GAO finds leveraged lending ‘guidance’ is rule subject to Congressional Review Act

A policy statement issued four years ago as guidance by federal banking agencies about “leveraged lending” is a “rule” subject to the requirements of the Congressional Review Act (CRA), the Government Accountability Office (GAO) wrote in a letter late last week to a senator.

In its Oct. 19 letter to Sen. Pat Toomey (R-Pa.), GAO wrote that “Interagency Guidance on Leveraged Lending,” issued jointly in March 2013 by the Office of the Comptroller of the Currency (OCC), the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), contains the policy statement which is, GAP said, a rule for purposes of the CRA. Toomey had asked GAO to issue an opinion on the guidance document.

The CRA establishes a congressional review process of agency rules and establishes special expedited procedures under which Congress may pass a joint resolution of disapproval that, if enacted into law, overturns the rule. GAO noted that congressional review is assisted by CRA’s requirement that all federal agencies, including independent regulatory agencies, submit each rule to both Houses of Congress and to the Government Accountability Office (GAO) before it can take effect. Congress has 60 days to act after a rule takes effect under CRA.

The guidance issued by the banking agencies, GAO found, is a “general statement of policy” designed to assist financial institutions in providing leveraged lending to creditworthy borrowers in a sound manner. “As such, it is a rule subject to the requirements of CRA,” GAO wrote.

The guidance, GAO stated, forms the basis of the banking agencies’ review of leveraged lending activities of supervised financial institutions. “Leveraged lending,” GAO noted, generally encompasses large loans to corporate borrowers for the purposes of “mergers and acquisitions, business recapitalization and financing, equity buyouts, and business … expansions.”

The guidance outlined the agencies’ minimum expectations on a wide range of topics related to leveraged loans (which are generally used to finance one-time business transactions rather than a company’s ordinary course of business activities), including underwriting standards, valuation standards, the risk rating of leveraged loans, and problem credit management, GAO stated.

The agencies had argued that the guidance was a general statement of policy explaining how they will exercise their broad enforcement discretion policy, and is thus not subject to the CRA.

But GAO found that that the guidance does not fall within any of the three categories of rules excepted from CRA coverage: rules of particular applicability; rules relating to agency management or personnel; and rules of agency organization, procedure, or practice that do not substantially affect the rights or obligations of non-agency parties.

“We can readily conclude that the Guidance does not fall within any of the three exceptions in CRA,” GAO wrote. “We note here that the Interagency Guidance is of general and not particular applicability, does not relate to agency management or personnel, and is not a rule of agency organization, procedure, or practice.”

Regarding whether the guidance constitutes a “general statement of policy,” GAO pointed to at least two rulings it has made over the last 16 years about CRA applicability to general statements of policy issued by federal agencies. Among them: a 2001 “record of decision” issued by the U.S. Fish and Wildlife Service (USFWS), which modified previous policy by the USFWS, and; a 2008 letter issued by the Center for Medicare and Medicaid Services (CMS) to state officials, which concerned the State Children’s Health Insurance Program (SCHIP). In both cases, GAO found that the agency actions constitute general statements of policy.

“It is clear that CRA covers general statements of policy,” GAO wrote in its letter to Toomey.

The watchdog agency further cited legislative history of CRA, which GAO said confirms that general statements of policy are subject to CRA requirements. “A principal sponsor of the legislation that became CRA made clear that general statements of policy are covered by CRA, stating that ‘[t]he committees intend [CRA] to be interpreted broadly with regard to the type and scope of rules that are subject to congressional review.’”

The congressional sponsor, GAO noted, added that documents covered by CRA include “statements of general policy, interpretations of general applicability, and administrative staff manuals and instructions to staff that affect a member of the public.”

GAO opinion: Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation–Applicability of the Congressional Review Act to Interagency Guidance on Leveraged Lending

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