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November 6, 2017

In Another Threat to Common Sense Financial Rules Necessary to Protect Main Street from Wall Street, Congress Now Has Broader Power to Invalidate Them

In a significant and troubling step that will increase the already broad power that Congress has under the Congressional Review Act (CRA) to invalidate agency rules, the GAO announced last week its determination that “Interagency Guidance on Leveraged Lending” was subject to the CRA.

The Guidance was issued in 2013 by banking regulators to address the heightened risks posed by leveraged loans—large loans to corporate already-indebted borrowers for special transactions such as mergers and acquisitions.  These are often junk bonds.  Specifically, the Guidance outlined the regulators’ expectations for the prudent handling of leveraged loans, including underwriting standards, risk-ratings, and credit management.   However, earlier this year, the Treasury Department under the Trump Administration criticized the Guidance as restricting the flow of credit to the economy, and a senator asked the GAO to determine whether the Guidance was a “rule” within the meaning of the CRA.  The GAO decided that the Guidance was a “rule” subject to the CRA, notably concluding that even though such general statements of policy are exempt from the notice and comment rulemaking requirements of the Administrative Procedure Act, they still fall under the CRA, which has narrower exclusions.

This matters a great deal for several reasons.  First, because the CRA requires all rules to be submitted to Congress before they can take effect, and the Guidance was never submitted for CRA review, the GAO’s determination casts doubt on whether the Guidance is still, or ever was, effective.  Second, it means that Congress now can pass a resolution of disapproval under the CRA invalidating any agency’s guidance and not just rules that were finalized pursuant to the Administrative Procedures Act (APA).  Third, even though agency guidance is most often issued due to industry requests for clarification, this decision is going to chill agency guidance, leaving companies and the public to guess how agencies will interpret or implement laws and rules.  Ironically, the likely unintended result will almost certainly be more regulation by enforcement action.  Fourth, once a rule or guidance is disapproved under the CRA, the agency is prohibited from revisiting the subject matter or issuing any future rules or guidance on the subject unless Congress specifically authorizes it.  Therefore, because passing legislation almost always takes 60 votes in the Senate and CRA disapproval only requires majority vote, such prohibitions are likely to be virtually permanent.

Finally, and more broadly, the GAO’s determination strengthens the hand of the special interests who want Congress to have the broadest possible power to kill regulations—and now guidance— of their industry that they don’t like no matter how important or necessary they are to protect the financial security or health and safety of the American public.  This is going to politicize the rulemaking process and empower lobbyists to use their influence – often unseen and unaccountable – to undo rules that were passed according to a law (the APA) that requires an open process and the input of the public.

For example, the most recent example is the demise of the CFPB’s rule that was designed to protect financial consumers’ right to join with other victims of fraud and abuse and seek fair compensation in court, as our President and CEO Dennis Kelleher discussed on C-Span here:

That rulemaking took almost five years and involved a massive amount of work and outreach to all stakeholders, including most prominently the industry.  Congressional Republicans, heavily lobbied by the financial industry, voted via the CRA to overturn the rule without a single hearing or input from anyone in open, public hearings.  That wasn’t a decision on the merits, but, at best, was based on political arguments and talking points supplied by the special interests.

Most remarkably, the use of the CRA has exploded during this Administration.  In fact, the CRA was used only once before the Trump administration (during the Bush administration in the 2000s), but it has been used 15 times now in just the first few months of the Trump administration.  The result is that special interest lobbyists and campaign contributors get elected officials to kill rules enacted by experts at agencies after an inclusive and open process.  That’s just wrong.

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