U.S. Congress committee urges regulators to review leveraged lending: letter

By Michelle Price and Davide Scigliuzzo

WASHINGTON (Reuters) – A top U.S. House of Representatives Republican has written to banking regulators asking them to stop enforcing restrictions on leveraged lending and to review other guidance that he says may no longer be legally enforceable.

The letter, sent on Wednesday by Blaine Luetkemeyer, chairman of the House Financial Services Subcommittee and seen by Reuters, will increase pressure on the watchdogs to rescind rules banks say have stymied billions of dollars of deals.

It could also pave the way for Congress to scrutinize and roll-back other rules banks say have dampened lending, prevented business expansion, and bogged them down in paperwork.

Leveraged lending is a form of financing typically used for mergers and acquisitions that involves using debt instead of equity.

Luetkemeyer is a contender to succeed committee Chairman Jeb Hensarling who announced this week he is stepping down at the end of 2018.

The letter was sent to the chairs of the Federal Reserve, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC).

Luetkemeyer’s office declined to comment beyond the letter. The OCC declined to comment. The Fed said it planned to respond to the letter. The FDIC did not immediately respond to a request for comment.

The letter follows a determination issued by the Government Accountability Office (GAO) on Oct. 19 that said the guidance issued by the three watchdogs in 2013 restricting leveraged lending legally constituted a rule-making.

The decision could have profound consequences for leveraged buyouts, acquisitions that load the companies being bought with a lot of debt, as well as other rules.

This is because U.S. law requires all rule-makings to be submitted to Congress for review before they are legally binding. Since the leveraged lending guidance was never submitted, Luetkemeyer said they are not yet effective.

Three senior leveraged finance bankers said there has been no change in the way regulators review transactions following the GAO decision and that they plan to continue to underwrite deals in compliance with the guidance.

Banking regulators use guidance letters to clarify formal rules or guide behaviors, instead of drafting new rules which requires a lengthy legal process. Much of this guidance may now be subject to Congressional review, Luetkemeyer said.

“I note that in recent years your agencies have also issued many other guidance and supervisory letters that were never submitted to the Congress. I urge you to conduct a zero-based review of that guidance, which is presumably now ineffective,” he wrote in the letter.

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