In addition to formal regulations, informal federal regulatory guidance has become commonplace in the world of banking law.
The terms “guidance,” “bulletin,” “interagency statement,” “advisory letter,” “financial institution letter,” “frequently asked questions” and others describe issuances by bank regulatory agencies that are typically not formally promulgated as regulations, but are provided as informal explanations of regulatory policies and expectations. Bank regulatory manuals and handbooks also provide this type of informal guidance.
In 2017 alone, the federal prudential bank regulators — the Office of the Comptroller of the Currency (the “OCC”), the Board of Governors of the Federal Reserve System (the “Fed”) and the Federal Deposit Insurance Corporation (the “FDIC”) — put out dozens of regulatory guidance issuances for banks.
However, the federal Government Accountability Office (the “GAO”) has recently issued two opinions that could impact this steady flow of informal bank regulatory guidance.
Each of the two GAO opinions issued in late 2017 determined that a specific issuance of informal financial regulatory guidance (described below in more detail) is a “rule” under the Congressional Review Act (the “CRA”), meaning that the issuance must be submitted to Congress for review and can be disapproved by Congress.
In both cases, the regulatory issuances were not promulgated as formal regulations under the federal Administrative Procedure Act (the “APA”) and were not submitted for review under the CRA. Instead, the issuances were released by the respective agencies in an informal manner. The agencies responsible for the issuances did not consider APA rulemaking procedures or the CRA to be applicable.
The GAO’s opinions, stating that the issuances are “rules” under the CRA, were provided in response to a request from Senator Pat Toomey, who serves on the Senate Banking, Housing and Urban Affairs Committee and is the chairman of the Financial Institutions and Consumer Protection Subcommittee.
Regulatory issuances addressed by GAO opinions
The two regulatory issuances (the “Issuances”) that are the focus of the GAO opinions are:
- The “Interagency Guidance on Leveraged Lending” issued in 2013 by the OCC, the Fed and the FDIC; and
- A “Bulletin” on Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act issued in 2013 by the Consumer Financial Protection Bureau (the “CFPB”).
Basis for GAO opinions
The GAO noted in its opinions that the CRA borrows the definition of “rule” from the APA. The GAO also expressly stated in the opinions that the responsible agency’s characterization of guidance as not being a “rule,” was not dispositive. In other words, simply calling an Issuance “Interagency Guidance” or a “Bulletin,” rather than a “rule,” does not determine whether that Issuance is a “rule” under the CRA.
In each case, the GAO determined that the Issuance in question was a “general statement of policy,” which qualifies as a “rule” under the CRA. According to the GAO, each responsible agency agreed that its Issuance was, in fact, a “general statement of policy,” but contested the characterization of the Issuance as a “rule” under the CRA.
Binding vs. non-binding
As part of the process of putting together its opinions on the Issuances, the GAO asked each of the responsible agencies to explain why it adopted the applicable Issuance without complying with the CRA. According to the GAO opinions, each agency argued to the GAO that the applicable Issuance should not be considered a “rule” under the CRA because the Issuance was not legally binding.
However, the GAO determined that any general statement of policy can be a “rule” under the CRA regardless of whether it is legally binding.
The regulatory agencies may have based their positions on certain court cases in which certain types of regulatory guidance were determined not to constitute “rules” under the APA definition because that guidance was not legally binding. See, e.g., Amoco Production Company v. Watson, 410 F.3d 722, 732 (D.C. Cir. 2005) and Independent Petroleum Ass’n of America v. Babbitt, 92 F.3d 1248, 1255-57 (D.C. Cir. 1996).
Impact of GAO opinions
The GAO opinions have no direct legally controlling impact on the Issuances.
However, in the short term:
- Based on the GAO opinions, Senator Toomey or other members of Congress may insist that the Issuances were improperly issued — and therefore invalid — and press the agencies responsible for each Issuance to submit that Issuance for Congressional review under the CRA; and
- The GAO opinions may be used as the basis for arguments in legal challenges against the Issuances in court actions.
In the longer term, the GAO opinions could have the following impact:
- Certain bank regulatory agencies may cite the GAO opinions as a reason to avoid issuing new regulatory guidance or even to rescind existing guidance.
- Certain bank regulatory agencies may begin to rely more on enforcement actions to provide information about how an agency may interpret and apply certain financial laws and regulations.
- The GAO opinions may be cited by Congress to disapprove similarly issued bank regulatory guidance under the CRA in the future.
Potential fallout for banks
The immediate reaction of many bankers and bank trade groups was likely positive with regard to the news of the GAO’s opinions that CRA restrictions should be applied to a wide variety of bank regulatory guidance.
Bankers have been inundated with federal regulations and regulatory guidance for years, and that issue has become more pronounced since the Dodd Frank Act was passed in 2010. If the GAO’s opinions are applied, they may effectively reduce this barrage of regulatory guidance that banks have to process.
However, some of the longer term potential fallout from the GAO opinions, as described above, may not always be completely positive for bankers. For example, if regulators refuse to issue informal regulatory guidance, bankers may be less certain about expected compliance standards and may be presented with those standards only in the form of examination citations or enforcement actions.
In fact, the CFPB has been criticized in the past for taking exactly that type of “gotcha” approach. The president of the U.S. Chamber of Commerce Center for Capital Markets Competitiveness noted in November that “[t]oo often, the CFPB adopted a ‘keep them guessing’ approach to regulation and supervision.”
As the new year progresses, it will be interesting to see if and how Congress makes use of the GAO opinions on the applicability of the CRA to informal regulatory guidance that could be characterized as “rules.”
It may be even more interesting to see if any regulators adopt the GAO’s broad-scope approach to the CRA and begin limiting the informal issuance of regulatory guidance — regardless of what name that guidance goes by.
Greg Omer advises banking and financial services organizations on regulatory and corporate issues. He is a former bank and financial services regulator and speaks regularly to financial industry groups on regulatory issues.