We appreciate your weekly FAQs. It is printed and handed out to staff in our Monday compliance meetings. Thank you for your dedication to our compliance needs.
In one of our meetings recently, there was quite a bit of discussion about the difference between regulations and guidance. The consensus was that regulations must be followed, but guidance is not required to be followed.
The thinking was that regulatory guidance would become regulations, so we should just follow them anyway.
Our question is, what’s the difference between regulations and guidance?
ANSWER
First and foremost, thank you for reading our FAQs. We have provided this labor of love for many years because of our philosophy to serve our clients and the mortgage community more broadly. In fact, our very motto – Creating a Culture of Compliance® – is reflective of our commitment and vision.
Your question is a good one. Regulations and guidance are not synonyms, but they are closely aligned. I will offer some insight into the difference by considering a current regulatory proposal.
The Federal Reserve, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, National Credit Union Administration, and Office of the Comptroller of the Currency are asking for comment on a proposal that outlines and confirms the agencies' use of supervisory guidance for regulated institutions.
The proposal would codify the 2018 Interagency Statement Clarifying the Role of Supervisory Guidance (“2018 Statement”) that clarified the differences between regulations and guidance. The 2018 Statement reiterated well-established law by stating that, unlike a law or regulation, supervisory guidance does not have the force and effect of law.
The proposal would codify the 2018 Interagency Statement Clarifying the Role of Supervisory Guidance (“2018 Statement”) that clarified the differences between regulations and guidance. The 2018 Statement reiterated well-established law by stating that, unlike a law or regulation, supervisory guidance does not have the force and effect of law.
The agencies do not take enforcement actions or issue supervisory criticisms based on noncompliance with supervisory guidance. Instead, supervisory guidance outlines supervisory expectations and priorities or articulates views regarding appropriate practices for a given subject area.
Thus, in contrast to supervisory guidance, regulations do have the force and effect of law, and enforcement actions can be taken if regulated institutions violate the regulations. Regulations are also generally required to go through a notice and comment process.
To amplify this outline further, the agencies had issued the 2018 Statement on September 11, 2018, to explain the role of supervisory guidance and describe the agencies’ approach to supervisory guidance. An interesting feature of the 2018 Statement was its view that agencies issue various supervisory guidance types to their respective supervised institutions, including, but not limited to, interagency statements, advisories, bulletins, and policy statements, questions and answers, and frequently asked questions.
To be clear, 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 mitigate risks or that the agencies generally consider to be consistent with safety and soundness standards or other applicable laws and regulations, including those designed to protect consumers.
It is also worth noting that the agencies stated in the 2018 Statement that supervised institutions sometimes request supervisory guidance. That guidance is essential to providing clarity to these institutions in a transparent way that ensures consistency in the supervisory approach.
Here’s the important takeaway: the 2018 Statement restates existing law and reaffirms the agencies’ understanding that supervisory guidance does not create binding, enforceable legal obligations. Furthermore, it reaffirms that the agencies do not issue supervisory criticisms for violations of supervisory guidance, and the appropriate use of supervisory guidance by the agencies.
Specifically, in this particular interagency statement, the agencies also expressed their intention to (1) limit the use of numerical thresholds in guidance; (2) reduce the issuance of multiple supervisory guidance on the same topic; (3) continue efforts to make the role of supervisory guidance clear in communications to examiners and supervised institutions; and (4) encourage supervised institutions to discuss their concerns about supervisory guidance with their appropriate agency contact.
Financial institutions must use regulatory guidance constructively to be prepared for regulatory scrutiny. Implementing guidance provides certainty and transparency to financial institutions.
Thus, in contrast to supervisory guidance, regulations do have the force and effect of law, and enforcement actions can be taken if regulated institutions violate the regulations. Regulations are also generally required to go through a notice and comment process.
To amplify this outline further, the agencies had issued the 2018 Statement on September 11, 2018, to explain the role of supervisory guidance and describe the agencies’ approach to supervisory guidance. An interesting feature of the 2018 Statement was its view that agencies issue various supervisory guidance types to their respective supervised institutions, including, but not limited to, interagency statements, advisories, bulletins, and policy statements, questions and answers, and frequently asked questions.
To be clear, 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 mitigate risks or that the agencies generally consider to be consistent with safety and soundness standards or other applicable laws and regulations, including those designed to protect consumers.
It is also worth noting that the agencies stated in the 2018 Statement that supervised institutions sometimes request supervisory guidance. That guidance is essential to providing clarity to these institutions in a transparent way that ensures consistency in the supervisory approach.
Here’s the important takeaway: the 2018 Statement restates existing law and reaffirms the agencies’ understanding that supervisory guidance does not create binding, enforceable legal obligations. Furthermore, it reaffirms that the agencies do not issue supervisory criticisms for violations of supervisory guidance, and the appropriate use of supervisory guidance by the agencies.
Specifically, in this particular interagency statement, the agencies also expressed their intention to (1) limit the use of numerical thresholds in guidance; (2) reduce the issuance of multiple supervisory guidance on the same topic; (3) continue efforts to make the role of supervisory guidance clear in communications to examiners and supervised institutions; and (4) encourage supervised institutions to discuss their concerns about supervisory guidance with their appropriate agency contact.
Financial institutions must use regulatory guidance constructively to be prepared for regulatory scrutiny. Implementing guidance provides certainty and transparency to financial institutions.
In effect, by following regulatory guidance, a financial institution anticipates the agencies’ supervisory criticisms relating to identifying the practices, operations, financial conditions, or other matters that could have a negative effect on the safety and soundness of the financial institution; could cause harm to consumers; or could cause violations of laws, regulations, final agency orders, or other legally enforceable conditions.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group
