Federal Agencies Issue Statement Clarifying 'Regulation by Enforcement'

MBA NewsLink Staff

September 12, 2018

Five federal agencies, including the Consumer Financial Protection Bureau, issued a statement yesterday 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.

The statement (https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180911a1.pdf), by the CFPB; the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corp., National Credit Union Administration and Office of Comptroller of the Currency, said while supervisory guidance can outline the agencies' supervisory expectations or priorities and articulate the agencies' general views regarding appropriate practices for a given subject area, it does not carry legal weight.

"A law or regulation has the force and effect of law," the agency statement said. "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."

The statement came following a July letter by Rep. Blaine Luetkemeyer, R-Mo., a member of the House Financial Services Committee, who had called on the regulators to address so-called "regulation by enforcement."

"For too long, regulators have inappropriately used guidance as if it had the full force of a formal rulemaking," Leutkemeyer said in a statement yesterday. "We must continue to restore sanity and clarity in the regulatory regime, and move away from regulation by enforcement."

The Mortgage Bankers Association has also long-criticized the concept of "regulation by enforcement," particularly by the CFPB. In a July 2 letter, MBA urged the Bureau to adopt guidance principles to provide certainty to its rules and regulations.

"The value of Bureau guidance materials lies in their reliability. Unfortunately, the Bureau's practice of using disclaimers to make guidance non-binding on the Bureau erodes much of its reliability," wrote MBA Senior Vice President of Residential Policy and Member Engagement Pete Mills. "Regulated entities must be able to rely on guidance to ensure they are operating within the rules. MBA therefore asks that the Bureau stand by its guidance and use disclaimers only when absolutely necessary and provide the rationale for doing so."

Specifically, the agencies clarified the following policies and practices related to supervisory guidance:

--Agencies intend to limit the use of numerical thresholds or other "bright-lines" in describing expectations in supervisory guidance;

--Examiners will not criticize a supervised financial institution for a "violation" of supervisory guidance. While examiners may identify unsafe or unsound practices or other deficiencies in risk management or other areas, any citations will be for violations of law, regulation, or non-compliance with enforcement orders or other enforceable conditions;

--Agencies may continue to seek public comment on supervisory guidance. This does not mean that the guidance is intended to be a regulation or have the force and effect of law;

--Agencies will aim to reduce the issuance of duplicative supervisory guidance documents; and

--Agencies will continue efforts to make the role of supervisory guidance clear in their communications to examiners and to supervised financial institutions.

"MBA welcomes this positive development for regulatory clarity as it makes clear that supervisory bulletins do not impose new legal requirements on regulated entities," said Justin Wiseman, MBA Associate Vice President and Managing Regulatory Counsel. "This statement does seem to clearly indicate that failure to follow Bureau guidance will not, by itself, be used as the basis for an enforcement action. It also suggests that following Bureau guidance should satisfy supervisory expectations as they are delineated examples of acceptable practices."

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