WASHINGTON — Federal regulators’ 2013 guidance on leveraged lending should have been treated as a rule under the Congressional Review Act – and is now eligible for Congress to repeal, the Government Accountability Office said Thursday.

In a letter to Sen. Pat Toomey, the GAO ruled against the agencies’ arguments that the guidance was not a formal rulemaking, concluding that the leveraged lending guidelines are a “general statement of policy” and therefore subject to Congressional review.

Because regulators did not previously submit the guidance for review in 2013, a process that starts a 60-day legislative deadline for lawmakers to act, that window is now open. The decision puts the leveraged lending guidelines at risk of being overturned by Congress years after it went into effect.

The regulators can either send the guidance over now, which starts the 60-day clock, or could opt to drop the guidance, meaning banks wouldn't be held to those standards.

Senator Patrick Toomey.
"This is an important reminder that agencies have a responsibility to live up to their obligations under the Congressional Review Act. When they don’t, Congress should hold them accountable," said Sen. Pat Toomey, R-Pa. Bloomberg News

“We concluded that the interagency guidance is a general statement of policy and is a rule under [the Congressional Review Act] which must be submitted to the Congress for review,” said a summary of the judgment from the GAO.

The GAO review was prompted by a March letter from Toomey, R-Pa., who asked whether two pieces of guidance – leveraged lending and the Consumer Financial Protection Bureau’s indirect auto lending guidance – should be treated as a rule. The GAO decision on Thursday only affects the leveraged lending guidance; it’s unclear when it will issue a decision regarding the CFPB’s guidelines.

In response to GAO’s determination, Toomey said, “This is an important reminder that agencies have a responsibility to live up to their obligations under the Congressional Review Act. When they don’t, Congress should hold them accountable. I will explore steps to do so.”

The Congressional Review Act was a seldom-used legislative procedure created in 1996 allowing lawmakers to quickly overturn agency rulemakings, but Republicans have newly embraced it again since President Trump took office. It has been used to overturn more than a dozen rules this year promulgated by agencies under President Obama.

Yet efforts to overturn some key financial rules have stalled. Senate Republicans abandoned an effort to overturn a CFPB rule on prepaid cards, allowing it to take effect.

And they have struggled to overturn a separate CFPB regulation that would ban mandatory arbitration clauses in financial contracts. The House voted to overturn the rule under the Congressional Review Act, but it remains unclear if Senate Republicans have the votes to act. The Congressional Review Act only requires a majority vote, so the GOP does not need Democratic support. They have until early- to mid-November before the legislative window to repeal the arbitration rule expires.

It’s too early to say, meanwhile, whether Republicans will take aim at the leveraged lending guidance now that the GAO has given the green light to act.

Since its enactment in 2013, the guidance has helped push banks out of leveraged lending, in favor of nonbanks.

The guidance sets expectations for banks regarding such lending, including requiring an “appropriate” capital structure, cash flow and balance sheet leverage. The guidance specifics that those elements should “support a borrower’s capacity to repay.”

It also calls for well-defined underwriting standards and says each institution should set a credit and concentration limit consistent with the bank’s risk appetite.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.