With the U.S. Government Accountability Office’s (GAO’s) letter ruling on Oct. 19, 2017, that the 2013 Interagency Guidance on Leveraged Lending (Leveraged Lending Guidance) constitutes a “rule” for purposes of the Congressional Review Act (CRA), participants in the leveraged lending markets are inquiring as to what the current status of the Leveraged Lending Guidance is and what the likely procedural next steps under the CRA will be. Set forth below is discussion of these issues.   What is the Leveraged Lending Guidance?   The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corp. (collectively, the agencies) jointly issued the supervisory Leveraged Lending Guidance, which applies to all national banks, federal savings associations, and federal branches and agencies of foreign banks (collectively, banks). This guidance was published in the Federal Register on March 22, 2013, and replaced similar guidance issued in April 2001. The agencies have indicated that they issued the Leveraged Lending Guidance in response to concerns that deteriorating underwriting practices in the loan market contributed to the financial crisis and could pose systematic risks to the financial system. 

The underlying rationale for the Leveraged Lending Guidance is to encourage a minimum standard of creditworthiness for borrowers and adequate risk management by banks. The Leveraged Lending Guidance seeks to prevent the origination of loans that would be non-pass credits. While not presented as bright line tests, among other things, loans are considered non-pass where the borrower cannot demonstrate the ability to repay from free cash flow 100% of its secured debt or 50% of its total debt within five to seven years or where total debt divided by EBITDA ratio is in excess of 6-to-1, as excessive levels of leverage would raise supervisory concerns, and loans to borrowers that exceed this leverage level may receive additional scrutiny to assess the sustainability of the capital structure and repayment capacity of the borrower. 

The Leveraged Lending Guidance is applicable to the origination and distribution of all leveraged loans, including loans approved on a “best efforts” basis and fully committed distributions.

Is the Guidance Still Legally Binding?

The CRA provides that no rule can take effect unless the agency promulgating the rule submits a report (a Rule Report) to the House, the Senate and the Comptroller General’s Office containing the rule, a description thereof and a statement as to whether it is a “Major Rule.” (A Major Rule is one that has had or would likely result in an annual effect on the economy of $100 million or more; a major increase in costs or prices for consumers, individual industries, government agencies or regions; or a significant adverse effect on competition, employment, investment, productivity, innovation or the ability to compete with foreign-based enterprises). Prior to Oct. 19, 2017, no Rule Report had been submitted with respect to the Leveraged Lending Guidance. This might seem to be the end of the analysis, but it is not. In the past, the Senate has accepted the publication of GAO letter rulings in the Congressional Record as sufficient to initiate the period in which to introduce a joint resolution of disapproval in lieu of a conforming Rule Report. On Oct. 19, 2017, Sen. Patrick Toomey (R-PA) directed that the GAO letter ruling be published in the Congressional Record.

The next issue is whether the Leveraged Lending Guidance/rule is a Major Rule. To our knowledge, no authority has publicly expressed a view on this. If it is a Major Rule, the rule cannot become effective until, at the earliest, 60 days after the GAO letter ruling is published in the Congressional Record. If it is not a Major Rule, it would go into effect otherwise in accordance with its terms, and in the case of the Leveraged Lending Guidance/rule, would simply continue to remain in effect.

The intricacies of the CRA are interpreted by Congress alone; the CRA states, “[N]o determination, finding, action, or omission under this chapter shall be subject to judicial review.”

The Senate staff we have spoken to are of the view that the Leveraged Lending Guidance remains legally binding, as Sen. Toomey’s action satisfied the requisite filing of a Rule Report for a rule to become (or remain) effective. They are also of the view that the Leveraged Lending Guidance will be presumed to not be a Major Rule. (These views were not presented to us as necessarily being the views of the Senate or the House as a whole or of a majority of the respective members thereof.)

What are the Next Steps Under the CRA?

Sen. Toomey’s publication of the GAO letter ruling in the Congressional Record has triggered a period of “60 days of continuous session” during which any senator or representative may file a joint resolution of disapproval of the Leveraged Lending Guidance. (Days-of-continuous-session periods count every calendar day, including weekends and holidays, and exclude only days that either chamber – or both – is gone for more than three days pursuant to an adjournment resolution.) If a joint resolution of disapproval is filed during the allowed time period, it must be approved by both houses of Congress during the life of the current two-year Congress. As of this writing, we are not aware of any joint resolution of disapproval of the Leveraged Lending Guidance being submitted to either house of Congress.   While there is no “fast track” procedure for the consideration of a joint resolution of disapproval in the House, there are fast-track procedures in the Senate. During the 20-calendar-day period after publication in the Congressional Record, if a joint resolution of disapproval is submitted in the Senate, the joint resolution can be discharged from committee by a petition signed by at least 30 senators. Once the joint resolution is discharged or reported out of committee, any senator may make a motion to call the joint resolution of disapproval for consideration. No debate is allowed on this motion; and if it is approved, the joint resolution of disapproval may be subject to no more than 10 hours of debate before being voted on.

If a joint resolution of disapproval is approved by both houses of Congress, it is sent to the president for signature or veto (subject to customary override procedures).

If a joint resolution of disapproval were to be enacted, the Leveraged Lending Guidance would “be treated as though such rule had never taken effect” and “may not be reissued in substantially the same form.”

Has GAO Made Similar Determinations in the Past?

As with the Leveraged Lending Guidance, in the past, when a Member of Congress has thought an agency action is a rule under the CRA, the Member has sometimes asked GAO for a formal opinion on whether the specific action satisfies the CRA definition of a “rule” such that it would be subject to the CRA’s disapproval procedures. 

In a Nov. 16, 2016 publication, GAO presented that during the period September 1996 and May 2014, it had issued 11 opinions of this type at the request of Members of Congress. In seven opinions, GAO determined that the agency action satisfied the CRA definition of a “rule.” After receiving these opinions, some Members submitted CRA resolutions of disapproval for the “rule” that was never submitted. In four opinions, GAO determined that the agency action did not satisfy the CRA definition of “rule,” either because it fell under one of the exceptions or was outside the scope of the statute altogether. In addition to the Oct.19, 2017, Leveraged Lending Guidance opinion, on Oct. 23, 2017, in response to a letter from Sen. Lisa Murkowski, GAO issued a decision on whether the 2016 amendment to the Tongass Land and Resource Management Plan, approved on Dec. 9, 2016, is a rule for purposes of the CRA — concluding that it in fact was a rule, which requires that it be submitted to Congress for review.

Can an affected party challenge in court an agency’s failure to submit a rule to Congress pursuant to the CRA?

It is unlikely that an affected party would be able to challenge in court an agency’s failure to submit a rule to Congress pursuant to the CRA, because the statute explicitly states that “no determination, finding, action, or omission under [the CRA] shall be subject to judicial review.”

Addendum: What congressional resolutions of disapproval have occurred under the CRA?

The following is a list of resolutions of disapproval that have been enacted since 1996 (when the CRA itself was enacted), all but one in 2017:

On May 17, 2017, a Department of Labor rule on Savings Arrangements Established by States for Non-Governmental Employees (81 Fed. Reg. 59464 (Aug. 30, 2016)) was overturned (see Pub. L. No. 115-35 (May 17, 2017)).

On April 13, 2017, a Department of Labor rule on Savings Arrangements Established by Qualified State Political Subdivisions for Non-Governmental Employees (81 Fed. Reg. 92,639 (Dec. 20, 2016)) was overturned (see Pub. L. No. 115-24 (April 13, 2017)).

On April 13, 2017, a Health and Human Services rule on Compliance With Title X Requirements by Project Recipients in Selecting Subrecipients (81 Fed. Reg. 91,852 (Dec. 19, 2016)) was overturned (see Pub. L. No. 115-23 (April 13, 2017)).

On April 3, 2017, a Federal Communications Commission rule on Protecting the Privacy of Customers of Broadband and Other Telecommunications Services (81 Fed. Reg. 87,274 (Dec. 2, 2016)) was overturned (see Pub. L. No. 115-22 (April 3, 2017)).

On April 3, 2017, a Department of Labor rule on Clarification of Employer’s Continuing Obligation to Make and Maintain an Accurate Record of Each Recordable Injury and Illness (81 Fed. Reg. 91,792 (Dec.19, 2016)) was overturned (see Pub. L. No. 115-21 (April 3, 2017)).

On April 3, 2017, a Department of Interior rule on Non-Subsistence Take of Wildlife, and Public Participation and Closure Procedures, on National Wildlife Refuges in Alaska (81 Fed. Reg. 52,247 (Aug. 5, 2016)) was overturned (see Pub. L. No. 115-20 (April 3, 2017)).

On March 31, 2017, a Department of Labor rule on drug testing of unemployment compensation applicants (81 Fed. Reg. 50,298 (Aug. 1, 2016)) was overturned (see Pub. L. No. 115-17 (March 31, 2017)).

On March 27, 2017, a Department of Education rule on Teacher Preparation Issues (81 Fed. Reg. 75,494 (Oct. 31, 2016)) was overturned (see Pub. L. No. 115-14 (March 27, 2017)).

On March 27, 2017, a Department of Education rule on Accountability and State Plans under the Elementary and Secondary Education Act of 1965, as Amended by the Every Student Succeeds Act — (81 Fed. Reg. 86,076 (Nov. 29, 2016)) was overturned (see Pub. L. No. 115-13 (March 27, 2017)).

On March 27, 2017, a Department of Interior rule on Resource Management Planning (81 Fed. Reg. 89,580 (Dec. 12, 2016)) was overturned (see Pub. L. No. 115-12 (March 27, 2017)).

On March 27, 2017, a Department of Defense, General Services Administration, and National Aeronautics and Space Administration rule amending the Federal Acquisition Regulation (FAR); Fair Pay and Safe Workplaces (81 Fed. Reg. 58,562 (Aug. 25, 2016)) was overturned (see Pub. L. No. 115-11 (March 27, 2017)).

On Feb. 28, 2017, a Social Security Administration rule on Implementation of the National Instant Criminal Background Check System (NICS) Improvement Amendments Act of 2007 (81 Fed. Reg. 91,702 (Dec. 19, 2016)) was overturned (see Pub. L. No. 115-8 (Feb. 28, 2017)).

On Feb.16, 2017, a Department of Interior rule on Stream Protection (81 Fed. Reg. 93,066 (Dec. 20, 2016)) was overturned (see Pub. L. No. 115-5 (Feb. 16, 2017)).

On Feb. 14, 2017, a Securities and Exchange Commission rule on Disclosure of Payments by Resource Extraction Issuers (81 Fed. Reg. 49,359 (Mar. 27, 2016)) was overturned (see Pub. L. No. 115-4 (Feb. 14, 2017)).

On March 20, 2001, a Department of Labor rule on the Ergonomics Program (65 Fed. Reg. 68,262 (Nov. 14, 2000)) was overturned (see Pub. L. No. 107-5 (Mar. 20, 2001)).

In addition, on Oct. 24, 2017, the Senate voted to repeal the Consumer Financial Protection Bureau’s rule banning mandatory arbitration clauses in financial contracts. The House passed similar legislation in July and, with the Senate’s approval, the bill will now be sent to President Trump.