Consumer advocates weigh in on syndicated loans court case

WASHINGTON — A federal judge has accepted an amicus brief from consumer advocacy group Americans for Financial Reform in a case that could undercut the way that banks do business in the syndicated loan market. 

Beginning early March, the United States Court of Appeals for the 2nd Circuit will hear oral arguments in an appeal for Kirschner, v. JPMorgan Chase Bank, N.A, which held that syndicated term loans are not securities, and aren't subject to securities laws. 

Some large banks, including big regionals, participate heavily in these trillion-dollar markets, in which many banks or other investors pool their capital together to finance a large project and each institution takes a share of the proceeds. 

Treating syndicated loans as securities could throw a wrench in that business, as banks would need to comply with Securities and Exchange rules as well as a patchwork of state laws, which would make them more expensive to offer and execute and would likely require them to be conducted through broker-dealers rather than through bank lending arms. 

The amicus brief, submitted by Americans for Financial Reform late on Friday and accepted by a federal judge this week, asks that the court consider overturning the case that a lower court used to rule in favor of the banks in the first place: Banco Espanol de Credito v. Security Pacific National Bank. 

Regulators recently signaled continued concern with syndicated bank loans.  The syndicated loan market, Americans for Financial Reform argues, is  larger than the subprime-mortgage collateralized debt obligations market. 

This lawsuit could upend banks' role in syndicated loans

"Modern syndicated loans, just like modern loan participations, allow banks to evade securities laws and non-banks to evade banking laws," the group said in the amicus brief. It adds that legislation introduced by Congress in 2008 in the wake of the financial crisis "didn't intend to allow such a huge $2.5 trillion syndicated loan market to evade securities regulation." 

While most industry-watchers don't anticipate that the court will overturn the opinion in Kirschner, the acceptance of the amicus brief means that the more fundamental questions posed in the Banco Español case could be discussed during oral arguments. 

"Our financial system is being threatened by the lack of basic protections in syndicated loans," said Andrew Park, senior policy analyst at Americans for Financial Reform, in a statement. "This risky debt is being sold off in a manner that is exposing our entire financial system to unacceptable risk with little recourse given the lack of regulation. The banks are pushing this debt, giving it a stamp of approval and failing to reveal problems associated with it." 

Other documents filed with the court last year from industry participants favor the continuation of not treating syndicated loans as securities. The Loan Syndications and Trading Association, which filed an amicus brief in May supporting the lower court's decision, argues that along with the higher cost, regulating syndicated term loans as securities would have other adverse effects. 

"To do that would take one of the major tools out of the hands of lenders and investors on one hand and borrowers on the other," said Elliot Ganz, head of advocacy at the LSTA, in a November interview. "First, borrowers know who their lenders are, they have control over who their lenders are, they know who has their paper, and that's important to the borrower market. Secondly, they're very amendable — there's tremendous flexibility in amending credit agreements, but that's something that's not the case in the bond market."