Introduction – GAO Determines That Federal Banking Agencies’ Leveraged Lending Guidance Is Subject to Congressional Review and Potential Disapproval

On October 19, 2017, the Government Accountability Office (“GAO”), in response to an inquiry from Senator Pat Toomey (R-PA), determined that the Interagency Leveraged Lending Guidance (“ILLG”) issued by three federal banking agencies, the Board of Governors of the Federal Reserve System (“FRB”), Federal Deposit Insurance Corporation (“FDIC”) and Office of the Comptroller of the Currency (“OCC”) (collectively, the “Agencies”), is a “rule” for purposes of the Congressional Review Act (“CRA”). This determination gives Congress the right to review the ILLG and issue a joint resolution for signature by the President disapproving it. To date, the Agencies have not publicly or formally responded to the GAO Determination Letter and have not indicated their intention or plans to amend, change or reissue the ILLG.

The conclusion reached in the GAO Determination Letter could result in the ILLG being invalidated by Congress, and leaves significant uncertainty about regulatory standards that will be applied to leveraged lending going forward depending on whether Congress (a) formally disapproves the ILLG or (b) does not act at all during the 60-day review period.

If Congress formally disapproves the ILLG, the Agencies would be prohibited by the CRA from adopting similar standards. Alternatively, if Congress does not act to disapprove the ILLG, the Agencies could undertake a rulemaking project – subject to public notice and comment – designed to address the GAO’s determination and codify the ILLG as rules. If Congress does not act, the Agencies could decide to do nothing and leave the ILLG in place; however, we believe that outcome is unlikely, since the GAO’s determination now leaves the ILLG vulnerable to challenge for not being adopted pursuant to a formal rulemaking process.

During the 60-day review period, there is no change to the status quo. 


The Congressional Review Act

The CRA establishes a process for congressional review of agency rules and establishes special expedited procedures under which Congress may pass a joint resolution of disapproval within 60 legislative days – i.e., days that Congress is actually in session, rather than calendar days – of submission of the rule to Congress. However, this only applies when an agency action constitutes a “rule,” and not to other forms of legislation or guidance. While prior to the current Congress this was used only once (in 2001), the current Congress has availed themselves of the CRA numerous times to disapprove more than a dozen rules.5

Congressional Review of Agency Rules

Under the CRA, once a rule is disapproved by Congress there are two important results: (1) it has no further force and effect and is treated as if it never had any force or effect and (2) it cannot be reissued in substantially the same form (unless authorized by a later-enacted law).6 Consequently, if a rule is formally disapproved, any reissuance of a similar law would only be permitted if the Agencies made substantial changes. As a practical matter, the Agencies would almost certainly issue such substantially changed guidance as a formal rule, with a public notice and comment period.

Interagency Guidance on Leveraged Lending

On March 30, 2012, the Agencies requested public comment on proposed leveraged lending guidance, with the comment period closing on June 8, 2012.7 On March 22, 2013, the Agencies issued the ILLG as “final guidance.”8 Importantly, the ILLG was not a formal rulemaking enacted under APA notice and comment procedures (despite the request for comment on the proposed version). It is, however, legally binding in the sense that it defines the Agencies’ expectations regarding safe and sound lending practices.9 The GAO Determination Letter comes down on the side of shifting momentum toward repeal of the ILLG by putting CRA disapproval on the table.

The GAO Determination That the ILLG Is a “Rule” for Purposes of the CRA

On October 19, 2017, more than four and a half years after issuance of the ILLG by the Agencies, the GAO issued a written determination that the ILLG is a “general statement of policy designed to assist financial institutions in providing leveraged lending to creditworthy borrowers in a sound manner,” and thus, a “rule” for purposes of the CRA.10 The GAO’s analysis is centered on the premise that a rule for CRA purposes is “an agency statement of general or particular applicability and future effect designed to implement, interpret or prescribe law or policy.” The Agencies, on the other hand, contend that the ILLG did not fit within the CRA definition of a “rule,” as the ILLG explains how the Agencies will exercise enforcement authority in the future, as opposed to establishing a set of legally binding standards.11

Potential Impact of GAO’s Determination on Regulatory Standards Governing Leveraged Lending Transactions

Now that GAO has determined the ILLG is a rule for purposes of the CRA, the clock is ticking on the 60- day review period. The following are initial takeaways on the impacts of the GAO’s determination on leveraged lending transactions if Congress formally disapproves the ILLG. The other possibility (although the less likely scenario) is that Congress takes no action at all, which would result in no automatic change to the status quo.

A. If the ILLG Is Disapproved by Congress:

  • The ILLG would have no further force or effect and would be treated as if never implemented.
  • The Agencies would not be able to cite a loan participation or syndication as violating the ILLG in bank examinations and reviews of syndicated loans under the Shared National Credit (“SNC”) Program, including as it relates to the 6.0x leverage ratio set out in the ILLG.12
  • The Agencies, nevertheless, would likely argue that they retain broad statutory "safety and soundness" authority to consider a loan to be highly leveraged and/or take enforcement action against a banking organization for its participation in highly leveraged lending.
  • The Agencies would be prohibited from reissuing the ILLG in substantially the same form, unless specifically authorized by a new law after the date of the disapproval.

B. If Congress Does Not Act During the 60-Day Period to Disapprove the ILLG:

  • A deal could be worked out with Congress whereby Congress would not disapprove the ILLG, but the Agencies agree to undertake a rulemaking project to adopt the ILLG as a formal rule. If the Agencies undertake such a rulemaking project, they may look to the Trump administration's recent recommendations on leveraged lending, including:
  • Reissuing the ILLG for public comment;
  • Refining the ILLG "with the objective of reducing ambiguity in the definition of leveraged lending and achieving consistency in supervision, examination and enforcement"; and
  • Encouraging banks “to incorporate a clear but robust set of metrics when underwriting a leveraged loan, instead of solely relying on a 6x leverage ratio.”13

It is also possible that both: (1) Congress will not pass a joint resolution of disapproval of the ILLG and (2) the Agencies will fail to act. In this scenario, the ILLG would remain in place, financial institutions would likely continue to rely on it and the Agencies would remain free to cite the ILLG to support enforcement actions. However, we believe that this outcome is unlikely because, among other things, the ILLG may now be more vulnerable to challenge under the APA, certain members of Congress (including Senator Toomey) maintain interest in challenging the ILLG, the Treasury report recommends the ILLG be revised and subject to public comment and the general deregulatory environment favors formal agency action over informal guidance.

Final Considerations

In all likelihood, lending transactions already underway are likely to continue to be structured in accordance with the ILLG. Financial institutions are likely to continue to comply with the ILLG until it is overturned or they are given clear legal guidance to do otherwise.

More broadly, under any scenario, applying CRA review to items of informal guidance such as the ILLG potentially opens up broad swathes of agency statements, FAQs, guidelines and other items of guidance – which function as binding regulation in practice, even if they are entitled to a lower level of formal deference in theory – to disapproval by Congress. Even if limited, as in the case of the ILLG, to items of interagency guidance only – and we note that such a limit is not contemplated on the face of the GAO Determination Letter – the impact of any potential CRA disapproval of even a few such items of guidance could be substantial. Many venerable and high-profile items of guidance could be subject to review if viewed as rules, or declared to be rules, for CRA purposes. Examples run from 20-year-old guidance on 100% loan participations14 to this year’s statement on the treatment of certain controlled foreign funds under the Volcker Rule,15 and beyond. It remains to be seen whether Congress will take up the baton handed to it by the GAO to broadly review informal agency guidance – both within and beyond the financial services industry.