The GAO’s Determination that Leveraged Lending Guidance is a “Rule” under the Congressional Review Act: Key Issues & Ramifications

The GAO’s Determination that Leveraged Lending Guidance is a “Rule” under the Congressional Review Act: Key Issues & Ramifications

On October 19, the GAO determined that the 2013 Interagency Guidance on Leveraged Lending was a “rule” under the Congressional Review Act (“CRA”).  The CRA provides that before any rule can become effective, it must first be submitted to Congress and the GAO for review and potential disapproval.

We have received a lot of questions about the direct and indirect effects of this determination, and seen a fair amount of reporting that misses some of the key takeaways.  Because the law in this area is complicated, we set out an explanation below.  (Important disclaimer:  This is a blog post; it is not intended to be, and should not be construed as, legal advice of any kind.)

Q.  At this point, pending Congressional action, is the leveraged lending guidance valid or not?

A.  Not valid.  The first sentence of the CRA (12 U.S.C. § 805(a)(1)) states:

Before a rule can take effect, the Federal agency promulgating such rule shall submit to each House of the Congress and to the Comptroller General a report containing—

(i) a copy of the rule;

(ii) a concise general statement relating to the rule, including whether it is a major rule; and

(iii) the proposed effective date of the rule.

(The CRA then specifies a special “fast track” legislative procedure by which Congress can consider and decide to disapprove a rule.)

The GAO concluded that the guidance is a “rule” under the CRA.  Because the agencies that promulgated the guidance (the Federal Reserve, OCC and FDIC) have not provided to Congress or the Comptroller General any of the three required items, the guidance is therefore not effective.

Indeed, it would appear that Congress cannot yet act under the CRA to disapprove the guidance, as the CRA contemplates that it do so only after the rule and the required reports have been submitted.  Of course, this makes sense, because there is no point invalidating a rule that is not yet valid.

Q.  What does it mean to be a “rule”?  How can “guidance” be a “rule” if the agencies say it is guidance?

A.  The Administrative Procedure Act (APA) defines a rule as “the whole or part of an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy.”  This broad definition, which is incorporated into the CRA by reference, includes regulations that have been promulgated through traditional notice-and-comment rulemaking, but also includes a wide range of other, less formal regulatory pronouncements that have the effect of articulating an agency’s policy.  Here the GAO concluded, consistent with a number of similar previous determinations, that the leveraged lending guidance was clearly a “rule” under this definition.  (Thus, because it has not yet been properly submitted, it is not even valid as an agency statement of policy.)

Q.  What is the practical impact of the GAO’s determination, given that the agencies told the GAO that the leveraged lending guidance “does not establish legally binding standards, is not certain or final, and does not substantially affect the rights or obligations of third parties”?

A.  If that were true, the practical impact of the GAO’s determination would be minimal.

Q.  What are the ramifications of this determination beyond leveraged lending?

A.  The leveraged lending guidance is not unique – in recent years, banking (and other) regulators have routinely issued other guidance, policy statements, and similar directives.  The GAO’s ruling indirectly but clearly has the same impact on this other guidance.  Examples would appear to include the OCC’s vendor management guidance and the Federal Reserve’s supervisory policy on how it approaches regulatory applications and notices (known as SR Letter 14-2).

If the agencies now take the position that all other such guidance “does not establish legally binding standards, is not certain or final, and does not substantially affect the rights or obligations of third parties,” then that guidance would still be ineffective but the practical impact small.  However, it is well known within banks and outside counsel that agency guidance is routinely cited as the basis for supervisory directives – in particular, an MRA or MRIA – and thus is being applied as a legally binding standard, considered certain and final, and substantially affecting the obligations of banks and their customers.  Thus, the agencies would appear to be in violation of the GAO’s holding to the extent that they continue to do so.

Q.  Why is the GAO the decision-maker here?

A.  Although it is highly unusual for the GAO to make legal determinations, the CRA vests the Comptroller General of the GAO with specific responsibilities to administer the CRA.

Q.  Can the agencies appeal the GAO’s decision?

A.  No.  Section 805 of the CRA states that “[n]o determination … under this chapter shall be subject to judicial review.”

Q.  Is this CRA issue limited to the banking agencies?

A.  No.  The CRA applies to all “rules” issued by Federal government agencies, and the GAO has issued similar determinations with respect to rules issued by non-banking agencies.  However, it appears likely that the banking agencies have used guidance as a substitute for notice-and-comment rulemaking more frequently than other Federal agencies.  Therefore, the impact on the banking agencies may presumably be larger than on others.

Q.  Could the agencies submit the guidance at this point?

A.  Yes.  If they did so, the guidance could then become effective, but would also then be subject to Congressional review and potential disapproval under the CRA.  If the guidance were to be disapproved under those circumstances, section 801(b)(2) of CRA would forbid the agencies from reissuing the guidance or issuing a new rule that is substantially the same, unless specifically authorized to do so by a subsequent law of Congress.

Q.  What is the practical difference between a “rule” that goes through a traditional APA notice-and-comment process and one that does not – for example, a policy statement that is properly submitted under the CRA?  Is one more enforceable than the other?

 A.  Under section 553 of the APA, all rules must be promulgated through a public notice and comment process unless an exemption applies; one such exemption is for “interpretive rules” and “general statements of policy.”  As the Attorney General’s Manual on the APA describes, the key distinction is that only substantive rules that have gone through the notice and comment rulemaking process “have the force and effect of law.”  In contrast, interpretive rules merely “advise the public of an agency’s construction of the statute and rules which it administers,” and general statements of policy merely “advise the public prospectively of the manner in which the agency proposed to exercise a discretionary power.”[1]

Q.  Does this ruling affect regulations that went through notice and comment/APA process and were properly submitted to Congress and the GAO under the CRA?

A.  No. The GAO determination does not invalidate or otherwise affect any existing Federal statute or regulation, all of which remain in full force; nor does it restrict or otherwise affect the banking agencies’ ability to enforce those laws and rules.  It appears that all of those regulations were properly submitted to Congress under the CRA and not disapproved.

Disclaimer: The views expressed in this post are those of the author(s) and do not necessarily reflect the position of The Clearing House or its membership.


[1] See Attorney General’s Manual on the Administrative Procedure Act at 30 n. 3 (1947), reprinted in William F. Funk, Jeffrey S. Lubbers & Charles Pou, Jr., Federal Administrative Sourcebook (4th ed. 2008).