7th Cir. Opens Door to Possible CAMELS Rating Litigation Challenges

The U.S. Court of Appeals for the Seventh Circuit recently held that the presence of capital as one of six components in the FDIC’s CAMELS rating does not mean that the rating as a whole is committed to agency discretion for the purpose of 5 U.S.C. §701(a)(2) and therefore unreviewable.

A copy of the opinion in Builders Bank v. FDIC is available at:  Link to Opinion.

As you may recall, the FDIC is charged with conducting a full-scope on site examination every 12-18 months of the banks whose deposits it insures. In June 2015, the FDIC examined a bank and assigned it a 4 in the Uniform Financial Institutions Rating System, called a “CAMELS” rating. In this system, the lowest rating is a 5 and the highest rating is a 1.

The bank filed suit against the FDIC alleging the rating should have been a 3, and that the lower rating was arbitrary and capricious. The district court dismissed the suit for want of jurisdiction, ruling that the assignment of ratings is committed to agency discretion by law under 5 U.S.C. § 701(a)(2).

The Seventh Circuit held that, when a private party seeks judicial review of administrative action, 5 U.S.C. § 702 and 28 U.S.C. § 1346(a)(2) supply subject matter jurisdiction, and if there are no standards for judicial review — the usual meaning of “committed to agency discretion by law” — then the lawsuit should be dismissed on the merits because the plaintiff cannot show that the agency’s action was unlawful.  See Vahora v. Holder, 626 F.3d 907, 916–17 (7th Cir. 2010).

The Court noted that 5 U.S.C. § 701(a)(2), which prevents review of matters committed to agency discretion by law, does not refer to or limit §702, which creates subject-matter jurisdiction for claims under the Administrative Procedure Act (APA). Further, the Seventh Circuit noted that when the Supreme Court had considered arguments under §701(a)(2) on the merits, it had not remanded the cases with instructions to dismiss for want of jurisdiction.

The Seventh Circuit noted that the assignment of a CAMELS rating by the FDIC is not a final decision, where APA review would apply. The rating affects how much a bank must pay for deposit insurance, but here, the bank did not ask the FDIC to lower the rate, only the rating.  Further, the Court noted that the bank did not request review by the FDIC Supervision Appeals Review Committee.

According to the Seventh Circuit, the absence of a final decision would be grounds to dismiss the suit. The effect of CAMELS ratings on deposit insurance premiums creates a concrete stake that makes the dispute judiciable. Yet, the fact that the bank may have initiated the suit prematurely “does not require a court to dismiss the suit when the agency has acquiesced in immediate review.”

The FDIC argued that the rating is unreviewable because it has discretion to set appropriate levels of capital for a banking institution, as necessary or appropriate in light of the circumstances of the banking institution under 12 U.S.C. § 3907(a)(2). The bank argued that the CAMELS rating system uses six factors, which are rated separately, and the rating as a whole is comprehensive of those six factors, including capital adequacy.

The Tenth Circuit previously held that capital adequacy determinations are within the FDIC’s discretion and therefore unreviewable, yet management, liquidity, and interest-rate sensitivity were reviewable. See Frontier State Bank v. FDIC, 702 F.3d 588, 593–97 (10th Cir. 2012). The bank argued it was not challenging the capital adequacy factor, but the FDIC argued the bank was attempting to disguise a challenge to a decision protected by 12 U.S.C. § 3907(a)(2).

The district court did not attempt to resolve this conflict. The Seventh Circuit ordered that the trial court should address these issues on remand.

The Seventh Circuit held that “the presence of capital as one of six components in a CAMELS rating does not necessarily mean that the rating as a whole is committed to agency discretion for the purpose of §701(a)(2).”

Because the parties did not brief the question, the Seventh Circuit did not “decide whether one or more components of a CAMELS rating other than capital may be committed to agency discretion.”

Accordingly, the Seventh Circuit vacated the judgment and remanded the matter to the trial court.

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Morgan Hochheiser is an Associate in Maurice Wutscher's Chicago office. She earned her Juris Doctor from The John Marshall Law School. While in law school, she served as the Symposium Editor for The John Marshall Law School Journal of Information Technology and Privacy Law, as a teaching assistant for Contracts, and as a member of the Moot Court Honor Society.