BLJOct2007
9/26/07
3:28 PM
Page 833
CREDIT SUISSE V. BILLING AND A CASE FOR
ANTITRUST IMMUNITY FOR MORTGAGE
LENDERS SUBJECT TO FEDERAL REGULATION
BRUCE H. SCHNEIDER
The author analyzes the Supreme Court’s recent decision conferring protection
from antitrust liability for regulated practices of the securities industry, and
explores its application to the federally-regulated mortgage lending industry.
I
t is widely perceived that the Supreme Court’s recent decision in Credit
Suisse Securities (USA) LLC v. Billing conferred on the securities industry
enormous protection from antitrust liability. In Billing, the Court held
that Congress had impliedly repealed the antitrust laws with respect to certain industry practices in the initial public offering of securities. Other federally regulated or quasi-regulated industries undoubtedly will look to this
decision to determine whether practices in their respective industries qualify
for similar immunity. While many practitioners may have hoped for a more
generic articulation of the guiding principles in determining the interplay
between federal regulation and the antitrust laws, rather than one so specific
to securities regulation, Billing does illustrate an approach that can be of
value to other federally regulated industries. This article considers the broader application of Billing, taking practices in the federally-regulated mortgage
lending industry as an illustrative case.1
Bruce H. Schneider is a litigation partner in the New York office of Stroock &
Stroock & Lavan LLP who concentrates in antitrust litigation and counseling, and
securities litigation. Michael Basile, a partner in the firm’s Miami office, contributed to the banking regulatory discussion in this article.
833
Published in the October 2007 issue of The Banking Law Journal.
Copyright ALEXeSOLUTIONS, INC.
BLJOct2007
9/26/07
3:28 PM
Page 834
BANKING LAW JOURNAL
THE TENSION BETWEEN COMPETITION AND
REGULATION
Because of their sometimes differing objectives, it is often necessary to
reconcile the federal antitrust laws with the requirements of federal regulatory policy. This tension between industry regulation and the antitrust laws
frequently arises when industry regulation authorizes collaboration among
competitors or with intermediaries in the distribution chain, or when it supplants market forces in determining price, quality, or quantity of output.
Where conflicts arise between regulatory and competition objectives, courts
attempt, to the extent possible, to give effect to both statutory schemes.2
Some regulatory statutes are explicit in stating whether they preclude application of the antitrust laws.3 Other regulatory statutes are silent, in which
case it falls to the courts to determine Congress’ intent. Those determinations will vary from statute to statute, and from industry to industry.4
However, the Supreme Court has cautioned that “a cardinal principle of construction [is] that repeals by implication are not favored”5 and “can be justified only by a convincing showing of clear repugnancy between the antitrust
laws and the regulatory system.”6
As a general matter, Congress has not expressly granted financial institutions immunity from the antitrust laws, although in some instances,
Congress has created special antitrust rules that are applicable to the financial services industry.7 Although the industry is subject to the antitrust laws,
there may be situations where federal regulation of particular industry conduct may give rise to the immunity found in Billing.
THE BILLING CASE
The District Court and Second Circuit Decisions
In Billing, investors alleged a conspiracy among ten investment banks
that had acted as underwriters in initial public offerings (“IPOs”) between
March 1997 and December 2000. According to the complaint, these underwriting firms had market power in the markets for general equity IPOs and
technology-related IPOs. The complaint alleged that the defendants engaged
834
Published in the October 2007 issue of The Banking Law Journal.
Copyright ALEXeSOLUTIONS, INC.
BLJOct2007
9/26/07
3:28 PM
Page 835
CREDIT SUISSE V. BILLING
in anticompetitive conduct that caused investors to pay
‘additional anticompetitive charges’ over and above the agreed-upon IPO
share price plus underwriting commission. In particular, these additional charges took the form of (1) investor promises ‘to place bids … in the
aftermarket at prices above the IPO price’ (i.e., ‘laddering’ agreements)8;
(2) investor ‘commitments to purchase other, less attractive securities’
(i.e., ‘tying’ arrangements)9; and (3) investor payment of ‘non-competitively determined (i.e., excessive) ‘commissions,’ including the ‘purchase[e] of an issuer’s shares in follow-up or ‘secondary’ public offerings
(for which the underwriters would earn underwriting discounts).10
The conduct at issue in Billing had also been the subject of SEC enforcement proceedings and class actions by investors under the federal securities
laws. The antitrust class actions in Billing, however, alleged that this conduct
violated § 1 of the Sherman Act, which prohibits “contracts, combinations
… or conspiracies” in unreasonable restraint of trade.11
The district court dismissed the complaint, noting that various conduct of
the underwriters as part of the IPO process — the syndicate system, “road
shows,” and other underwriter collaboration — was either permitted by SEC
regulation or was within the purview of the SEC’s power to regulate. The district court reasoned that “a failure to find implied immunity [from the antitrust
laws] would ‘conflict with an overall regulatory scheme that empowers the
[SEC] to allow conduct that the antitrust laws would prohibit.’”12
The Second Circuit reversed, finding no indication of congressional
intent to repeal the antitrust laws and immunize IPO tying arrangements.13
The Second Circuit rejected the argument that antitrust immunity should
arise simply from a potential conflict between the antitrust laws and the securities laws. The Second Circuit also rejected an argument that SEC regulation to prevent this conduct in public offerings was sufficiently pervasive that
the conduct was immunized under the antitrust laws.
The Supreme Court Decision
The Supreme Court began its analysis by noting that the activities at
issue were “central to the proper functioning of well-regulated capital mar-
835
Published in the October 2007 issue of The Banking Law Journal.
Copyright ALEXeSOLUTIONS, INC.
BLJOct2007
9/26/07
3:28 PM
Page 836
BANKING LAW JOURNAL
kets” and “lie at the very heart of the securities marketing enterprise.”14 The
Court also noted that the SEC had the authority to, and did in fact, regulate
the conduct at issue.
Plaintiffs argued that there was not a conflict between the antitrust laws
and the securities laws with respect to this conduct because the SEC disapproved of the very conduct that the antitrust complaints attacked.
Nonetheless, the Court found that the securities laws and the antitrust laws
were incompatible and that Congress must have intended an implied repeal
of the antitrust laws in the securities regulation.
Notwithstanding that the conduct was objectionable under both the regulatory scheme and the antitrust laws, the Court found that antitrust liability could cause serious harm to the functioning of the capital markets. First,
the Court observed that there was “only a fine, complex, detailed line [that]
separates activity that the SEC permits or encourages” from that which it forbids. The Court found, by way of example, that there was a subtle difference
between prohibited “laddering” and legitimate “book building” activities by
which underwriters, as part of their pricing of the offering, inquire as to customers’ desired future positions and prices at which they might buy in the
aftermarket. Given the subtle distinctions necessary to the capital formation
activities, the Court believed it was best if the SEC, the agency with securities-related expertise, set the standards. Finally, the Court argued, antitrust
lawsuits could be brought in “different courts with different nonexpert
judges and different nonexpert juries” with the possibility of inconsistent
results.15 The Court concluded that:
where conduct at the core of the marketing of new securities is at issue;
where securities regulators proceed with great care to distinguish the
encouraged and permissible from the forbidden; where the threat of
antitrust lawsuits, through error and disincentive, could seriously alter
underwriter conduct in undesirable ways, to allow an antitrust lawsuit
would threaten serious harm to the efficient functioning of the securities
markets.16
The Court further noted that this was an area in which the need for
enforcement through private antitrust litigation was “unusually small”
836
Published in the October 2007 issue of The Banking Law Journal.
Copyright ALEXeSOLUTIONS, INC.
BLJOct2007
9/26/07
3:28 PM
Page 837
CREDIT SUISSE V. BILLING
because of SEC and private enforcement through the securities laws.17
The Court stated that its analysis followed its earlier decision in Gordon
v. New York Stock Exchange, Inc.18 and that the same four elements were present here:
1) the conduct at issue was “within the heartland of securities regulation”;
2) there was “clear and adequate authority for the SEC to regulate”;
3) there was, in fact, “active and ongoing agency regulation”; and
4) there was a “serious conflict between the antitrust and regulatory regimes.”
FEDERAL MORTGAGE LENDING REGULATION AND THE
ANTITRUST LAWS
Overview
On occasion, disputes within the mortgage lending business have been
couched in federal antitrust claims. Regulation of, and regulation by, the
Federal Home Loan Mortgage Corporation (“Freddie Mac”) govern practices
and standardize elements of single-family mortgage lending.19 The standardization of mortgage terms, restrictions on the practices of sellers and servicers
of mortgages, and other uniform practices may reduce competition that
might otherwise provide borrowers with competitive variations in terms.
These restrictions on terms and lending practices might give rise to claims of
antitrust violations either by borrowers or by sellers of mortgages or other
intermediaries. If such claims were brought, could lenders and others in the
business of single-family mortgage lending make the case that, at least as to
these aspects of federally regulated mortgage lending, they have the same
antitrust immunity as the underwriters in Billing?
Freddie Mac
Freddie Mac was chartered by Congress pursuant to the Federal Home
Loan Mortgage Corporation Act, 12 U.S.C. § 1451 et seq. (the “Freddie
Mac Charter Act”)
837
Published in the October 2007 issue of The Banking Law Journal.
Copyright ALEXeSOLUTIONS, INC.
BLJOct2007
9/26/07
3:28 PM
Page 838
BANKING LAW JOURNAL
1) to provide stability in the secondary market for residential mortgages;
2) to respond appropriately to the private capital market;
3) to provide ongoing assistance to the secondary market for residential
mortgages … by increasing the liquidity of mortgage investments and
improving the distribution of investment capital available for residential
mortgage financing; and
4) to promote access to mortgage credit throughout the Nation (including
central cities, rural areas, and underserved areas) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing.20
Pursuant to the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992 (the “GSE Act”),21 Freddie Mac is regulated by the
Office of Federal Housing Enterprise Oversight (“OFHEO”) with respect to
its financial safety and soundness and by the Secretary of Housing and Urban
Development (the “Secretary of HUD”) in all other respects.22
To implement the purpose of providing assistance to the secondary market for residential mortgages, Congress authorized Freddie Mac
to purchase, and make commitments to purchase, residential mortgages.….The operations of [Freddie Mac] under this section shall be
confined so far as practicable to residential mortgages which are deemed
by [Freddie Mac] to be of such quality, type, and class as to meet generally the purchase standards imposed by private institutional mortgage
investors.
To that end, Congress authorized Freddie Mac to
establish requirements…for different classes of sellers or servicers, and
for such purposes [Freddie Mac] is authorized to classify sellers or servicers according to type, size, location, assets, or, without limitation on
the generality of the foregoing, on such other basis or bases of differentiation as [Freddie Mac] may consider necessary or appropriate to effectuate the purposes or provisions of this [Act].23
838
Published in the October 2007 issue of The Banking Law Journal.
Copyright ALEXeSOLUTIONS, INC.
BLJOct2007
9/26/07
3:28 PM
Page 839
CREDIT SUISSE V. BILLING
Congress included this authorization to set criteria for mortgages in
order to protect the financial soundness of Freddie Mac and because it was a
necessary tool in fulfilling the legislative objective of increasing access to capital markets for mortgage financing.24
Pursuant to the GSE Act, the Secretary of HUD is authorized to establish, by regulation, an annual goal for Freddie Mac for the purchase of mortgages for low- and moderate-income families taking into account, inter alia,
“the ability of [Freddie Mac] to lead the industry in making mortgage credit
available for low- and moderate-income families” and “the need to maintain
the sound financial condition of [Freddie Mac].”25 In promulgating the
Housing Goals in November 2004, the Secretary of HUD described HUD’s
regulatory role:
The Department’s role as a regulator is to set broad performance standards for the GSEs through the Housing Goals, but not to dictate the
specific products or delivery mechanisms the GSEs will sue to achieve a
Housing goal. Regulating two exceedingly large financial enterprises
[i.e., Freddie Mac and Fannie Mae] in a dynamic market requires that
HUD provide the GSEs with sufficient latitude to use their innovative
capacities to determine how best to develop products to carry out their
respective missions. HUD’s regulations are intended to allow the GSEs
the flexibility to respond quickly to market opportunities. At the same
time, the Department must ensure that the GSEs’ strategies address
national credit needs, especially as they relate to housing for low- and
moderate-income families and housing located in underserved geographical areas.26
OFHEO also regulates Freddie Mac with respect to maintaining and
enforcing the safeness and soundness requirements of the Charter Act and
the GSE Act. In the exercise of that authority, OFHEO promulgated rules
requiring the reporting of mortgage fraud.27
In furtherance of these legislative and regulatory objectives, Freddie Mac
promulgates in its Single Family Seller/Servicer Guide (the “Freddie Mac
Guide”) the requirements for its purchases of single-family mortgages.28 The
Freddie Mac Guide sets requirements for financial and credit terms of eligi-
839
Published in the October 2007 issue of The Banking Law Journal.
Copyright ALEXeSOLUTIONS, INC.
BLJOct2007
9/26/07
3:28 PM
Page 840
BANKING LAW JOURNAL
ble mortgages, and other terms that Freddie Mac determines to be necessary
in order to fulfill its statutory mandate of improving access to secondary markets for residential mortgage financing. Among other things, the Freddie
Mac Guide sets requirements for the minimum (and, in some cases, maximum) contract servicing spread, minimum coupon servicing spread, minimum margin servicing spread, and the minimum lifetime ceiling servicing
spread for different mortgage instruments.29
The Case for Antitrust Immunity
By setting criteria on spreads for eligible mortgages, Freddie Mac restricts
competition that might otherwise exist between lenders/mortgagees with
respect to certain mortgage terms. Likewise, the Freddie Mac Guide defines
certain unacceptable financing practices.30 The Guide prohibits a seller/servicer from including mortgages for delivery to Freddie Mac if the seller “has
knowledge or reason to believe” that the mortgage broker or correspondent
has engaged in these unacceptable practices and thereby excludes certain suppliers and the mortgages they arrange from the Freddie Mac-insured segment
of the market. Since a seller/servicer is subject to discipline, including disqualification from the Freddie Mac program, for violating these rules, if seller/servicers suspect that a mortgage broker or correspondent has engaged in
these unacceptable practices, many may refuse to deal with the same suspect
mortgage broker, which could lead to accusations that they are engaging in a
boycott.
The four-element Billing analysis provides a vehicle for determining
whether Congress impliedly repealed the antitrust laws with respect to these
practices. The regulation of mortgages eligible for inclusion in the Freddie
Mac program — which will simultaneously meet the needs of the targeted
low- and moderate-income borrowers and attract further investment and liquidity for mortgage investments — lies in “the heartland of [mortgage] regulation.”
The Charter Act and the GSE Act give clear authority to OFHEO and
the Secretary of HUD to regulate in this area and there is, in fact, ongoing
regulation by Freddie Mac of these criteria and practices.31 It is arguable that
where regulations set maximum (or minimum) prices — as in the case of the
840
Published in the October 2007 issue of The Banking Law Journal.
Copyright ALEXeSOLUTIONS, INC.
BLJOct2007
9/26/07
3:28 PM
Page 841
CREDIT SUISSE V. BILLING
Freddie Mac permissible spreads — the regulatory scheme does not intend to
displace price competition entirely but permit such competition within the
permitted range. Still, because the regulator may have the power to regulate
prices more directly or exert general supervisory power over unfair practices
by regulated persons, sufficient regulation may be found to permit a finding
of implied repeal.32
Finally, there is a serious conflict between the regulation of federallyinsured mortgages and the free competition envisioned by the antitrust laws.
Mortgage lenders, servicers, and brokers could find themselves caught
between the differing strictures of regulation and the antitrust laws. Freddie
Mac brings to the process an expertise in the secondary market for residential securities, and is in the most expert position to opine on the necessary
criteria for successfully attracting capital to the residential mortgage market
with adequate safety and soundness.
CONCLUSION
Billing lays out a test for implied antitrust immunity that is not unique
to the securities industry. Whether a court will find congressional intent to
repeal the antitrust laws will, of course, depend on the scope and extent of
federal regulation and the existence of a conflict between regulatory objectives and the goals of the antitrust laws to promote competition, the availability of supply and innovation. Billing adds some additional dimensions to
a court’s determination of when the antitrust laws give way to the regulatory
regime. For there to be antitrust immunity, it also will be significant that the
regulation at issue lie at the “heartland” of important goals of federal regulation in that industry, and that the regulatory judgments involved be of a kind
that requires agency expertise that should not be second-guessed by antitrust
courts.
NOTES
The issues in Billing and those discussed in this article relate to the implied repeal
of the federal antitrust laws by other federal legislation. There are times when state
action, in the form of state legislation, will be deemed to supplant the federal
1
841
Published in the October 2007 issue of The Banking Law Journal.
Copyright ALEXeSOLUTIONS, INC.
BLJOct2007
9/26/07
3:28 PM
Page 842
BANKING LAW JOURNAL
antitrust laws. The “state action” doctrine in antitrust law has a different rationale
from the rationale for implied repeal, and is beyond the scope of this article.
2
See, e.g., Silver v. New York Stock Exch., 373 U.S. 341, 357 (1963).
3
The Court in Billing contrasted the Webb-Pomerene Act, 15 U.S.C. § 62
(expressly providing antitrust immunity), with § 601(b)(1) of the
Telecommunications Act of 1996, 47 U.S.C. § 152 (expressly stating that the
antitrust laws remain applicable).
4
See generally Phonetelle, Inc. v. American Telephone and Telegraph Co., 664 F.2d
716, 727 (9th Cir. 1981) (Kennedy, J.) (“[T]here is no simplistic and mechanically
universal doctrine of implied antitrust immunity; each of the Supreme Court’s cases
is decisively shaped by considerations of the special aspects of the regulated industry
involved.”).
5
Silver v. New York Stock Exch., 373 U.S. at 357.
6
United States v. Nat’l Assn. Of Sec. Dealers, 422 U.S. 694, 719-20 (1975).
7
For example, there are statutes governing bank mergers and acquisitions that
incorporate the language and criteria of § 7 of the Clayton Act, but provide for procedures and defenses that are unique to bank mergers. See Bank Merger Act, 12
U.S.C. § 1828(c) and Bank Holding Company Act, 12 U.S.C. § 1841 et seq. There
are also unique provisions that prohibit tying arrangements by financial institutions.
See Bank Holding Company Act, 12 U.S.C. §§ 1971-78, and Home Owners’ Loan
Act, 12 U.S.C. § 1464(q).
8
“Laddering” has been defined as “inducing investors to give orders to purchase
shares in the aftermarket at pre-arranged, escalating price in exchange for receiving
IPO allocations….” 2005 Guidance Statement (Commission Guidance Regarding
Prohibited Conduct in Connection with IPO Allocations; final Rule, Securities Act
Release No. 8565, Exchange Act Release No. 51,5000 (April 7, 2005), 70 F.R.
19,672)
9
A classic definition of a tying arrangement is “an agreement by a party to sell one
product [the tying product] but only on the condition that the buyer also purchases
a different (or tied) product….” Northern Pac. Ry. v. United States, 356 U.S. 1, 5-6
(1958).
10
127 S. Ct. at 2389.
11
15 U.S.C. § 1.
12
In re Initial Pub. Offering Antitrust Litig., 287 F. Supp. 2d 497, 523 (S.D.N.Y.
2003) (quoting In re Stock Exchs. Options Trading Antitrust Litig., 317 F.3d 134, 149
(2d Cir. 2003)).
13
Billing v. Credit Suisse First Boston Ltd., 426 F.3d 130 (2d Cir. 2005).
14
127 S. Ct. at 2392.
15
127 S. Ct. at 2394-95.
842
Published in the October 2007 issue of The Banking Law Journal.
Copyright ALEXeSOLUTIONS, INC.
BLJOct2007
9/26/07
3:28 PM
Page 843
CREDIT SUISSE V. BILLING
127 S. Ct. at 2397.
Interestingly, the Solicitor General in an amicus brief signed by the Justice
Department, the Federal Trade Commission and the SEC, argued that the Court
should not find immunity for all underwriter conduct. Rather than categorical dismissal of all claims of anticompetitive misconduct, the Solicitor General advocated
that “courts should demand specific allegations of forbidden misconduct and disallow inferences from authorized conduct.”
18
422 U.S. 659 (1975).
19
The Federal National Mortgage Association (“Fannie Mae”) has similar powers
and restrictions with respect to its mortgage programs.
20
12 U.S.C. § 1451(b).
21
12 U.S.C. § 4501 et seq. (the “GSE Act”).
22
Freddie Mac is only a quasi-governmental entity, and may not seem like a government “regulator” like the SEC. It participates in competitive financial markets
and, while faithful to its public mandate, it is a “profit” making enterprise for these
purposes, Freddie Mac could be analogized to a securities exchange or the NASD
which, although a “private” organization, has a public purpose and is registered with
and overseen by the SEC. See United States v. Nat’l Ass’n of Sec. Dealers, 422 U.S. at
705 n.13.
23
12 U.S.C. § 1454(a)(1).
24
The Senate Report stated:
The bill contains specific limitations on the kind and quality of a mortgage eligible for purchase in order to protect against the accumulation of high risk mortgages which could jeopardize the soundness of the Corporation. Also, in order to
avoid the corporation becoming a ‘dumping ground’ for mortgages rather than a
truly secondary market facility, the bill requires that mortgages to be purchased
shall be deemed by the Corporation to “be of such quality, type, and class as to
meet generally the purchase standards imposed by private institutional mortgage
investors.” S. Rep. 91-761, 1970 U.S. Cong. & Adm. News 3488, 3496 (1970).
25
12 U.S.C. § 4562
26
69 Fed. Reg. at 63582 (November 2, 2004)
27
70 Fed. Reg. 43625 (July 28, 2005)
28
The Freddie Mac Guide is available at http://www.allregs.com/fhlmc/.
29
Freddie Mac Guide § 8.2.2. The “servicing spread” is “the amount of interest
income retained by the Servicer from each Mortgage as compensation for Servicing
that Mortgage.” Arguably, by mandating a minimum spread Freddie Mac is “fixing”
the price for the services of the Servicer, much like resale price maintenance or other
vertical price-fixing.
30
Freddie Mac Guide § 8.10.
16
17
843
Published in the October 2007 issue of The Banking Law Journal.
Copyright ALEXeSOLUTIONS, INC.
BLJOct2007
9/26/07
3:28 PM
Page 844
BANKING LAW JOURNAL
See, e.g., Freddie Mac Industry Letter: Unacceptable Refinance Practices
09/01/05, available at http://www.allregs.com/fhlmc/doc/doc.asp?path=fhlmc/bulletins/n2005/ltr-09-01-05.
32
See generally United States v. Nat’l Ass’n of Sec. Dealers, 422 U.S. at 720-25; In re
Workers’ Comp In. antitrust Lit., 867 F.2d 1522, 1558 (8th Cir. 1989).
31
844
Published in the October 2007 issue of The Banking Law Journal.
Copyright ALEXeSOLUTIONS, INC.