With apologies to the Temptations, the title to their classic song seems to apply to the current state of leveraged lending and other supervisory guidance issued by various regulatory agencies in the United States.

Last week, two banking industry trade groups took the unusual step of petitioning1 the US prudential banking regulators2 and the Bureau of Consumer Financial Protection (“CFPB” and, together with the Banking Agencies, the “Agencies”) for a formal rulemaking to codify and clarify the Agencies’ recent Interagency Statement Clarifying the Role of Supervisory Guidance3 (“Supervisory Guidance Statement”) under section 553(e) of the Administrative Procedures Act (“APA”).

The Petitions generally commend the Agencies for issuing the Supervisory Guidance Statement and note that the Supervisory Guidance Statement:

  • Clarifies that “[u]nlike a law or regulation, supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance.”4 Rather, it emphasizes that guidance is intended to outline “the agencies’ supervisory expectations or priorities and articulates the agencies’ general views regarding appropriate practices for a given subject area.”5
  • Explicitly affirms that “[e]xaminers will not criticize a supervised financial institution for a ‘violation’ of supervisory guidance. Rather, any citations will be for violations of law, regulation, or non-compliance with enforcement orders or other enforceable conditions.”6  The Petitions state that this statement is particularly important in light of supervisors’ reported practice in recent years of issuing matters requiring attention (“MRAs”), matters requiring immediate attention (“MRIAs”) and other examination criticisms on the basis of alleged noncompliance with guidance.
  • States that “[t]he agencies intend to limit the use of numerical thresholds or other ‘bright-lines’ in describing expectations in supervisory guidance.” The Supervisory Guidance Statement also states that “[w]here numerical thresholds are used, the agencies intend to clarify that the thresholds are exemplary only and not suggestive of requirements.”7 The Petitions note that these statements would appear to be directed at, among other things, concerns raised by the Agencies’ reliance on such thresholds in the context of leveraged lending and other guidance.
  • States that the Agencies may sometimes issue supervisory guidance for notice and comment (which the petitioners stated that they strongly support) but also makes clear that this does not mean that such guidance is intended to be a regulation or have the force and effect of law.

The Supervisory Guidance Statement responds to certain findings8 by the Government Accountability Office (“GAO”) earlier in 2018 that certain supervisory guidance constituted a “rule” under the Congressional Review Act (“CRA”) that had not been submitted to Congress.

However, the Petitions note that, notwithstanding its “helpful text,” the Supervisory Guidance Statement still leaves room for examiners to continue to base examination criticisms on matters not based in law. Also, the Petitions express concern that examiners might defeat the purpose of the Supervisory Guidance Statement by replacing guidance-based examination criticisms with MRAs and MRIAs grounded in generic and conclusory assertions about “safety and soundness” (as opposed to those that identify specific, demonstrably unsafe and unsound practices—the actual relevant legal standard).

The Petitions also note that the Supervisory Guidance Statement is itself only guidance and, as a result, may well be viewed by current or future staff of the Agencies as non-binding and, in fact, includes a general reference to a “criticism” or “citation” that the petitioners claim has engendered some confusion about whether MRAs, MRIAs and other adverse supervisory actions are covered by the Supervisory Guidance Statement, with the related concern that some examiners may believe that they retain authority to issue MRAs and other such mandates on the basis of such supervisory guidance.

For these reasons, the Petitions request two specific rulemaking actions:

  • First: The Agencies propose and adopt, through notice and comment rulemaking, the content of the Supervisory Guidance Statement as a formal expression and acknowledgment of the proper legal status of guidance and the Petitions note that doing so would have the important legal effect of binding each agency and its staff.
  • Second: The Agencies include in that proposed rulemaking a clear statement that MRAs, MRIAs, examination rating downgrades, and any other formal examination mandate or sanction will be based only on a violation of a statute, regulation or order—that is, that these are the types of “criticisms” or “citations” at which the guidance is directed. The Petitions state that, for this purpose, a violation of law includes the identification of a demonstrably unsafe and unsound practice pursuant to 12 U.S.C. 1818(b)(1) (which itself might include significant management or control weaknesses that have contributed to a violation of law or otherwise pose material financial risk to the firm) rather than a generic or conclusory reference to “safety and soundness.” The petitioners state that this is a critical distinction and that it is essential that any examination criticisms adhere to the relevant legal standard: namely, the statutory bar on “unsafe and unsound” conduct, as interpreted and binding on the agencies under governing case law.

The Petitions note that denial must be justified by a statement of reasons pursuant to section 555(e) of the APA and can be appealed to the courts under sections 702 and 706 of the APA9and, further, that the APA requires that “[p]rompt notice … be given of the denial in whole or in part” of any petition under 12 U.S.C. 553, and that any denial shall include a “brief statement of the grounds for denial.”10

However, the APA does not include required procedures to be followed by an agency regarding the receipt and processing of a rulemaking petition and does not prescribe a stated period for such agency’s response to such petition. As a result, and with the additional complication that the requested action is a multiple-agency rulemaking, it is difficult to predict with any certainty how and, if so, when the Agencies will respond to the Petitions.

1 The petitions (“Petitions”) are described herein and are also available at: https://www.aba.com/Advocacy/LetterstoCongress/Documents/BPI-ABA-joint-PFR-on-Supervisory-Guidance-FDIC.pdf.

2 Namely, the Federal Reserve Board of Governors, the Office of the Comptroller of the Currency in the Department of the Treasury and the Federal Deposit Insurance Corporation (together, the “Banking Agencies”).

3 Federal Reserve Supervisory Letter SR 18-5 / CA 18-7, Interagency Statement Clarifying the Role of Supervisory Guidance (Sept. 12, 2018).

4 See Supervisory Guidance Statement at 1.

5 Id. at 1.

6 Id. at 2.

7 Id. at 2.

8 Regarding the Banking Agencies’ “Interagency Guidance on Leveraged Lending”, see: https://www.gao.gov/products/B-329272; and for a CFPB Bulletin 2013-02 “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act, see: https://www.gao.gov/products/D18160. The GAO finding regarding the CFPB Bulletin 2013-02 is also discussed in our January 8 Legal Update “Using the Congressional Review Act to Invalidate or Repeal Informal Agency Guidance .”

9 See 12 U.S.C. §§ 553(e), 555(e), 702, and 706; see also Auer v. Robbins, 519 U.S.C 452 at 459 (1997).

10 The DC Circuit has opined that while there is “no per se rule as to how long is too long” to wait for an agency action, a reasonable time for agency action is “typically counted in weeks or months, not years.” In re Am. Rivers & Idaho Rivers United, 372 F.3d 413, 419 (D.C. Cir. 2004) (quoting Midwest Gas Users Ass'n v. FERC, 833 F.2d 341, 359 (D.C. Cir.1987)).