Tag Archives: merger

Cutting Back on Community Reinvestment

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Bloomberg Law quoted me in Banks Look to Narrow Exams Under Community Reinvestment Act. It opens,

Banks see an opening to limit the types of violations that could lead to a Community Reinvestment Act downgrade as federal regulators begin rewriting rules under the 1977 law.

Banks say regulators have improperly used consumer fair lending and other violations involving credit cards or other financial products to evaluate compliance with the law meant to increase lending and investment to lower-income communities.

“When a bank violates a consumer protection law, there is no shortage of enforcement agencies and legal regimes available to seek redress and punishment. Adding the CRA to that long list thus has little marginal benefit, and risks diluting and undermining the CRA’s core purpose of promoting community reinvestment,” the Bank Policy Institute, a leading bank lobbying group, said in a Nov. 19 comment letter to the Office of the Comptroller of the Currency.

The OCC set the stage for a CRA rewrite in August by releasing an advanced notice of proposed rulemaking. The Federal Reserve and Federal Deposit Insurance Corp. have signaled a desire to sign on to a joint proposal.

With that momentum building, banks are taking their shot to limit the types of enforcement actions included in CRA reviews. They want CRA reviews to focus on mortgages, small business and other community development investments.

The question of how non-CRA-related violations apply to banks’ community lending reviews is not merely a theoretical exercise.

Wells Fargo & Co. saw its CRA grade downgraded two levels to “needs to improve”in March 2017 following the revelation of the fake accounts it generated for consumers. Several states and municipalities cut off business with the bank in response.

CRA exam cycles run three years for large national banks and can run longer for smaller banks that perform well. Banks receive one of four grades—outstanding, satisfactory, needs to improve or substantial noncompliance—and a poor grade can restrict their merger and branch expansion plans.

OCC, Treasury Leading Push

The Trump administration, led by Treasury Secretary Steven Mnuchin and Comptroller of the Currency Joseph Otting, has been pushing for the latest CRA revision.

Both of those officials ran into CRA trouble when they tried to sell OneWest Bank to CIT Group Inc. Mnuchin was OneWest’s chairman and Otting its chief executive.

The Treasury Department released a report on “modernizing the CRA” in April. Included in that report is a call to not allow fair lending enforcement investigations from the Consumer Financial Protection Bureau and other regulators to slow down CRA reviews.

Otting went farther, issuing a bulletin on Aug. 15 highlighting that his agency’s examiners will no longer take into account non-CRA lending violations when assessing a bank’s CRA compliance.

The FDIC and the Fed have not yet followed suit. But banks want the three agencies to set a common policy on dealing with non-CRA related enforcement actions in their community lending reviews.

“Regulators should develop consistent policies clarifying that CRA will not be used as a general enforcement tool,” the American Bankers Association said in a Nov. 15 comment letter.

There is some merit to the idea, according to David Reiss, a professor at Brooklyn Law School and the research director at the Center for Urban Business Entrepreneurship.

“It’s delinking fair lending concerns, which are regulated elsewhere, from CRA concerns. From an industry perspective that may make a lot of sense,” he said in a Nov. 30 phone interview.

The proposal, taken in a vacuum, may be reasonable. But in the context of broader attempts to weaken the CRA, it should be viewed more skeptically.

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.
*     *      *
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.

Georgia Court Dismisses Federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq Claim

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The court in deciding Morrison v. Bank of Am., N.A., 2013 U.S. Dist. (N.D. Ga. Dec. 16, 2013) eventually granted Bank of America, N.A.’s motion to dismiss.

Plaintiff defaulted on her loan obligations after taking a loan from bank of America. Plaintiff asserted that she “suspended” payments because the defendant failed to properly identify the person that was the holder in due course of legal title or the ability to enforce the note under O.C.G.A. § 11-3-309.

Plaintiff asserted that foreclosure would be wrongful because the defendant lacked standing to foreclose on the property, also that the defendant violated the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq (“FDCPA“), and Georgia law by failing to validate the debt and provide an accounting of plaintiff’s mortgage. Lastly, plaintiff asserted that the defendant failed to obtain Secretary of U.S. Department of Housing and Urban Development approval to be designated as Foreclosure Commissioner, in violation of 12 U.S.C. § 3754.

Plaintiff also sought to have the security deed and note declared fully satisfied, to enjoin foreclosure of the property, to compel production of the plaintiff’s note and any assignments, and to require the defendant to validate the alleged debt. Bank of America moved to dismiss Plaintiff’s Complaint for failure to state a claim.

The court considered the plaintiff’s assertions, and categorically dismissed them in granting the defendant’s motion to dismiss.

Ohio Court of Appeals Finds that BAC had Failed to Demonstrate that it had Standing to Accelerate the Note and Foreclose the Mortgage

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The court in deciding BAC Home Loans Servicing, L.P. v. Blythe, 2013-Ohio-5775 (Ohio Ct. App., Columbiana County, 2013) reversed the lower court’s judgment.

Appellant Walter J. Blythe appealed the lower court’s decision granting summary judgment in favor of Appellee, BAC Home Loans Servicing, L.P., in this foreclosure action.

Blythe challenged the lower court’s finding that BAC Home Loans Servicing had standing to foreclose in the absence of evidence that BAC was the holder of the note creating the obligation. Blythe relied on the material submitted by BAC in support of this claim. Because the copy of the note filed by BAC was specifically indorsed to Countrywide Bank, FSB, not BAC, and there was nothing to indicate otherwise, BAC had failed to demonstrate that it had standing to accelerate the note and foreclose the mortgage. Thus this court reversed the judgment of the lower court and dismissed the suit for lack of standing.

This court held that a note that had been specially indorsed to a bank under R.C. 1303.25(A) could not be enforced by a loan servicing company (LSC) that was not the transferee or successor in interest of the bank. This court also held that the LSC was not the holder of the note under R.C. 1303.32(A)(1) by virtue of the merger of the bank and a national association (NA). Further, the LSC was not a non-holder in possession entitled to enforce under R.C. 1303.31 as it had not acquired the bank’s right to the note under R.C. 1303.21.

This court noted that even if the NA had filed the foreclosure suit, there was no evidence of the transaction, merger, or mergers that gave rise to an its interest in the note. Lastly, the court held that the note was not bearer paper and could only be enforced by the bank since the note was payable to the bank, as such the bank was the real party in interest in the foreclosure action. Thus the LSC lacked standing to foreclose.