The Lending-Limit Combination Rules: Regulation by Enforcement at the OCC
Dreier, Douglas C., Duke Law Journal
An agency cannot merely flit serendipitously from case to case, like a bee buzzing from flower to flower, making up the rules as it goes along.
--Judge Bruce M. Selya 
The regulation-by-enforcement critique has made an impact at the Securities and Exchange Commission, and scholars are beginning to turn this critique against other agencies. Using this critique, this Note demonstrates that the federal combination rules for the lending-limit law should be rewritten. Under the lending-limit law, national banking associations may lend only a certain percentage of their unimpaired capital and unimpaired surplus to any one borrower. Although the combination rules include several per se rules pursuant to which loans made to two borrowers will be aggregated, they also grant the Office of the Comptroller of the Currency (OCC) the power to determine ad hoc whether to aggregate two loans. This power to determine on an ad hoc and even on a post hoc basis whether a violation of the law has occurred is an affront to the rule of law and is unfair to the industry. The combination rules should be amended to remove the OCC's power to make ad hoc determinations.
In the wake of the 2008 financial crisis, scholars, (2) the media, (3) and legislators turned their focus to banking regulators and how they regulate the banking industry. (4) As Comptroller of the Currency Thomas Curry has explained, the "mission of ensuring the safety and soundness of America's national banks and federal savings associations has never been more important or more challenging." (5) This Note focuses on one of the ways in which the Office of the Comptroller of the Currency (OCC) ensures the safety and soundness of financial institutions--namely, by preventing financial institutions from lending too much money to any one borrower. (6) Because loans made to two technically distinct borrowers may carry the same risk as loans made to one borrower, the OCC has established combination rules to define when two borrowers should be treated as one. (7) As explained in Part II, these combination rules do not inform banks whether a given loan would exceed a bank's capital requirements because the OCC may aggregate loans to two borrowers whenever "the facts and circumstances" warrant such action. (8)
Political theory has long held the rule of law in high esteem. Aristotle wrote that "the law must govern, and not individuals," (9) and that "the rule of the law is preferable to that of any individual." (10) When a rulemaker has the power to determine whether past conduct violated some heretofore unstated law, the rule of law is rendered obsolete. (11) An industry should be able to know what the law is by examining the applicable laws and regulations. When the law is unclear, it is unfair for an agency to hold people accountable for violating that law.
This idea is at the heart of the regulation-by-enforcement critique. Regulation by enforcement occurs when an agency creates a piecemeal rule via enforcement actions or interpretive letters, bypassing the normal rulemaking process. (12) The regulation-by-enforcement critique has historically been applied to the Securities and Exchange Commission (SEC), but in recent years scholars have extended this critique to other agencies. (13) This Note further extends the regulation-by-enforcement critique to the OCC, an agency historically less visible than the SEC, (14) but no less important. Part I of this Note describes the regulation-by-enforcement critique. Part II explains the lending-limit law and the combination rules. Part III explains why the OCC should not rely on regulation by enforcement in the context of the combination rules.
The combination rules provide one particularly egregious example of regulation by enforcement in the field of banking regulation. With the combination rules, the OCC has established multiple per se tests according to which the OCC will aggregate loans made to two related borrowers, but the OCC has also granted itself the discretion to determine whether to aggregate loans. …