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Getting CAMELS Past Regulators

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photo by Max Pixel

Bloomberg BNA Banking Daily quoted me in Court Asked to Second-Guess Bank Capital, Earnings, Risk Ratings (behind a paywall). It reads, in part,

A now-shuttered Chicago bank is taking on the proverbial giant in a fight to give banks the right to challenge safety and soundness ratings by federal regulators.
Builders Bank, an Illinois-chartered community bank that technically closed its doors in April, wants a federal judge to review a so-called CAMELS rating of 4 it got from the Federal Deposit Insurance Corporation, a rating it said triggered higher costs for insurance premiums (Builders Bank v. Federal Dep. Ins. Corp., N.D. Ill., 15-cv-06033, response 9/13/17). The rating should be reviewed by a court, it said, because it didn’t accurately reflect the bank’s risk profile. A 3 rating would have been more appropriate, it said.
It’s hard to exaggerate the importance of the awkwardly-named CAMELS ratings, which also are used by the Federal Reserve and the Office of the Comptroller of the Currency. The ratings — which measure capital, assets, management, earnings, liquidity, and sensitivity to market risk on a range of 1 to 5, with 1 being the best rating — can mean thumbs-up or thumbs-down on business plans by banks and affiliates.
Want to merge with or buy another bank? Don’t bet on it if your bank has a low CAMELS rating. Want to pay lower premiums for federal deposit insurance? A high rating may mean yes, a low rating probably not. Want to lower your capital costs? Endure fewer examinations? Open new branches? Hold on to a profitable business unit or face regulatory demands to divest it? All of those business decisions and others can turn on how well a bank scores under the CAMELS system.
Pinchus D. Raice, a partner with Pryor Cashman LLP in New York who represents the New York League of Independent Bankers, said judges should be able to look over those rating decisions.
Judicial review would enhance the integrity of bank examinations, he said. “I think it would increase confidence in the process,” Raice told Bloomberg BNA. “Somebody should be looking over the shoulders of the agency, because CAMELS ratings are critical to the life of an institution.” The New York trade group has filed a brief in the suit urging the court to rule against the FDIC.
FDIC Rating Challenged
The FDIC has asked Judge Sharon J. Coleman of the U.S. District Court for the Northern District of Illinois to dismiss the case on several grounds.
For one, the FDIC said, Builders Bank no longer exists. It voluntarily dissolved itself earlier this year and in April transferred its assets to Builders NAB LLC, a nonbank limited liability company in Evanston, Ill., that couldn’t be reached for comment. In a Sept. 13 filing, the bank said Illinois law allows it to continue the suit even though it’s now merged with the LCC, and that it’s seeking damages in the amount of the excessive deposit insurance premiums it says were paid.
Bank Groups Join
The next likely step is a ruling on the FDIC’s motion to dismiss, though it’s not clear when the court might make a decision. Meanwhile, the case has attracted briefs from several banking groups — a joint brief filed in August by the Clearing House Association, the American Bankers Association, and the Independent Community Bankers of America, and a separate brief a few weeks later by the New York League of Independent Bankers.
None of the four groups is wading into the actual dispute between Builders Bank and the FDIC, and their briefs explicitly said they’re not supporting either party. However, all four groups urged the court not to issue a sweeping decision that says CAMELS ratings are exempt from outside review.
According to the Clearing House, the ABA, and the ICBA, banks should be able to seek judicial review in exceptional cases “where such review is necessary and appropriate,” such as if regulators get their calculations wrong, or if regulators use ratings to retaliate against banks that criticize FDIC policies or personnel.
“At a minimum, given the complexity of the CAMELS rating system and the consequences of CAMELS ratings, this court should not issue a ruling that is broader than necessary to decide this dispute and that may undermine the ability of other banks to obtain judicial review,” the brief said.
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David Reiss, professor of finance law at Brooklyn Law School in Brooklyn, N.Y., called the case a signal that the banking industry believes a range of agency actions might be held to be unreviewable. “As a general philosophy, unless Congress has made unreviewability crystal clear, I think we want to be careful,” Reiss told Bloomberg BNA. “This does seem intuitively overbroad to me.”
He also said the case, because it involves a bank that no longer exists, raises the possibility of a result that might not be welcomed by the banking industry. “The bank groups may be somewhat worried that a now-dissolved bank may get a court ruling that could have unintended consequences for banks still doing business,” he said.

Debt Collection in Flux

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Until Debt Tear Us Apart

Bloomberg BNA Banking Daily quoted me in Loans in Flux as Appeals Court Rebuffs Midland Funding (behind a paywall). It opens,

Lenders, investors and others are watching to see whether the U.S. Supreme Court is the next stop for a case raising questions about how a host of loans are collected, purchased, structured, and priced (Madden v. Midland Funding LLC, 2015 BL 162010, 2d Cir., No. 14-cv-02131, 5/22/15).

At issue is a May ruling by the U.S. Court of Appeals for the Second Circuit that said a debt collector cannot claim protection from state-law claims under the National Bank Act for loans acquired from a national bank (100 BBD, 5/26/15).

The ruling, which jolted banking lawyers who say the decision upsets expectations that assignees may charge and collect interest at rates that were valid at origination, hit with renewed force Aug. 12, when the Second Circuit turned away a petition to rehear the case (156 BBD, 8/13/15).

New questions about the impact of the case arise almost daily, but for many the main question is whether the debt collector, Midland Credit Management, will take the case to the U.S. Supreme Court.

Many expect the company to seek review by the justices. Midland has until early November to do so.

Brooklyn Law School Professor David Reiss isn’t making a prediction, but ticked off a list of factors that might make the difference, including a possible circuit split, questions raised by the case that have “serious doctrinal consequences” for the National Bank Act and other federal statutes, and the potential for friend-of-the-court briefs by the banking industry to grab the justices’ attention.

“While it is a fool’s game to predict confidently which cases will be picked up by the Supreme Court, this case has a bunch of characteristics that make it a contender,” Reiss said Aug. 17.

What To Do With MERS?

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Bloomberg BNA quoted me in More Policy Queries As MERS Racks Up Court Wins (behind a paywall). The article further discusses the case I had blogged about earlier this week.  It reads, in part,

Mortgage Electronic Registration Systems, Inc. (MERS), the keeper of a major piece of the U.S. housing market’s infrastructure, has beaten back the latest court challenge to its national tracking system, even as criticism of the company keeps coming (Montgomery County v. MERSCORP, Inc., 2015 BL 247363, 3d Cir., No. 14-cv-04315, 8/3/15). In an Aug. 3 decision, the U.S. Court of Appeals for the Third Circuit reversed a lower court ruling in favor of Nancy J. Becker, the recorder of deeds for Montgomery County, Pa., whose lawsuit claimed MERS illegally sidestepped millions of dollars in recording fees.

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MERS has faced an array of critics, including those who say its tracking system is cloaked in secrecy. MERS disagrees, and provides a web portal for homeowners seeking information.

A host of friend-of-the-court briefs filed in the Third Circuit blasted the company, including one filed in March by law school professors who said the MERS system “has introduced unprecedented opacity and incompleteness to the record of interests in real estate.”

One of those, Brooklyn Law School Professor David Reiss, Aug. 6 raised the question whether MERS, though not a servicer, might be the subject of increased oversight.

“The problems consumers faced during the foreclosure crisis were compounded by MERS,” Reiss told Bloomberg BNA. “Those issues have not been resolved by the MERS litigation, and it would be interesting to see if the Consumer Financial Protection Bureau will seek to regulate MERS as an important player in the servicing industry. It would also be interesting to see whether state regulators will pick the ball in this area by further regulating MERS to increase transparency and procedural fairness for homeowners,” he said.

Reiss on SCOTUS Junior Lien Decision

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Bloomberg BNA quoted me in Nagging Economic and Credit Questions Dampen Bankruptcy Victory for Bankers (behind paywall). It reads, in part:

The U.S. Supreme Court delivered an important bankruptcy ruling for bankers that doesn’t, however, do anything about still-struggling homeowners (Bank of Am. N.A. v. Caulkett, 2015 BL 171240, U.S., No. 13-cv-01421, 6/1/15); (Bank of Am. N.A. v. Toledo-Cardona, 2015 BL 171240, U.S., No. 14-cv-00163, 6/1/15).

In a June 1 decision, the court said Chapter 7 debtors cannot void junior liens on their homes when first-lien debt exceeds the value of the property, as long as the senior debt is secured and allowed under the Bankruptcy Code.

The decision is a victory for Bank of America, which held both junior liens in the two related cases, and for banking groups that said a different result could have destabilized more than $40 billion in commercial loans secured by similar liens.

But Brooklyn Law School Professor David Reiss June 2 said the case highlights the need for a broad remedy for homeowners who have continued to struggle to make payments since the financial crisis.

“The bank’s position as a legal matter is a very reasonable one, but from a policy perspective we needed and still need a bigger and more systemic solution to the problems that households face,” Reiss told Bloomberg BNA.

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[S]ome said the ruling highlights economic questions on several levels.

Reiss, who coedits a financial blog, June 2 said the case shows the federal government’s inability to deal head-on with the impact of financial turmoil in 2008 and 2009.

“Not enough is being done to move households beyond the crisis, and it’s bad for households and it’s bad for the financial sector,” Reiss said. “Here we are seven or eight years later and we’re sitting here with these valueless second mortgages. We’re just slogging through the muck and we’re not coming up with any good solutions to get past it.”

Reiss on Big BoA FIRREA Penalty

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Bloomberg BNA quoted me in FIRREA-Fueled Penalty Against BofA Signals More Risk for Large Institutions (behind a paywall). It reads in part,

A federal judge in New York ordered Bank of America to pay $1.26 billion in civil penalties to the U.S. government in connection with a Countrywide lending program, setting up a likely appeal in one of the most closely watched cases in the financial services arena (United States v. Bank of Am. Corp., S.D.N.Y., No. 12-cv-01422, 7/30/14).

The ruling by Judge Jed Rakoff of the U.S. District Court for the Southern District of New York, which also said former Countrywide official Rebecca Mairone must pay $1 million in installments, followed an October jury verdict that found Bank of America liable for Countrywide’s sale of bad loans to Fannie Mae and Freddie Mac, some of which were securitized.

Countrywide sold those loans under its “High-Speed Swim Lane” program—an initiative aimed at speeding the loan approval process and one launched before Bank of America acquired Countrywide in 2008.

Rakoff called the nine-month HSSL program “from start to finish the vehicle for a brazen fraud,” and imposed a $1,267,491,770 penalty on Bank of America.

The amount was less than the $2.1 billion sought by the government, but well above what Bank of America argued was appropriate, which was $1.1 million at the most .

“We believe that this figure simply bears no relation to a limited Countrywide program that lasted several months and ended before Bank of America’s acquisition of the company,” Bank of America spokesman Lawrence Grayson told Bloomberg BNA July 30. “We are reviewing the ruling and assessing our appellate options,” he said.

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According to Rakoff, Firrea could have allowed a penalty in this case that would have equaled the value of the loan transaction itself, which totaled $2.96 billion.

Rakoff, citing the discretion granted to judges in such cases, reduced the penalty to $1.267 billion, saying not all of the loans were flawed.

Brooklyn Law School Professor David Reiss called Rakoff’s ruling significant and a new turn in an important area of case law for businesses.

“We’re beginning to see a jurisprudence of Firrea penalties and a penalty regime that is very pro-government,” Reiss told Bloomberg BNA. “This shows that the penalty can be as high as the nominal amount of the transaction. It’s good guidance in the sense that it helps businesses know the outer boundaries of their risk, but it’s a generous view of deterrence,” he said.