The CFPB, OCC, Federal Reserve, FDIC, and NCUA have issued a proposed rule on the role of supervisory guidance.

In September 2018, the agencies issued an “Interagency Statement Clarifying the Role of Supervisory Guidance.”  In response to the Statement, the agencies received a petition requesting a formal rulemaking on the subject.  The proposed rule would codify the Statement, with clarifying changes, as an appendix to a new subpart added to the regulations of each agency.  Each of the new subparts would state that the subpart “reiterates the distinctions between regulations and guidance, as stated in the [Interagency Statement] and provides that that the Statement is binding on the [agency].”

Key items in the Interagency Statement are:

  • The following description of the difference between supervisory guidance and laws or regulations:

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 view regarding appropriate practices for a given subject area.

  • The agencies intend to limit the use of numerical thresholds or other “bright-line” tests in describing expectations in supervisory guidance and numerical thresholds will generally be used as exemplary only and not suggestive of requirements.
  • Examiners will not criticize (through the use of matters requiring attention, matters requiring immediate attention, matters requiring board attention, documents of resolution, and supervisory recommendations) a supervised financial institution for, and agencies will not issue an enforcement action on the basis of, a violation of or non-compliance with supervisory guidance.

The agencies indicated that they rejected a suggestion in the rulemaking petition for them to provide that MRAs, examination downgrades, and other formal examination mandates or sanctions should be based only on a violation of a statute, regulation, or order, including a “demonstrably unsafe or unsound practice.”  They stated that their examiners “all take steps to identify deficient practices before they rise to violations of law or regulation or before they constitute unsafe or unsound banking practices.  The agencies continue to believe that early identification of deficient practices serves the interest of the public and of supervised institutions.”

As we commented when the Interagency Statement was issued in 2018, the Statement suggests that instead of issuing supervisory guidance to set forth expectations to be used as a “sword” if not followed by supervised entities, the agencies intend to use supervisory guidance to identify compliant practices.  As a result, supervised entities may be better able to rely on supervisory guidance as a potential “safe-harbor” or “shield” from agency criticism when structuring their compliance programs.  (The Statement provides that examiners may reference 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 Statement also leaves open the possibility of an agency’s use of supervisory guidance as the basis for an investigation.

The proposal includes several specific questions on which the agencies seek comments.  Comments will be due 60 days after the date the proposal is published in the Federal Register.