Docket: Court's Slaps at Agencies Give Banks Ammunition

Life just got a bit tougher for the banking agencies.

The U.S. Court of Appeals for the District of Columbia Circuit issued two rulings last month highly critical of administrative actions taken by the Office of Thrift Supervision and the Federal Reserve Board.

Banking lawyers have seized on these rulings, saying they indicate a new skepticism on behalf of a court that has pretty much sided with the regulators since the savings and loan crisis.

Michael Crotty, deputy general counsel for litigation at the American Bankers Association, said the agencies abused the wide discretion the court had given them in earlier rulings. "The court has to slap some hands to get people to toe the line a little bit," he said.

These slaps came in two cases. The first featured a bout between the OTS and Charter Federal Savings and Loan, a mutual thrift that wanted in 1988 to convert to stock ownership using a method that didn't limit the amount of stock its directors could purchase. The OTS' predecessor as thrift regulator, the Federal Home Loan Bank Board, refused the request, igniting a legal battle that the thrift lost at the appeals court level.

Following that victory, the OTS hit the thrift with an enforcement action for a safety and soundness violation. The charge: Charter Federal wasted its resources pursuing the court battle.

The D.C. court threw out that enforcement action, ruling April 12 that the charge is "unsupported by substantial evidence."

The court then went a step further. It ruled that a safety and soundness violation does not automatically occur whenever a financial institution loses money. Rather, the violation must threaten a bank or thrift's "stability or integrity," the court said.

"This is a pretty strong standard to prove," said Gil Schwartz, a partner at the Washington law firm of Schwartz & Ballen. "This really will affect the ability of agencies to take many actions."

In another ruling, handed down April 23, the federal appeals court overturned the Fed's approval of Electronic Payment Services' purchase of an ATM network operated by National City Corp.

The court, in a blunt attack on the central bank, said the Fed didn't have all the facts before it approved the merger. It ordered the Fed to hold a public hearing to receive testimony on how the deal would affect competition in the Ohio valley.

These two decisions could affect more than just enforcement actions and antitrust concerns. Mr. Crotty said the rulings may provide the industry with a new weapon in the war with credit unions.

Mr. Crotty said the court in both orders criticized the agencies for not basing their decisions on the facts of the case. Banks have accused the National Credit Union Administration of making the same transgression when it approves community-based credit unions.

Such credit unions are supposed to serve areas where residents feel a special sense of belonging to a particular community. But banks have long charged that credit unions exploit this authority.

Banks regularly brought in demographic experts who testified that the folks in these neighborhoods lack any sense of belonging, Mr. Crotty said. Still, the NCUA has approved the charters. Mr. Crotty said he hopes the courts, emboldened by the D.C. circuit court's ruling, will force the agency to apply its standards more strictly.

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