Yesterday, five agencies that oversee financial institutions issued a joint statement regarding the role of supervisory guidance. The Federal Reserve Board, the Bureau of Consumer Financial Protection, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency confirmed 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 -- which follows -- explains that supervisory guidance can outline the agencies’ supervisory expectations or priorities and articulate the agencies’ general views regarding appropriate practices for a given subject area.

Difference between supervisory guidance and laws or regulations

The agencies issue various types of supervisory guidance, including interagency statements, advisories, bulletins, policy statements, questions and answers, and frequently asked questions, to their respective supervised institutions. A law or regulation has the force and effect of law. 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. Supervisory guidance often provides examples of practices that the agencies generally consider consistent with safety-and-soundness standards or other applicable laws and regulations, including those designed to protect consumers. Supervised institutions at times request supervisory guidance, and such guidance is important to provide insight to industry, as well as supervisory staff, in a transparent way that helps to ensure consistency in the supervisory approach. 

Ongoing agency efforts to clarify the role of supervisory guidance

The agencies are clarifying the following policies and practices related to supervisory guidance:

  • The agencies intend to limit the use of numerical thresholds or other “bright-lines” in describing expectations in supervisory guidance. Where numerical thresholds are used, the agencies intend to clarify that the thresholds are exemplary only and not suggestive of requirements.  The agencies will continue to use numerical thresholds to tailor, and otherwise make clear, the applicability of supervisory guidance or programs to supervised institutions, and as required by statute.
  • Examiners will not criticize a supervised financial institution for a “violation” of supervisory guidance. Rather, any citations will be for violations of law, regulation, or non-compliance with enforcement orders or other enforceable conditions. During examinations and other supervisory activities, examiners may identify unsafe or unsound practices or other deficiencies in risk management, including compliance risk management, or other areas that do not constitute violations of law or regulation. In some situations, examiners may reference (including in writing) supervisory guidance to provide examples of safe and sound conduct, appropriate consumer protection and risk management practices, and other actions for addressing compliance with laws or regulations. 
  • The agencies also have at times sought, and may continue to seek, public comment on supervisory guidance. Seeking public comment on supervisory guidance does not mean that the guidance is intended to be a regulation or have the force and effect of law. The comment process helps the agencies to improve their understanding of an issue, to gather information on institutions’ risk management practices, or to seek ways to achieve a supervisory objective most effectively and with the least burden on institutions.
  • The agencies will aim to reduce the issuance of multiple supervisory guidance documents on the same topic and will generally limit such multiple issuances going forward.    
  • The agencies will continue efforts to make the role of supervisory guidance clear in their communications to examiners and to supervised financial institutions, and encourage supervised institutions with questions about this statement or any applicable supervisory guidance to discuss the questions with their appropriate agency contact.

insideARM Perspective

This is certainly a change from the position taken by former CFPB Director Richard Cordray, who famously warned a group of bankers in March 2016,

"Without undermining the confidentiality of the supervision process, we are providing this de-identified information so that everyone can see and respond immediately to violations and remedial actions being taken elsewhere."

(emphasis added) and

"[I]t would be ‘compliance malpractice’ for executives not to take careful bearings from the contents of these orders about how to comply with the law and treat consumers fairly."

Indeed, nearly all supervised industries under the CFPB complained that rules were effectively being written - and retroactively imposed - without proper administrative process, and based on actions against specific companies for specific fact patterns, or based on vague supervisory documents.

Also worth noting is industry's support for guidance, when properly issued and used. In response to the Bureau’s call for evidence regarding its Guidance Bulletins, the Consumer Relations Consortium (CRC) urged the agency to continue – or even increase -- the practice of offering guidance to provide clarity where needed. The group highlighted multiple examples of important guidance provided in the past by the Federal Trade Commission, and noted that guidance can be helpful in addressing elements of laws that have become outdated or “gray” due to market advancements. For example, technology has evolved so greatly during the last several years that some of the positions addressed in the November 2013 Advanced Notice of Proposed Rulemaking (ANPR) for debt collection have become moot, or at least outdated to the point where they ought to be reconsidered from scratch. 

The process of rule (or law) making is, by definition, a slow one. But markets are changing at an ever-increasing pace. The joint statement issued yesterday addresses the need to provide interim guidance, while maintaining the integrity of the rulemaking process that carefully considers many perspectives.

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