue regulations that were aimed at improving financial regulation.

Generally, when agencies draft or implement regulations, they are required to analyze the potential impact of those regulations on small entities—such as community banks and credit unions. Today’s WatchBlog looks at our recent work on how regulators have been meeting the requirements to maintain a level playing field for small entities.

Regulations can create challenges for small banks

Financial regulators and others note that regulations provide benefits such as protecting mortgage borrowers from lending discrimination or facilitating anti-terrorism and anti-money-laundering efforts. However, complying with regulations can create costs and burdens. More than 60 community banks and credit unions told us that the most burdensome regulations were those requiring them to

  • report mortgage characteristics,
  • review transactions for potentially illicit activity, and
  • disclose fees, conditions, and mortgage terms to consumers.

They said these regulations were time-consuming and costly because the requirements were complex and the reporting had to be reviewed for accuracy.

Proposed rules not analyzed thoroughly

The Regulatory Flexibility Act lays out rulemaking requirements for federal agencies, including financial regulators. The act aims to have agencies tailor rules to the scale of the entity being regulated in a manner consistent with the objectives of the rule—so smaller banks are not necessarily expected to bear the same regulatory burdens as larger banks. Generally, agencies must assess a proposed rule’s impact on small entities and consider alternatives to minimize any significant economic impact. In lieu of this analysis, agencies may certify that a potential rule will not have a significant economic impact on a substantial number of small entities.

We reviewed six regulators’ analyses and found:

  • Evaluation and information were limited. For example, some evaluations didn’t describe or estimate compliance costs at all, even though that’s required. Similarly, many certification decisions we reviewed lacked key information, such as discussions of data sources or methodologies and consideration of broader economic impacts. This could undermine the goal of regulatory flexibility.
  • Supporting documentation was mostly unavailable. According to the Office of Management and Budget’s guidance, agencies should document that regulatory analysis is based on the best information they could get. While independent regulatory agencies aren’t subject to OMB guidance, this is a strong practice that could increase transparency and accountability.
  • Comprehensive policies and procedures were not in place.These could have helped regulators complete more effective analyses.

Missed opportunities in retrospective reviews

The Regulatory Flexibility Act and another law require further analyses by certain agencies within 10 years of a rule’s publication and at least every 10 years thereafter. In these retrospective reviews, we found that regulators had not analyzed quantitative data, nor had they assessed the cumulative effect of regulations. As a result, they may be missing opportunities for better, more transparent assessments.

We also found that some regulators were using the process for one law to fulfill requirements for the other—even though the requirements do not fully align. As with the proposed rulemaking reviews, we found that regulators generally have not developed policies and procedures for retrospective reviews.

Check out our two reports to learn more about the 20 recommendations we made to financial regulators to improve their policies, procedures, and analyses.


  • Questions on the content of this post? Contact Lawrance Evans, Jr., at evansl@gao.gov.
  • Comments on GAO’s WatchBlog? Contact blog@gao.gov.
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