Wednesday, 26 September 2018

Rule or not a rule? That's the question for GAO on lending

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The investigative arm of Congress has been asked to review guidelines on US lending released in 2013 that critics say have put a crimp in bank loans to businesses.

The so-called leveraged lending guidelines, which grew out of the last financial crisis, effectively block banks from making loans to companies with a debt-to-earnings ratio greater than six times.

US Senator Pat Toomey has asked the US Government Accountability Office to determine the formal status of those guidelines, which as such have never been approved by Congress.

Toomey’s technical question, put to the GAO in a March 31 letter seen by IFR, is whether the guidelines amount to formal rules that would thus be subject to Congressional review.

Yet more broadly the issue is the extent to which agencies such as the Federal Reserve - which took part in crafting the guidelines - are usurping the prerogatives of the legislature.

“We have seen this huge shift in power from the legislative branch of government to the executive branch,” Toomey said last month at a Chamber of Commerce industry event in Washington.

He said there had been a “huge increase in the regulatory powers and authorities [granted] to various agencies”, including their use of guidance to help shape policy.

“These kind of actions have the power of a rule-making … just to say they really have the power of law, but they exist outside the traditional rule-making.”



Under existing US law, the difference between mere guidance and a formal rule is critical, as the latter can be repealed by Congressional vote.

Congress has 60 legislative days to review rules submitted by the agencies and can vote to approve or reject them. Toomey asked the GAO for a decision by June 1.

“The GAO is considering Senator Toomey’s request for a legal opinion, but we do not have a definitive timeframe yet for the response,” GAO spokesman Chuck Young told IFR.

In his letter, Toomey incorrectly states that US banking authorities did not put the guidance up for public comment - they in fact did so in 2012.

An aide to Toomey acknowledged the mistake but told IFR the senator’s main concern is with the attempt to undermine Congressional authority.

And some experts say the mistake has no effect on the senator’s essential point.

“[The letter] is sloppy but doesn’t weaken his argument,” said Richard Farley, a debt financing partner at the law firm of Kramer Levin Naftalis & Frankel.

“If it wasn’t presented as a rule, it avoided a Congressional vote to reject, which is the gravamen of his request.”

If the GAO deems the guidance to be a rule, the agencies have at least two options, lawyers said.

The agencies could submit the existing guidelines for Congressional review, but with the risk that Congress would strike them down.

The agencies could also start the process from scratch - issuing a notice and seeking comment from the market - before presenting a watered-down version more likely to be approved by the Republican-controlled Congress.

The aide, however, said that based on prior cases, the GAO’s response could be entered into the Congressional Record, immediately triggering the 60-day clock even without action from the agencies.

A decision by the GAO that the guidelines do not constitute a formal rule would “probably be the end of our inquiry on that front”, the aide said.

Since Donald Trump took office in January, Republicans in Congress have repeatedly used the Congressional Review Act - signed by Bill Clinton in 1996 - to overturn regulations.

According to Reuters, Congress has passed at least 13 resolutions rolling back regulations that came into effect while Barack Obama was in office.

Trump signed 11 into law, both repealing rules and barring government agencies from issuing “substantially similar” regulations in the future without Congressional approval, Reuters reported.



The Federal Reserve, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency - the main US bank regulators - announced the lending guidelines in 2013.

While the guidelines are not formal law per se, participants in the finance industry say any lending that flouts them invites the scrutiny - or worse - of the authorities.

Loans to companies with a leverage ratio above six times, or that are unable to pay down a significant portion of their debt quickly, raise concerns.

Yet many argue the guidelines are too opaque and too broad.

Some sectors, for example, are better able than others to cope with higher leverage multiples.

Companies that have strong cashflows but are light on assets have struggled to get financing from banks fearful of running afoul of the regulators.

“Senator Toomey is right,” said Paul Forrester, a partner at law firm Mayer Brown and a specialist in post-crisis regulation.

“There has been a significant constraint on activity posed by the guidance, and the agencies should have gone through the proper process for rule-making,” he said.

“The absence of those things has resulted in an arbitrary rule.”

Some see Toomey’s actions as the first step in what could become a more widespread backlash against agency efforts to rein in lending.

“Could (Toomey’s letter) be the groundswell for aggrieved, job-creating companies that view this faceless bureaucracy as what’s stopping them from growing their business?” said one leveraged finance banker.

“All you need is a tweet from the president.”


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