United States: Ball Of Confusion (That's What The World (Of Leveraged Lending And Other Supervisory Guidance) Is Today)

Last Updated: November 16 2018
Article by J. Paul Forrester

With apologies to the Temptations, the title to their classic song seems to apply to the current state of leveraged lending and other supervisory guidance issued by various regulatory agencies in the United States.

Last week, two banking industry trade groups took the unusual step of petitioning1 the US prudential banking regulators2 and the Bureau of Consumer Financial Protection ("CFPB" and, together with the Banking Agencies, the "Agencies") for a formal rulemaking to codify and clarify the Agencies' recent Interagency Statement Clarifying the Role of Supervisory Guidance3 ("Supervisory Guidance Statement") under section 553(e) of the Administrative Procedures Act ("APA").

The Petitions generally commend the Agencies for issuing the Supervisory Guidance Statement and note that the Supervisory Guidance Statement:

  • Clarifies that "[u]nlike a law or regulation, supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance."4 Rather, it emphasizes that guidance is intended to outline "the agencies' supervisory expectations or priorities and articulates the agencies' general views regarding appropriate practices for a given subject area."5
  • Explicitly affirms that "[e]xaminers will not criticize a supervised financial institution for a 'violation' of supervisory guidance. Rather, any citations will be for violations of law, regulation, or non-compliance with enforcement orders or other enforceable conditions."6  The Petitions state that this statement is particularly important in light of supervisors' reported practice in recent years of issuing matters requiring attention ("MRAs"), matters requiring immediate attention ("MRIAs") and other examination criticisms on the basis of alleged noncompliance with guidance.
  • States that "[t]he agencies intend to limit the use of numerical thresholds or other 'bright-lines' in describing expectations in supervisory guidance." The Supervisory Guidance Statement also states that "[w]here numerical thresholds are used, the agencies intend to clarify that the thresholds are exemplary only and not suggestive of requirements."7 The Petitions note that these statements would appear to be directed at, among other things, concerns raised by the Agencies' reliance on such thresholds in the context of leveraged lending and other guidance.
  • States that the Agencies may sometimes issue supervisory guidance for notice and comment (which the petitioners stated that they strongly support) but also makes clear that this does not mean that such guidance is intended to be a regulation or have the force and effect of law.

The Supervisory Guidance Statement responds to certain findings8 by the Government Accountability Office ("GAO") earlier in 2018 that certain supervisory guidance constituted a "rule" under the Congressional Review Act ("CRA") that had not been submitted to Congress.

However, the Petitions note that, notwithstanding its "helpful text," the Supervisory Guidance Statement still leaves room for examiners to continue to base examination criticisms on matters not based in law. Also, the Petitions express concern that examiners might defeat the purpose of the Supervisory Guidance Statement by replacing guidance-based examination criticisms with MRAs and MRIAs grounded in generic and conclusory assertions about "safety and soundness" (as opposed to those that identify specific, demonstrably unsafe and unsound practices—the actual relevant legal standard).

The Petitions also note that the Supervisory Guidance Statement is itself only guidance and, as a result, may well be viewed by current or future staff of the Agencies as non-binding and, in fact, includes a general reference to a "criticism" or "citation" that the petitioners claim has engendered some confusion about whether MRAs, MRIAs and other adverse supervisory actions are covered by the Supervisory Guidance Statement, with the related concern that some examiners may believe that they retain authority to issue MRAs and other such mandates on the basis of such supervisory guidance.

For these reasons, the Petitions request two specific rulemaking actions:

  • First: The Agencies propose and adopt, through notice and comment rulemaking, the content of the Supervisory Guidance Statement as a formal expression and acknowledgment of the proper legal status of guidance and the Petitions note that doing so would have the important legal effect of binding each agency and its staff.
  • Second: The Agencies include in that proposed rulemaking a clear statement that MRAs, MRIAs, examination rating downgrades, and any other formal examination mandate or sanction will be based only on a violation of a statute, regulation or order—that is, that these are the types of "criticisms" or "citations" at which the guidance is directed. The Petitions state that, for this purpose, a violation of law includes the identification of a demonstrably unsafe and unsound practice pursuant to 12 U.S.C. 1818(b)(1) (which itself might include significant management or control weaknesses that have contributed to a violation of law or otherwise pose material financial risk to the firm) rather than a generic or conclusory reference to "safety and soundness." The petitioners state that this is a critical distinction and that it is essential that any examination criticisms adhere to the relevant legal standard: namely, the statutory bar on "unsafe and unsound" conduct, as interpreted and binding on the agencies under governing case law.

The Petitions note that denial must be justified by a statement of reasons pursuant to section 555(e) of the APA and can be appealed to the courts under sections 702 and 706 of the APA9and, further, that the APA requires that "[p]rompt notice ... be given of the denial in whole or in part" of any petition under 12 U.S.C. 553, and that any denial shall include a "brief statement of the grounds for denial."10

However, the APA does not include required procedures to be followed by an agency regarding the receipt and processing of a rulemaking petition and does not prescribe a stated period for such agency's response to such petition. As a result, and with the additional complication that the requested action is a multiple-agency rulemaking, it is difficult to predict with any certainty how and, if so, when the Agencies will respond to the Petitions.


1 The petitions ("Petitions") are described herein and are also available at: https://www.aba.com/Advocacy/LetterstoCongress/Documents/BPI-ABA-joint-PFR-on-Supervisory-Guidance-FDIC.pdf.

2 Namely, the Federal Reserve Board of Governors, the Office of the Comptroller of the Currency in the Department of the Treasury and the Federal Deposit Insurance Corporation (together, the "Banking Agencies").

3 Federal Reserve Supervisory Letter SR 18-5 / CA 18-7, Interagency Statement Clarifying the Role of Supervisory Guidance (Sept. 12, 2018).

4 See Supervisory Guidance Statement at 1.

5 Id. at 1.

6 Id. at 2.

7 Id. at 2.

8 Regarding the Banking Agencies' "Interagency Guidance on Leveraged Lending", see: https://www.gao.gov/products/B-329272; and for a CFPB Bulletin 2013-02 "Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act, see: https://www.gao.gov/products/D18160. The GAO finding regarding the CFPB Bulletin 2013-02 is also discussed in our January 8 Legal Update "Using the Congressional Review Act to Invalidate or Repeal Informal Agency Guidance ."

9 See 12 U.S.C. §§ 553(e), 555(e), 702, and 706; see also Auer v. Robbins, 519 U.S.C 452 at 459 (1997).

10 The DC Circuit has opined that while there is "no per se rule as to how long is too long" to wait for an agency action, a reasonable time for agency action is "typically counted in weeks or months, not years." In re Am. Rivers & Idaho Rivers United, 372 F.3d 413, 419 (D.C. Cir. 2004) (quoting Midwest Gas Users Ass'n v. FERC, 833 F.2d 341, 359 (D.C. Cir.1987)).

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2018. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions