As a Rule, Guidance Is Not

Introduction:? Guidance and Guidelines, Rules and Regulations

Mark Twain advised:?“It is good to obey all the rules when you’re young, so you’ll have the strength to break them when you’re old.”? ?Comedian Steven Wright extended the concept of rules further when he quipped:? "It’s like the Wild West, the internet.? There are no rules.”? The flexible Groucho Marx announced:? Those are my principles and if you don’t?like them, well, I have others.”

Rules and regulations seem to be statements that we are supposed to obey, but guidance and guidelines?are seen as softer aspirations rather than the stipulations of rules. ?Even children recognize the subtle differences between a parent’s stipulation that you must be home by six o’clock vs. you should be home by six o’clock.

Guidance:? As a Rule, It’s Not a Rule

So why do we care about the difference? Because bankers are being buried under more regulations and rules “clarified” by guidance and guidelines.? It’s the clarification that muddies the waters.? In fact, the ABA’s past chair Dan Robb has been campaigning against a “tsunami of regulatory and legislative overreach,” including the CFPB’s junk fees campaign, the Section 1071 final rule, the Fed’s Reg II debit interchange price caps and the Credit Card Competition Act.[i]??

The GAO has also criticized bank regulators for skirting the regulation process by issuing guidelines and guidance instead of rules.? Why?—no time-consuming public comment and counter-proposals to digest.? This shortcut is not a new issue-- On Sept. 11, 2018,federal banking regulators issued an interagency statement confirming “that supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance . . .guidance can outline the agencies’ supervisory expectations or priorities and articulate the agencies’ general views regarding appropriate practices . . . however . . . supervisory guidance, no matter how helpful or illustrative, does not have the force and effect of law.”? Nevertheless, while mired down in the muck of guidance, guidelines, rules, and regulations, bankers are increasingly competing with non-bank lenders not burdened by any regulatory expectations. [ii]?? Don’t expect to see chief compliance officer positions at non-bank lenders anytime soon.

Must or Should:? Do or Die vs. Do Your Best

?Let’s start with the verbs “must” and “should,” shall we?? We use “must” to express a requirement or obligation; we use it for actions, responsibilities, or duties that are considered to be necessary or compulsory.? On the other hand, “should” suggests advice or a recommendation; it conveys actions, responsibilities, or duties that are thought to be in the best interests of the party being advised.?

Guidance.? Let’s go on to the next step.? Guidance is just the act or process of guiding, and guiding is showing or indicating they way to someone, directing or having an influence on the course of action of someone or something. Guidance may be advice or counseling on some topic, or it may refer to any process or system to control the path of a vehicle, missile, or plane.? ?Administrative law uses guidance to describe a variety of documents created by government agencies to explain, interpret, or advise interested parties about rules, laws, and procedures. Guidance documents clarify how agencies administer regulations and programs.

Guideline.? A guideline is a plan or explanation to guide one in setting standards or determining a course of action; it implies advice, recommendations, or instructions and are not expected to be hard and fast or must do.? A guideline is a non-specific rule or principle that provides direction to action or behavior.

Rules and Regulations. ?In contrast, rules are explicit regulations or principles governing conduct within a particular activity. Regulations and rules are similar, but a regulation is a little more formal than a rule – it prescribes the required conduct or action exactly.? ?Rules are also binding but usually describe what is generally considered to be the proper course of conduct.? Some common synonyms of regulation are canon, law, ordinance, precept, rule, and statute. While all these words describe a principle governing action or procedure, regulation implies?authority and the threat of punishment in order to ensure the?organization or system complies with the rule or regulation.

Actions Speak Louder than Words: ?Guidance Abused as Rules [iii]

The battle between bankers and regulators over guidance being treated as rules broke out on March 22, 2013, when the OCC, Federal Reserve and FDIC issued their Interagency Guidance on Leveraged Lending (IGLL) The IGLL addressed limits on leverage relative to cash flow, e.g., Debt/EBITDA in the 3x-4x range, how such loans would be underwritten and standards for evaluation, among other things.? After four years of objecting to this guidance being applied as a rule, bankers enlisted Senator Pat Toomey who, in turn, on March 201 asked the GAO whether IGLL is a rule.? The GAO decided it was a rule in October 2017 and should be subject to the more rigorous process of rulemaking, including cost-benefit analysis and public comment.

Finally, on September 11, 2018, the regulators backed off an issued an Interagency Statement Clarifying the Role of Supervisory Guidance (the “Statement”) The Statement begins by describing “supervisory guidance” as including interagency statements, ironically, the guidance on guidance, advisories, bulletins, policy statements, questions and answers, and frequently asked questions. The agencies then proclaimed that unlike 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. Rather, supervisory guidance outlines the agencies’ supervisory expectations or priorities and articulates the agencies’ general views regarding appropriate practices for a given subject area. [iv]

In an effort to draw a brighter line between guidance and regulation, the regulators would “limit the use of numerical thresholds or other ‘bright-lines’ in describing expectations in supervisory guidance” and clarified that, where thresholds are used, such thresholds “are exemplary only and not suggestive of requirements,” e.g., the Interagency Guidance on Leveraged Lending issued by the Federal Reserve, FDIC, and OCC in March 2013, which was extremely heavy on numerical thresholds and bright-line tests. The agencies have also committed not to criticize a supervised financial institution for a “violation” of supervisory guidance. Instead, any citations will be for violations of law, regulation, or noncompliance with enforcement orders or other enforceable conditions. The agencies do not generally reference guidance in enforcement actions because they are more likely to do so in examination findings, such as in a “Matter Requiring Attention.” Banks now have room to push back if guidance is referenced or relied on in examination findings. The agencies also committed to limit and reduce the issuance of multiple supervisory guidance documents on the same topic. In fact, one day before the issuance of the Statement, the FDIC issued a financial institution letter (“FIL”) seeking comment on a proposal to retire to an inactive status some 374 of the 664 risk management supervision-related FILs issued between 1995 through 2017. [v]

?I mention this recent history because I remember the long and tedious hours our credit policy team spent with our corporate bankers plowing through the leveraged lending guidance and the numerous contradictory and anonymous frequently asked questions (FAQ) published to clarify and update the guidance rather than just issue a corrected version of the leveraged lending guidance.? Even today when I see the FAQ acronym, I imagine a dozen or interns gathered around a conference table covered with pizza boxes and soda cans and trying to generate questions and answers before the trains stop running. Anyway, the agencies eventually gave up on enforcing the leveraged lending limits and just refocused on identifying problem leveraged borrowers, but that exhausting experience makes this latest wave of rules and regulations troubling to me.? The final irony is that despite this rising tide preventive governance, the agencies tend to behave more like police homicide departments—they ultimately catch the killer but rarely apprehend the next murderer.? The agencies can tell you why the banks fail but are not very good at identifying and stopping the next failure.

?Summary and Closing:? Deja Vu All Over Again?

As bankers try to manage risk in our post-Covid world, the regulatory authorities have responded to recent bank failures by dumping more rules and regulations, guidance and guidelines on banks while non-bank competitors skate under the regs to bag former bank clients. Haven’t we seen all this before?? As Mark Twain warned, “History never repeats itself, but it does often rhyme.” ??However, Yogi Berra warned: “The future ain’t what it used to be.”?

[i] ?“Robb Discusses Regulatory Tsunami, Talent Development on Podcast,? ABA Daily Newsbytes, March 19, 2024.

[ii]? Joe Mont, “Tackling the contentious issue of guidance vs. regulation” Compliance Week, Sep 12, 2018 11:15 AM, https://www.complianceweek.com/tackling-the-contentious-issue-of-guidance-vs-regulation/2145.article ?

[iii] Peter Weinstock and Marysia Laskowski, “If It Walks Like a Duck . . . The Demise of the Guidance Masquerade,” The Banking Law Journal, April 2018, ?https://www.huntonak.com/images/content/3/6/v2/36602/if-it-walks-like-a-duck-the-demise-of-the-guidance-masquerade.pdf

[iv]Peter Weinstock, “The Regulators and Guidance: Thou Doth Protest Too Much, Client Alert, Hunton Andrews & Kurth, September 2018, file:///C:/Users/dev%20strischek/OneDrive/LinkedIN%20Articles/032624%20regulators-and-guidance-thou-doth-protest-too-much.pdf

[v] Ibid.