Senate Banking Committee Considers Testimony on Agency Use of Non-Binding Guidance

The U.S. Senate Committee on Banking, Housing and Urban Affairs considered testimony on how federal banking agencies are using non-binding guidance in regulatory, examination and enforcement practices.

Senator Mike Crapo (R-ID) observed that there have been a "number of situations" in which banking agencies have wielded guidance or policy statements with the power typically reserved for rules. Mr. Crapo stated that this practice is not in compliance with notice-and-comment rulemaking processes or with the Congressional Review Act ("CRA").

Bank Policy Institute President and CEO Greg Baer argued that the legal process within the regulation and examinations of banks has "broken down." According to Mr. Baer, regulators have "diverg[ed] significantly from the laws as written." Specifically, Mr. Baer observed instances of examination reports being turned into enforcement actions, and certain mandates (i.e., Matters Requiring Attention and Matters Requiring Immediate Attention, or "MRAs" and "MRIAs") being misused as binding orders. Mr. Baer urged banking agencies to:

• grant the petition for rulemaking designed to rein in the expanded disciplinary use of regulatory guidance and MRAs;

• request comments on whether the public considers MRAs to be "an unenforceable suggestion" or "a de facto order";

• undertake a "zero-based review of the application process"; and

• reconsider the Capital adequacy, Asset quality, Management, Earnings, and Liquidity (CAMELS) rating system entirely.

Attorney Margaret Tahyar noted that while some secrecy is necessary for banking supervision, regulators should reconsider certain policies to ensure transparency and accountability. Ms. Tahyar recommended:

• modernizing requirements concerning confidential supervisory information to reflect the reality of the digital age;

• restricting the ability of regulators to make economic and social policy choices free from oversight; and

• providing supervisory staff with the support to perform their jobs in a "more transparent" way.

Boston College Law School Professor Patricia McCoy made the case for non-binding regulatory guidance, stating that attempting to require notice-and-comment proceedings and CRA oversight would be a "badly misguided" response. Ms. McCoy warned that forcing agencies into either action would result in (i) non-binding guidance becoming binding rules or (ii) supervisory and enforcement actions without any guidance. The latter, Ms. McCoy argued, would increase the lack of transparency and make interaction with regulators more difficult for financial institutions.