Concerns about “regulation by enforcement” continue to make headlines as Rep. Blaine Luetkemeyer (R-Missouri) reached out to federal financial regulators to encourage a halt to this “unsettling trend.
The chair of the House Committee on Financial Services hears “frequent complaints” from financial institutions that agency statements including supervisory letters, examination manuals or guidance documents are treated as binding obligations—and he wants the practice to stop.
What happened
In letters to the Federal Reserve Board of Governors, Federal Deposit Insurance Corp. (FDIC), National Credit Union Association (NCUA), Securities and Exchange Commission (SEC), Office of the Comptroller of the Currency (OCC) and Bureau of Consumer Financial Protection (CFPB), the lawmaker noted that the complaints from financial institutions have recently been backed up by federal action.
For example, last year the Government Accountability Office (GAO) determined that the Federal Reserve’s guidance on leveraged lending was technically a rule for purposes of the Congressional Review Act (CRA) but was not submitted to Congress before it took effect.
Similarly, the GAO found that the CFPB’s Bulletin 2013-02, which took the position that the practice of automobile “dealer markups” would be challenged by the CFPB under a disparate impact theory of discrimination, was a general statement of policy and therefore a rule that may be repealed pursuant to the CRA process. A majority of lawmakers responded with a resolution disavowing the bulletin, which passed both houses of Congress and was signed by President Donald Trump in May, ending the rule.
Treating agency guidance as though it were a rule, or “regulation by enforcement,” needs to stop, Rep. Luetkemeyer said. Not only does the practice evade the required rulemaking processes, a “significant number of agency guidance, handbooks and circulars” have been issued over the years, with few withdrawn or rescinded. This multitude of statements leaves financial institutions without clarity on what their binding obligations actually are.
The letters suggested several actions “to reverse this unsettling trend.”
“First, I encourage each of your agencies to issue and publish a clear statement affirming that agency statements—for example, guidance documents, supervisory letters or examination manuals—that have not gone through notice and comment rulemaking do not establish binding legal standards, and thus shall not be the basis of enforcement actions or supervisory directives, including but not limited to the issuance of ‘Matters Requiring Attention’ or ‘Matters Requiring Immediate Attention,’” the legislator wrote. “The statement should also clarify that any failure to adhere to guidance shall not, directly, or indirectly, form the basis of any other adverse supervisory determinations, such as ratings downgrades.”
This should include instances where an examiner purports that a determination is based on “safety and soundness,” with safe and sound practice equating compliance with agency guidance, Rep. Luetkemeyer added.
Each agency should also establish a standard practice by which similar clarifying language addressing each of these points is included in any subsequently issued guidance, he told the agencies.
“Finally, I urge you to undertake dedicated efforts to ensure that examiners are appropriately educated about the use and role of guidance; and held accountable when guidance is applied inappropriately,” Rep. Luetkemeyer wrote. “Taking these steps will help to ensure that the law is observed in practice, and that regulated entities are aware of their rights and responsibilities, without having to wonder whether the line between guidance and rule remains blurred.”
To read Rep. Luetkemeyer’s letter to the FDIC, NCUA, SEC, OCC and CFPB, click here.
To read Rep. Luetkemeyer’s letter to the Federal Reserve, click here.
Why it matters
A great deal of guidance for financial institutions does not appear in the form of formal regulations. As evidenced by the letters—and the GAO’s finding that some of the agency statements are in fact rules and therefore subject to the CRA process—nonregulation agency guidance is subject to review by Congress and possible reversal. “Greater clarity around the appropriate use and interpretation of such guidance is of the utmost importance,” Rep. Luetkemeyer wrote to the federal financial regulators. “I urge you to make it a priority and implement these recommendations in the most expedient manner possible.” Some agencies are already on board. Earlier this year, CFPB Acting Director Mick Mulvaney wrote a memorandum to CFPB employees about his leadership philosophy, promising “more formal rulemaking on which financial institutions can rely, and less regulation by enforcement.”
