FIFTH REPORT PURSUANT TO SECTION 202(e) OF THE

DODD-FRANK WALL STREET REFORM AND 

CONSUMER PROTECTION ACT

PUB. L. NO. 111-203 (2010)

ADMINISTRATIVE OFFICE OF THE

UNITED STATES COURTS

WASHINGTON, D.C. 20544

JULY 2020

ADMINISTRATIVE OFFICE OF THE

UNITED STATES COURTS

WASHINGTON, D.C. 20544

Fifth Report Pursuant to Section 202(e) 

Dodd-Frank Wall Street Reform and Consumer P

Pub. L. No. 111-203 (20

JULY 2020
ii

Contents

I. Introduction 

II. Executive Summary 

III. AOUSC Reports Under Title II 

IV. The Growth of Nonbanks in the Financial Markets 

A. Introduction to Nonbank Lending  

1. Overview of “Shadow Banking” and “Nonbank Lending” 

a. Key definitions in this report.  .

b. The typical nonbank lender’s capital structure. .

2. Size and Scope of the Market  .

3. Risks and Benefits of Nonbank Lending Sector Growth .

a. Risks associated with increased nonbank lending activity. .

b. Benefits associated with increased nonbank lending activity. .

B. Overview of the Regulatory Background  .

1. Key Changes in the Regulatory Environment .

2. Nonbanks in the Existing Regulatory Scheme  .

3. Approaches to Managing Firm-Specific Nonbank Failures  .

a. In re Taylor, Bean & Whitaker Mortgage Corp. .

b. In re Ditech Holding Corp. .

c. In re Stearns Holdings, LLC .

C. Potential Takeaways from the Case Studies  .

V. Conclusion .

Appendix A: List of Defined Terms Used in Report .

Appendix B: Annotated Bibliography .

Appendix C: Additional Background on Recent Reporting on Financial 

Intermediation Data and the Growth of the Shadow Banking Sector .
1

I. Introduction

In response to the global economic turmoil that began in late 2007, the Dodd-Frank Wall 

Street Reform and Consumer Protection Act of 2010 (Act) introduced a broad array of 

regulatory reforms in the financial sector. This report focuses on the reforms in Title II of 

the Act, which are intended to mitigate risks posed by the failure of systemically important 

financial institutions. Title II directs the Administrative Office of the United States Courts 

(AOUSC) to study the resolution of these institutions and report on its findings. The 

AOUSC submitted its first four annual reports pursuant to 12 U.S.C. § 5382(e) on July 21, 

2011 (First Report), July 17, 2012 (Second Report), July 19, 2013 (Third Report), and July 

10, 2015 (Fourth Report). The AOUSC submits this report in compliance with the directive 

of section 5382(e). 1

The report proceeds as follows:

• Part II provides an executive summary of the report’s primary research, findings, 

and analysis.

• Part III describes the AOUSC’s mandate under section 5382(e) of the Act and 

briefly summarizes the First, Second, Third, and Fourth Reports as well as the 

scope of this Fifth report.

• Part IV focuses on the key issue explored in this report: the growing presence of 

“nonbank lenders” in the U.S. residential mortgage market. We define “nonbank 

lenders” to mean U.S. lenders that lack the traditional features of banks and operate 

outside of the traditional banking system. There are risks associated with increased 

nonbank lending activity, including the unique vulnerability of nonbanks to liquidity 

crises and the potential negative consequences of sector failure on other financial 

institutions. There are also important benefits associated with increased nonbank 

lending activity, such as additional availability of loans to lower-income consumers. 

This section reviews these and other risks and benefits, as well as certain legal 

and regulatory developments that have contributed to nonbank lending sector 

growth. Finally, this section explores existing approaches to managing nonbank 

1. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 202(e)(2), 

124 Stat. 1376, 1449 (2010), codified under 12 U.S.C. § 5382(e)(2). The Act requires that the AOUSC 

summarize the results of its study in a report “[n]ot later than 1 year after the date of enactment of th[e] Act 

[and] in each successive year until the third year” and in every fifth year after date of enactment. The AOUSC 

appointed a Working Group to study the issues identified in section 5382(e). This Working Group is chaired 

by Judge Michelle M. Harner, United States Bankruptcy Court for the District of Maryland. Other members 

of the Working Group include: Judge Thomas L. Ludington, United States District Court for the Eastern 

District of Michigan; Judge Stuart M. Bernstein, United States Bankruptcy Court for the Southern District 

of New York; Judge Robert E. Grossman, United States Bankruptcy Court for the Eastern District of New 

York; Judge Brendan L. Shannon, United States Bankruptcy Court for the District of Delaware; Vito Genna, 

Bankruptcy Court Clerk for the Southern District of New York; and Professor Diane Lourdes Dick, Seattle 

University School of Law, as the academic representative. AOUSC and Federal Judicial Center staff provided 

support for the Working Group. A list of defined terms used in this report is set forth in Appendix A.
2

lender failures. Focusing on the use of the federal bankruptcy process to reorganize 

or liquidate a firm, the report presents three recent case studies that examine how 

chapter 11 of title 11 of the United States Code (the Bankruptcy Code) is meeting the 

restructuring needs of failed nonbank lenders, their stakeholders, and the financial 

system. The case studies suggest that the structure and flexibility of the Bankruptcy 

Code adapt well to many aspects of these cases. This section also identifies potential 

opportunities for enhancing the efficiency and effectiveness of the Bankruptcy Code 

with respect to these and other similar nontraditional financial intermediaries.

• Part V synthesizes the report’s discussion and analysis regarding the growing presence 

of nonbank lenders in the U.S. financial system and the effectiveness of the Bankruptcy Code in facilitating the orderly liquidation or reorganization of these firms.

II. Executive Summary

Historically, financial intermediation in the U.S. capital markets was provided by depository banks that accepted deposits from customers and extended the investment capital 

to borrowers in the form of loans. Then and now, traditional banks broker the flow of 

funds between savers and borrowers, reducing both the information costs naturally faced 

by households and businesses in a position to lend funds, on the one hand, and the liquidity 

constraints faced by those seeking to borrow, on the other. But history has also shown that, 

for all these important benefits, traditional financial intermediation is inherently fragile in 

its exposure to “runs.” For this reason, governments around the world attempt to minimize 

systemic risk by issuing guarantees on financial intermediary liabilities and by offering 

contingent liquidity through a central bank acting as a lender of last resort. Then, partly to 

manage the moral hazard risks associated with these interventions, an extensive network 

of laws and regulations provides for enhanced supervision and monitoring of banking institutions.

While the traditional model continues, financial intermediation is increasingly provided 

through what some describe as an alternative, parallel, “shadow” banking sector involving 

entities and activities outside of the regular banking system. As explained more fully 

below, there is no one-size-fits-all definition of the term “shadow banking,” as the concept 

encompasses many different categories of nontraditional financial intermediaries. It includes, 

among other things, the focus of this report: the “nonbank lenders” that originate or service 

residential mortgages and other consumer and business loans. These nonbank lenders do 

so even though they lack the traditional features of banks, such as accepting and holding 

customer deposits, and are not covered by traditional governmental protections, such as 

liquidity backstops. Compounding the lack of consensus on what, exactly, constitutes “shadow 

banking,” there is also some controversy surrounding the term itself. Some commentators 

believe that the term has pejorative associations, and that it obscures the positive influence 

these nontraditional financial intermediaries have had on the cost and availability of liquidity, 

maturity, and credit enhancement. Unfortunately, other labels have led to confusion.
3

Although the U.S. regulatory environment has changed over the years, the nonbank 

lending sector has largely avoided many of the administrative costs and regulatory burdens 

imposed on traditional banks. As a result, nonbank lending has grown substantially. On the 

one hand, there are many noteworthy benefits, such as increased availability of loans to 

lower-income individuals who may be turned away by traditional banking institutions. But 

there are also significant risks associated with increased nonbank lending. Because they 

are often thinly capitalized and lack access to important backstops, nonbank lenders are 

uniquely vulnerable to economic shocks and liquidity crises. 

In recent months, the issue has been heightened by the coronavirus (COVID-19) 

public health crisis, as the ensuing economic effects will lead to severe challenges for the 

residential lending market in the months and years to come. It is increasingly important to 

consider whether and to what extent adequate systems are in place to facilitate the orderly 

liquidation or reorganization of financially distressed nonbank lenders. Because nonbank 

lenders are not covered by language in the Bankruptcy Code that renders “banks” ineligible 

for bankruptcy protection, firms large and small have used the federal bankruptcy process 

to reorganize or liquidate. A detailed analysis of three recent nonbank lender bankruptcies 

suggests that the Bankruptcy Code has been generally effective in facilitating the orderly 

liquidation and reorganization of these firms. In each of the three cases, the debtor was able 

to advance a confirmable plan and exit bankruptcy within a reasonable period, minimizing 

disruptions and preserving value. Nevertheless, no process is perfect and the case studies 

offer insights and perspectives on potential enhancements to the bankruptcy scheme for 

distressed nonbank lenders and similar financial entities. This report provides that analysis 

below, as well as commentary that may further assist policy makers.

III. AOUSC Reports Under Title II

Title II of the Act mandates various studies to consider the implications and alternatives of 

the insolvency scheme created for covered financial companies under the Act. 2 This report 

relates to the study mandated by 12 U.S.C. § 5382(e), “Study of Bankruptcy and Orderly 

Liquidation Process for Financial Companies.”

Section 5382(e) requires the AOUSC to study the following three issues:

1. the effectiveness of chapter 7 or chapter 11 of the Bankruptcy Code in facilitating 

the orderly liquidation or reorganization of financial companies; 

2. ways to maximize the efficiency and effectiveness of the Court [Title II defines 

“Court” to mean “the United States District Court for the District of Columbia, 

unless context otherwise requires”]; and

3. ways to make the orderly liquidation process under the Bankruptcy Code for financial companies more effective.

2. 12 U.S.C. § 5382(e)–(g); Pub. L. No. 111-203, § 217, 124 Stat. at 1519–20.
4

Section 5382(e) further requires the AOUSC to submit a report summarizing the results 

of the study “[n]ot later than 1 year after July 21, 2010”—that is July 21, 2011. 3 It also 

requires the AOUSC to file two subsequent annual reports in July 2012 and 2013, and then 

a report “every fifth year after that date.” 4

The Act implemented a series of changes in the regulation of financial institutions, 

financial products, and various market participants that were designed to promote financial 

stability and more adequately address the financial distress of large, complex financial 

institutions. The provisions most relevant to the AOUSC’s reports under section 202(e) 

of the Act are Title I of the Act, Financial Stability, which creates the Financial Stability 

Oversight Council (FSOC); and Title II of the Act, Orderly Liquidation Authority (OLA), 

which creates a regulatory process for the Federal Deposit Insurance Corporation (FDIC) 

to act as receiver and liquidate certain covered financial companies, as defined by the Act 

and implementing regulations. 5

The First, Second, Third, and Fourth Reports systematically and objectively evaluated 

the resolution of distressed financial institutions and compared processes under the 

Bankruptcy Code to procedures under the OLA. This section briefly describes the substance 

of the First, Second, Third, and Fourth Reports and the scope of this Fifth Report.

The core contribution of the First Report is its systematic and thorough analysis of 

the key provisions of the Bankruptcy Code that likely would affect the reorganization or 

liquidation of a financial institution, with comparison to key OLA provisions. Relying on 

interviews with a range of stakeholders and case studies, the report explains the potential 

advantages and disadvantages of each resolution scheme in the context of large, complex 

financial institutions. It preliminarily concludes that the Bankruptcy Code generally 

functions well to address corporate distress, including that of bank holding companies and 

nonbank financial institutions.

The Second Report compared the relative efficiency and effectiveness of the claims 

resolution process under the Bankruptcy Code with that under the OLA. Notably, the OLA 

claims resolution procedure adopts certain aspects of the bankruptcy claims resolution 

procedure (e.g., requiring creditors to file proofs of claim and allowing the FDIC, as 

receiver, to object to claims). One critical OLA procedure, however, is contrary to the 

centralized claims resolution procedure fostered by the Bankruptcy Code (i.e., the ex post 

judicial review process whereby a creditor’s claim is deemed rejected unless the FDIC 

allows the claim within the 180-day review period). The report suggests that the flexibility 

and concurrent court supervision inherent in the bankruptcy claims resolution procedure 

may allow that process to adapt more easily to the variety of distressed companies that 

require a claims resolution scheme.

3. 12 U.S.C. § 5382(e)(2).

4. Id.

5. Id. §§ 5321, 5383.
5

The Third Report considered one of the Bankruptcy Code’s provisions for the treatment 

of stakeholders’ claims and interests under a plan of reorganization: the best interests test 

of section 1129(a)(7) of the Bankruptcy Code, which sets the minimum distribution that 

stakeholders are entitled to receive under a chapter 11 plan. 6 Certain provisions in the 

OLA, including a protection for creditors known as “minimum recovery,” are similar to 

the best interests test. Specifically, the OLA requires that creditors receive at least as much 

in a resolution under OLA as they would otherwise receive in a hypothetical chapter 7 

bankruptcy. The challenge in applying this provision compared to the best interests test 

is that unlike the similarity in priority and distribution schemes between chapter 11 and 

chapter 7, the OLA priority and distribution schemes do not align as well with the relevant 

provisions of the Bankruptcy Code. 

The Fourth Report focused on section 363(b) of the Bankruptcy Code, 7 which permits 

a chapter 7 or chapter 11 debtor to sell all or substantially all of its assets outside of the 

ordinary course of business—i.e., as a going concern sale—after notice and hearing. It 

evaluated this provision and a proposal by the American Bankruptcy Institute Commission 

to Study the Reform of Chapter 11 to amend the Bankruptcy Code, as well as the going 

concern/restructuring models underlying the OLA and similar proposals submitted to 

Congress for incorporation into the Bankruptcy Code. Each of the sale-based models 

presents a potential opportunity to preserve value, but they also raise issues concerning, 

for example, due process, fair and equitable treatment of similarly situated creditors, and 

the impact of additional indebtedness incurred prior to a sale on value realization and 

allocation.

This Fifth Report focuses on the unique restructuring needs of “nonbank lenders,” 

which we define to mean U.S. lenders that lack the traditional features of banks and operate 

outside of the traditional banking system. It explores the risks and benefits associated with 

increased nonbank lending activity, as well as certain legal and regulatory developments 

that have shaped nonbank lending in recent years. Additionally, the report analyzes existing 

approaches to managing nonbank lender failures, focusing on the use of the federal 

bankruptcy process to reorganize or liquidate firms. Examining three recent case studies, 

the report considers how the federal bankruptcy process is meeting the restructuring 

needs of failed nonbank lenders, their stakeholders, and the financial system. Finally, the 

report presents potential opportunities to enhance the efficiency and effectiveness of the 

Bankruptcy Code with respect to these unique financial company debtors. The following 

section describes the AOUSC Working Group’s research and analysis concerning the 

rise of nonbank lending in the United States and the ways in which the Bankruptcy Code 

facilitates the liquidation and reorganization of firms engaged in this and other forms of 

nontraditional financial intermediation.

6. 11 U.S.C. § 1129(a)(7).

7. Id. § 363(b).
6

IV. The Growth of Nonbanks in the Financial Markets

This report examines the growing presence of nonbank lending institutions in the financial 

markets and considers how these institutions fit within traditional legal and regulatory 

schemes, including the U.S. bankruptcy laws. The growth of the nonbank lending market 

has received some attention from academics and other analysts and commentators, 

particularly in the wake of the FSOC’s recent decision to remove the nonbank financial 

firm, Prudential Financial, from the list of systemically important financial institutions. As 

Treasury Secretary Steven T. Mnuchin explained, “The Council’s decision [to de-designate 

Prudential] follows extensive engagement with the company and a detailed analysis 

showing that there is not a significant risk that the company could pose a threat to financial 

stability.” 8 This decision was met with criticism from industry watchdogs, who argued that 

regulators had overlooked the critical role nonbanks play in the financial markets and that 

the decision would encourage the expansion of an unregulated “shadow banking” system. 9

The topic of nonbank lending also provides a lens through which to reconsider some of 

the issues identified in the prior reports and update the analysis to account for changes in 

the legal and regulatory infrastructure. Indeed, the past five years have seen several notable 

developments and initiatives. 

The U.S. House of Representatives passed legislation in 2017 that would have repealed 

Title II of the Act in favor of amendments to the Bankruptcy Code. 10 Proponents argued 

that a modified bankruptcy process would better meet the needs of distressed financial 

institutions, rendering the OLA in Title II unnecessary. In response to the legislation, 

President Trump directed the U.S. Treasury to conduct a review of the OLA and provide 

recommendations. 11 The U.S. Treasury published its findings in early 2018, recommending 

that bankruptcy serve as the primary option for distressed financial institutions, with the 

8. See Press Release, Fin. Stability Oversight Council, Financial Stability Oversight Council Announces 

Rescission of Nonbank Financial Company Designation (Oct. 17, 2018), available at https://home.treasury.

gov/news/press-releases/sm525.

9. See, e.g., Jeremy C. Kress, The Last SIFI: The Unwise and Illegal Deregulation of Prudential Financial, 71 Stan. L. Rev. Online 171 (2018) (arguing that the decision is, among other things, a threat 

financial stability).

10. On the Financial CHOICE Act, see Eric J. Spitler, The Long Game: The Decade-Long Effort to 

Dismantle the Dodd-Frank Act, 24 N.C. Banking Inst. 1, 47–50 (2020). The Financial CHOICE A

H.R. 5983, 114th Cong. (2016), was first introduced in 2016 and passed the House Financial Services Committee on a partisan vote of thirty to twenty-six, but was never considered by the full House of Representatives. 

An amended version was introduced as H.R. 10 in the 115th Congress, which the House passed by a vote 

of 233 to 186 in 2017. Both bills included many provisions in addition to those provisions that would have 

repealed Title II of the Act.

11. Memorandum from President Donald J. Trump on Orderly Liquidation Authority for the Secretary 

of the Treasury (Apr. 21, 2017), available at https://www.govinfo.gov/content/pkg/DCPD-201700266/pdf/

DCPD-201700266.pdf.
7

OLA preserved as a last resort. 12 In addition, the report recommended the adoption of certain 

amendments to both Title II and the Bankruptcy Code that would streamline the bankruptcy 

process and ensure a single-point-of-entry restructuring approach. Congress continues to 

explore these and other law reform proposals. In late 2018, the Senate Judiciary Committee 

held a hearing on a proposed law that would add a new chapter 14 to the Bankruptcy Code 

to address the unique needs of struggling financial institutions. 13 The proposed legislation 

reflects many of the U.S. Treasury report’s recommendations, including the single-pointof-entry approach.

On the regulatory front, the Board of Governors of the Federal Reserve System (FRS) 

in 2016 issued final regulations mandating that systemically vital firms maintain, at the 

holding company level, a certain amount of “total loss absorbing capacity” (TLAC). 14

TLAC may be comprised of equity, subordinated debt, and long-term senior debt. The 

requirement, which further solidifies regulators’ longstanding preference for the singlepoint-of-entry approach, ensures that losses can be allocated to the holding company’s 

debt and equity investors while the operating subsidiary remains intact. The board has 

also adjusted its approach to implementing the Act’s stress test and comprehensive capital 

analysis and review, shifting in recent years to a biannual testing interval for all but the 

largest banks. 15

Although we have chosen to focus this report on the growth of nonbanks in the 

financial markets, each of the legal and regulatory developments described above could 

warrant an in-depth analysis and a separate report. As identified at Appendix B, academics, 

working groups, and other commentators have already provided significant scholarship 

and commentary on these and related issues. 16

12. U.S. Dep’t of the Treasury, Report to the President of the United States

Presidential Memorandum Issued April 21, 2017, Orderly Liquidation Authorit

2 (2018), available at https://home.treasury.gov/sites/default/files/2018-02/OLA_REPORT.pdf.

13. Big Bank Bankruptcy: 10 Years After Lehman Brothers, 403 Corp. Couns. Int’l Adviser NL 2

2018) (reprinting witness statements).

14. Press Release, Bd. of Governors of the Fed. Reserve Sys., Federal Reserve Board Adopts Final 

Rule to Strengthen the Ability of Government Authorities to Resolve in Orderly Way Largest Domestic and 

Foreign Banks Operating in the United States (Dec. 15, 2016), available at https://www.federalreserve.gov/

newsevents/press/bcreg/20161215a.htm.

15. See, e.g., Lalita Clozel, Big Banks Ace First Round of Federal Reserve’s Stress Tests, Wall St. J.,

June 21, 2019.

16. Appendix B provides a sampling of the literature available on these topics. It is not an exhaustive list 

of the available resources.
8

A. Introduction to Nonbank Lending 

1. Overview of “Shadow Banking” and “Nonbank Lending”

Financial intermediaries play an important role in the capital markets, in the United States 

and around the world. 17 By aggregating investment capital and making it available to others 

in the form of loans, or by arranging the sale of a company’s stocks and bonds to investors, 

a financial intermediary serves as a middleman among diverse parties in order to facilitate 

transactions. 18 In the U.S. financial markets, traditional financial intermediaries include 

depository or investment banks, hedge funds, mutual funds, and insurance companies. 

For instance, a traditional bank brokers the flow of funds between savers and borrowers. 

Federal and state statutes and regulations generally provide that only “banks” may accept 

deposits, 19 which are typically made in the form of checking, savings, and money market 

deposit accounts and certificates of deposit. 20 By aggregating deposits and extending 

capital to borrowers in the form of loans, banks help to reduce both the information costs 

naturally faced by households and businesses in a position to lend funds, on the one hand, 

and the liquidity constraints faced by those seeking to borrow, on the other. Moreover, 

by engaging in securitizations and other structured finance transactions, banks and other 

financial intermediaries help parties manage their exposure to specific risks, such as those 

relating to credit, maturity, and liquidity. 

Despite all these important benefits, traditional financial intermediation is inherently 

fragile in its exposure to “runs.” The traditional bank’s liabilities (customer deposits) tend 

to be short-term and highly liquid, while its assets (mortgage loans) tend to be longer-term 

and illiquid. The prototypical bank run occurs when many depositors attempt to withdraw 

their capital at the same time, usually because they believe the bank is at risk of failing. In 

the extreme—such as during the Great Depression—a contagion of bank runs can lead to 

systemic disruption. 

Governments around the world attempt to minimize systemic risk by issuing guarantees 

on financial intermediary liabilities and by offering banks contingent liquidity through a 

central bank acting as a lender of last resort. To this end, Congress in 1933 established the 

FDIC as an independent agency to protect depositors (with the full faith and credit of the 

United States) against the loss of deposits that may occur when an insured bank fails. 21

17. See Robert G. King & Ross Levine, Finance and Growth: Schumpeter Might be Right, 108 Q. J. Econ

717 (1993) (exploring the view that a robust capital market and functioning intermediaries are important 

elements of a strong economy). 

18. On the history of financial intermediation, see Nicola Cetorelli et al., The Evolution of Banks and 

Financial Intermediation: Framing the Analysis, 18 Fed. Res. Bank N.Y. Econ. Pol’y Rev. 1, 3–4 (July 

19. See, e.g., 12 U.S.C. § 24 (providing that the acceptance of deposits is a fundamental power of banks); 

N.Y. Banking Law 96 (providing that only banks may hold and accept consumer deposits).

20. See generally 12 U.S.C. § 1813(l) (defining, for the purposes of the FDIA, “deposit”).

21. See Federal Deposit Insurance Act of 1933, 12 U.S.C. §§ 1811–1831.
9

Moreover, to provide contingent liquidity, the FRS has the authority to make advances to 

member banks during periods of systemic distress. 22

Although these policies have addressed key vulnerabilities in the traditional banking 

system, they are not a panacea. For example, commentators generally recognize that the 

provision of liability guarantees and liquidity backstops could lead to moral hazard issues 

in the form of excessive risk taking, leverage, and maturity transformation. 23 The moral 

hazard risk, in turn, is the theoretical basis for enhanced supervision and regulation of 

banking institutions.

Traditional financial intermediation, with credit intermediated through banks 24 and 

protection against runs, dominated the U.S. financial landscape well into the 1990s. 25 But 

over time, increased specialization in the provision of credit has transformed financial 

intermediation from a process involving a single institution to one involving several. 

Specialization has the benefit of reducing the total cost of intermediation. However, 

some commentators observe that the competitive drive to reduce costs has also fueled 

institutional evolution and structural innovations to reduce or eliminate costs associated 

with supervision and regulation—a phenomenon that is generally known as regulatory 

arbitrage. 26

In the world of financial intermediation, regulatory arbitrage and other competitive 

market pressures 27 have led to the development of what some describe as an alternative, 

parallel, “shadow banking” 28 sector. As explained below, there is no one-size-fits-all 

22. See 12 U.S.C. § 347b(a). For a thoughtful critique of lender-of-last-resort policies and practices, see 

Kathryn Judge, The First Year: The Role of a Modern Lender of Last Resort, 116 Colum. L. Rev. 843 (2016

23. See, e.g., Charles Goodhart, Balancing Lender of Last Resort Assistance with Avoidance of Moral 

Hazard, in Frank Heinemann et al., Monetary Policy, Financial Crises, and the Macroecono

24. By “traditional bank,” we mean depository institutions, including commercial banks, thrifts, credit 

unions, industrial loan companies, and federal savings banks. And, unless the context suggests otherwise, we 

use the term “bank” to refer to traditional banks. See Zoltan Pozsar et al., Fed. Reserve Bank of

Report No. 458, Shadow Banking (2010), 1 n2 (adopting a similar conven

25. Many analysts pinpoint the 1990s as the time when the U.S. financial landscape began to shift. See, 

e.g., Zsuzsa R. Huszar & Wei Yu, Mortgage Lending Regulatory Arbitrage: A Cross-Sectional Analysis of 

Nonbank Lenders, 41 J. of Real Est. Res. 219, 219 (2019) (“Since the early 1990s...the market has change

dramatically as less-regulated nonbank lenders have gradually become the primary lenders, especially for 

risky subprime mortgages”).

26. For a comprehensive discussion of regulatory arbitrage in various contexts, see Victor Fleischer, 

Regulatory Arbitrage, 89 Tex. L. Rev. 227 (2010

27. Professor Kathryn Judge acknowledges the role of regulatory arbitrage in the growth of shadow 

banking. However, she notes “there are also indicia that the system has grown in part to satisfy demands that 

the banking system cannot address,” such as strong demands for money claims. Kathryn Judge, Information 

Gaps and Shadow Banking, 103 Va. L. Rev. 411, 438 (2017

28. Economist Paul McCulley is widely acknowledged to have coined the term in 2007 to describe “the 

whole alphabet soup of levered up non-bank investment conduits, vehicles, and structures.” Paul McCulle

Pimco, Teton Reflections: Pimco Global Central Bank Focus 2 (2007), available at https://ww

com/en-us/insights/economic-and-market-commentary/global-central-bank-focus/teton-reflections. 
10

definition of the term “shadow banking,” as the concept encompasses many different types 

of entities and transactions with varying levels of risk to the broader financial system. This 

report uses the term to reference financial intermediation provided by entities that have not 

traditionally served as financial intermediaries. 29 An example of such intermediation is a 

trust designated as a special purpose entity to own and hold the rights to loan receivables. 

Investors then purchase trust certificates to gain exposure to the pool of loan assets. 30 While 

most of these entities would not qualify as systemically important financial institutions, they 

have the potential to impact systemically important financial institutions when they fail. 

Although the regulatory environment has changed over the years, the shadow banking sector has largely avoided many of the administrative costs and regulatory burdens 

imposed on traditional banking institutions. These costs include FDIC premiums, strict 

capital requirements, and regulatory restrictions on investment portfolios. 31 The following 

section develops, for the purposes of this report, a working definition of “shadow banking,” and distinguishes this broader concept from the narrower idea of alternative or “nonbank” lending.

a. Key definitions in this report.

Despite its widespread use by market participants and analysts, there is no universal 

definition of the term “shadow banking.” Rather, several main categories of definitions 

emerge in the literature. One common definitional strand reflects a primary concern with 

regulatory arbitrage and its attendant consequences. For instance, a World Bank report 

defines shadow banking as “a set of activities, markets, contracts, and institutions that 

operate partially (or fully) outside the traditional commercial banking sector and as such, 

are either lightly regulated or not regulated at all.” 32 In a similar way, the Financial Stability 

Board (FSB) defines shadow banking as “credit intermediation involving entities and 

activities outside of the regular banking system,” 33 where “prudential regulatory standards 

29. The FSB defines “shadow banking” as “the system of credit intermediation that involves entities 

and activities outside the regular banking system.” Fin. Stability Bd., Shadow Banking: Stre

Oversight and Regulation 3 (2011), available at https://www.fsb.org/wp-content/uploads/r_111027a.p

30. Special purpose vehicles are trusts that are formed to own the rights to the loan receivables. Investors 

purchase securities or trust certificates. See Bryan Noeth & Rajdeep Sengupta, Is Shadow Banking Really 

Banking?, 2011 The Reg’l Econ. 

31. Although we focus on the U.S. market, many other reports analyze the rise of shadow banking from 

a comparative and/or international perspective. See, e.g., Helen Huang, Chinese Shadow Banking and Its 

Impact on the U.S. Economy, 37 Rev. Banking & Fin. L. 2 (2017

32.	 Swati Ghosh, Ines Gonzalez del Mazo & İnci Ötker-Robe, Chasing the Shadows: How Significant 

Is Shadow Banking in Emerging Markets?, 2012 Economic Premise No. 88, at 3, available at http

openknowledge.worldbank.org/handle/10986/17088.

33. Fin. Stability Bd., Shadow Banking: Scoping the Issues (2011), available at ht

financialstabilityboard.org/2011/04/shadow-banking-scoping-the-issues/.
11

and supervisory oversight are either not applied or are applied to a materially lesser degree 

than is the case for regular banks engaged in similar activities.” 34

Definitions of this sort clearly emphasize the role of nontraditional financial 

intermediaries, but do not necessarily exclude traditional banks. Modern capital markets 

are incredibly complex35 and, even where financial intermediation is provided by new 

market participants, traditional banks may still be part of the overall chain of financial 

intermediation. 36 For instance, traditional banks may provide lines of credit and other 

services to nontraditional financial intermediaries and may even be related through their 

corporate structures. 37 The FSB’s definition of shadow banking is intended to be broad 

enough to account for the growing interconnectedness of traditional banking and more 

cutting-edge methods of financial intermediation. 38 At first blush this approach may seem 

overly broad in that it can potentially include any entity, market, or activity along the financial 

intermediation chain. However, the focus is narrowed by the FSB’s emphasis on activities 

that implicate four key risk factors: maturity transformation, liquidity transformation, 

imperfect credit risk transfer, and leverage. 39 These are the kinds of activities commonly 

associated with greater systemic risk. 

Another common approach to defining shadow banking attempts to zero in on the 

fundamental economic risks associated with such activities. Under this approach, the term 

is understood to include all financial intermediation liabilities other than those that are 

explicitly insured, guaranteed, or consolidated onto the balance sheet of an institution 

with access to lender of last resort support. 40 The Federal Reserve Bank of New York has 

used the term “shadow bank” to describe financial intermediaries that are “involved in 

the traditional bank activities of credit, maturity, or liquidity transformation, but without 

34. Fin. Stability Bd., supra note 29, at

35. For a thorough exposition, see Dan Awrey, Complexity, Innovation and the Regulation of Modern 

Financial Markets, 2 Harv. Bus. L. Rev. 235 (20

36. Fin. Stability Bd., supra note 29, at 1

37. Id.

38. Id. Academic commentators place a similar emphasis on the interconnectedness of banks and 

nonbanks. In remarks delivered at the Inaugural Symposium of the Review of Banking and Financial Law, 

Professor Steven Schwarcz urged policy makers and commentators to focus “not only the provision of financial 

products and services by shadow banks, but also the financial markets used to provide those products and 

services.” Steven L. Schwarcz, Regulating Shadow Banking: Inaugural Address for the Inaugural Symposium 

of the Review of Banking & Financial Law, 31 Rev. Banking & Fin. L. 619, 622 (2012). See also Eric F

Gerding, The Shadow Banking System and Its Legal Origins (Jan. 24, 2012) (unpublished manuscript), 

available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1990816 (describing the shadow banking 

sector as an interconnected web of financial and non-financial institutions).

39. Fin. Stability Bd., supra note 29, at

40. An influential report defines “shadow banking” to include “all credit intermediation activities that 

are implicitly enhanced, indirectly enhanced, or unenhanced by official guarantees established on an ex 

ante basis.” Tobias Adrian & Adam B. Ashcraft, Fed. Res. Bank of N.. Shado

the Literature, Staff Report No. 580, at 3 (2012), available at http://www.nyfedeconomists.org/r

staff_reports/sr580.pdf.
12

actually being chartered as banks and without having a meaningful access to a lender of last 

resort and an explicit insurance of their liabilities by the federal government.” 41

Compounding the lack of consensus on what, exactly, constitutes “shadow banking,” 

there is also some controversy surrounding the term itself. Some commentators believe 

that the term has pejorative associations 42 and that it obscures the positive influence these 

nontraditional financial intermediaries have had on the cost and availability of liquidity, 

maturity, and credit enhancement. 43

For this reason, some commentators prefer to refer to the activities of nontraditional 

financial intermediaries as “non-bank financial intermediation.” 44 Unfortunately, this label 

can lead to confusion, as the term “nonbank” is also used to refer to entities that engage 

in a specific form of nontraditional financial intermediation: originating and/or servicing 

loans even though they lack the traditional features of banks, such as accepting and holding 

customer deposits. This nontraditional financing activity—which is the primary focus of 

this report—is frequently called “independent” or “nonbank” lending. 

In this report, we use the term “shadow banking” to refer broadly to financial intermediation involving entities and activities outside of the regular banking system, at the 

same time acknowledging the role of traditional financial institutions in these activities. 

Then, because our report focuses specifically on the growing presence of nonbank lending 

institutions in the financial markets, we use the term “nonbank lenders” to refer to U.S. 

lenders—such as Quicken Loans Inc. and Freedom Mortgage Corporation—that lack the 

traditional features of banks and operate outside of the traditional banking system. With 

these working definitions in place, we turn now to a description of the typical nonbank 

lender’s capital structure.

b. The typical nonbank lender’s capital structure.

The typical nonbank lender is organized under state business entity laws as a for-profit 

registered organization, such as a corporation or limited liability company, to engage in 

the business of originating loans through retail, wholesale, joint venture, or preferred 

partner channels. 45 The retail channel consists of loans originated directly through the 

nonbank’s branch offices, while the wholesale channel consists of loans that are sourced by 

independent brokers. Finally, the joint venture and preferred partnership channels include 

41. Pozsar, supra note 24, at 

42. One commentator called it “an imprecise, overly ominous term.” Nicole Gelinas, Finance’s Lengthening Shadow, City J., Autumn 2018

43. For a discussion of the benefits associated with nonbank lending, in particular, see infra Part IV.A.3.a.

44. See, e.g., Fin. Stability Bd., Global Monitoring Report on Non-Bank Financial In

2019 (2020), available at https://www.fsb.org/wp-content/uploads/P190120.pdf. 

45. Lending channels are explained in Kathleen C. Engel & Patricia A. McCoy, The Sub

Reckless Credit, Regulatory Failure, and Next Steps 27–28
13

partnerships and strategic associations with other companies; for instance, many nonbank 

mortgage lenders develop affiliate relationships with homebuilders.

Nonbank lenders primarily derive income from the subsequent sale of the mortgage 

loans they originate. However, with so many mortgage loans available for purchase on the 

secondary market, investors are positioned to be selective. Accordingly, they frequently 

demand insurance to protect against borrower default, and they generally prefer smooth 

returns. In the residential lending market, loans to low-to-moderate-income borrowers are 

often insured by the Federal Housing Administration (FHA), 46 while loans to U.S. military 

veterans may be guaranteed by the Department of Veterans Affairs. 47 These and other newly 

originated mortgage loans are then sold to or securitized48 through government owned or 

supported credit agencies, such as the Government National Mortgage Association (Ginnie 

Mae), the Federal National Mortgage Association (Fannie Mae), and the Federal Home 

Loan Mortgage Corporation (Freddie Mac), with such agencies guarantying principal and 

interest. Sales of this sort are made pursuant to standardized contracts and guidelines that 

require the loans to meet detailed eligibility criteria. A small portion of loans are sold to 

private loan aggregators or directly to investors.

Many nonbank lenders also generate revenue by servicing a portfolio of loans and 

collecting fees for the direct or indirect provision of services. Servicing operations typically 

include the invoicing and collection of monthly mortgage payments from individual 

borrowers and the subsequent disbursement of those funds to the owners of the mortgages 

and to any applicable escrow account managers. In the event of a borrower default, a 

loan servicer may also exercise remedies (such as foreclosure) against the borrower. As 

compensation for these and other services, the servicer is entitled to retain a portion of the 

borrower’s monthly payment.

In part because they have not historically operated under any prescribed capital standards, 

nonbank lenders tend to be thinly capitalized. 49 Capitalization risks are compounded by lack 

of access to liquidity provided to traditional banks. As the name implies, nonbank lenders 

are not recognized as “banks” under applicable statutes and regulations, and therefore may 

not collect and use customer deposits to finance the loans they originate. Instead, they 

46. See 12 U.S.C. §§ 1701 to 1715z.

47. See 38 U.S.C. § 3702.

48. Securitization is the process of purchasing and bundling multiple loans into marketable mortgagebacked securities. This important form of financial intermediation facilitates the flow of funds in the 

residential lending market and smooths out risks by allowing investors to diversify their exposure. For a 

fascinating historical and political account of securitization, see Sarah L. Quinn, American 

Credit Markets Shaped a Nation

49. Citing research by the CSBS, a recent report by the FSOC observed that “in general, the largest 

nonbank servicers have limited liquidity, often just enough cash and securities held for sale to cover a few 

months of operating and interest expenses. Nonbank liquidity levels are significantly below those maintained 

by banks.” Fin. Stability Oversight Council, 2019 Annual Report 43 (2019), available at https:/

treasury.gov/system/files/261/FSOC2019AnnualReport.pdf.
14

customarily finance their activities with revolving credit facilities provided by commercial 

banks, finance companies, and other capital market participants. 50

These so-called mortgage warehouse lending facilities are often structured as repurchase 

agreements rather than secured loans. The nonbank lender sells newly originated loans to 

the counterparty to finance originations, and then repurchases the loans when it is ready to 

permanently sell them to a government owned or supported credit agency or other investor 

or aggregator. Credit facilities of this sort are structured to ensure that they qualify for 

certain “safe harbor” protections of the Bankruptcy Code that insulate nondebtor parties 

to certain financial contracts from the consequences that would otherwise flow from a 

counterparty’s bankruptcy. 51 Financial arrangements that qualify for safe harbor protections 

are exempt from the automatic stay of collection and enforcement proceedings. Instead, 

counterparties are permitted to exercise their contractual rights to, among other things, 

terminate the contract, set off mutual claims, and liquidate and collect any collateral they 

may hold. 52 It is important to note, however, that provisions establishing servicing rights are 

generally considered to be severable from the repurchase agreement. 53 And, when analyzed 

separately, an agreement providing for servicing rights does not fall within the categories 

of agreements that are entitled to safe harbor protections; rather it is considered an asset of 

the estate, subject to the normal protections afforded by the automatic stay. 54

Whether they are banks or nonbanks, mortgage lenders bear considerable risks. Pursuant to their purchase and/or servicing agreements, mortgage lenders are typically required to advance funds to investors in the event that the mortgage borrowers fail to make 

payments of principal and interest or fail to maintain sufficient escrow balances for taxes 

and insurance. 55 Mortgage servicers must also advance funds on behalf of investors for 

expenses, such as those associated with the exercise of remedies against a borrower and 

for property preservation. Although advances associated with defaulted mortgage loans are 

often reimbursed by a guarantor or insurer, there is typically a delay in the mortgage lender’s receipt of reimbursement, and in some circumstances, the guarantor or insurer may 

ultimately shift the losses back to the mortgage lender. For instance, a guarantor or insurer 

may exercise contractual remedies against a mortgage lender for losses associated with 

50. For an overview, see Thomas LaMalfa, The Inside Line on Warehouse Lending, Mortgage Banki

Nov. 1990, at 51.

51. See, e.g., 11 U.S.C. §§ 555, 556, 559–562.

52. See supra note 51 and statutory sources cited therein; see also 11 U.S.C. § 362(a) (imposing an 

automatic stay upon the commencement of a bankruptcy case).

53. See, e.g., Calyon New York Branch v. Am. Home Mortg. Corp. (In re Am. Home Mortg. Inc.), 379 

B.R. 503 (Bankr. D. Del. 2008).

54. Id.

55. These obligations are discussed in Joe Light, Mortgage Firms Teeter Near Crisis That Regulators 

Saw Coming, Bloomberg (Apr. 3, 2020), https://www.bloomberg.com/news/articles/2020-04-03/mortgageservicers-teeter-near-crisis-that-regulators-saw-comin
15

loans originated and underwritten based upon materially inaccurate information, or where 

the mortgage lender has otherwise breached its representations or warranties. 56

Like all mortgage lenders, nonbank lenders are susceptible to interest rate risks. One 

example of this risk occurs when a mortgage lender agrees to issue a loan to a borrower 

and enters into a so-called interest rate lock commitment with the borrower. As the name 

implies, an agreement of this sort fixes the interest rate that will apply to the loan. The 

lender bears the risk of market rate changes from the time that it enters into the agreement 

until the time that it sells the mortgage. Lenders typically manage these risks through 

interest rate hedging arrangements; in the case of nonbank lenders, such arrangements are 

often provided in conjunction with a warehouse lending facility. The following section 

explores the size and scope of both the shadow banking industry generally and the nonbank 

lending market specifically.

2. Size and Scope of the Market

As noted in Part IV.A.1.a above, there are no universally accepted definitions of the terms 

“shadow banking” and “nonbank lending.” Moreover, because so many of the parties and 

transactions involved lack regulatory oversight, attempts to quantify them necessarily rely on 

estimates and assumptions. Naturally, this creates a methodological problem in attempting 

to describe and assess the role of nontraditional participants in the financial markets. 

We can, however, examine and use various data sources to qualitatively understand 

the size and scope of shadow banking and nonbank lending. And the numbers paint a clear 

picture of a shifting financial landscape. According to a recent report, the shadow banking 

sector (defined in that report to include those “non-banks” that are likely to introduce 

bank-like financial stability risks and/or engage in regulatory arbitrage) provides financial 

intermediation for approximately 13.6 percent of global financial assets. 57 With respect 

to the U.S. financial markets, financial intermediation data suggest that the provision of 

maturity and credit transformation by shadow banking entities has grown from 5.4% of 

the transformation total in 1960 to 43.4% as of the third quarter of 2019. 58 Over the same 

time period, traditional financial intermediation has fallen from 94.9% to 56.6% of the 

transformation total. 59

Meanwhile, nonbank lending has grown substantially in the U.S., particularly in the residential mortgage market. Nonbank lenders originated only nine percent of new mortgages 

56. These so-called “repo demands” have received considerable attention in recent years. See, e.g., Nick 

Timiraos, Buyback of Loans is Forced on BofA, Wall St. J. (May 23, 2012), available for a fee at https:/

www.wsj.com/articles/SB10001424052702304065704577422540136789210.

57. Fin. Stability Bd., supra note 44, at

58. A more detailed discussion of historical bank and nonbank financial intermediation data evidencing 

the growth of the shadow banking sector in the U.S. financial markets is provided in Appendix C, prepared 

by Dr. William T. Rule, Senior Economist at the AOUSC.

59. Id.
16

in 2009.60 By 2016, they originated approximately half of all mortgage loans.61 More recent 

statistics published by the FDIC suggest that nonbanks have eclipsed traditional banks in 

various measures of market share, both in terms of mortgage loan origination and servicing.62 Reflecting on the interconnectedness of traditional banks and nonbank lenders in the 

modern economy, a recent FDIC report notes that “[b]ank lending to nonbank financial institutions has expanded seven-fold since 2010 and [today] exceeds $400 billion.”63 In light 

of this explosive growth, the following section considers the risks and benefits of increased 

nonbank lending activity.

3. Risks and Benefits of Nonbank Lending Sector Growth

Risks associated with increased nonbank lending activity include, among other things, the 

potential negative consequences of sector failure on other financial institutions, particularly given the unique vulnerability of nonbanks to liquidity crises. On the other hand, a noteworthy benefit of increased nonbank lending activity is the increased availability of loans 

to lower-income individuals who may be turned away by traditional banks. The following 

sections explore these and other risks and benefits of nonbank lending sector growth.

a. Risks associated with increased nonbank lending activity.

As Part IV.A.1.b explained, nonbank lenders tend to be thinly capitalized, making them 

uniquely vulnerable to liquidity crises. An example of this appears in the residential lending 

market, where mortgage lenders are often required to advance funds to security holders 

to compensate them for losses associated with defaulted mortgage loans. Although the 

mortgage lender may be reimbursed by a guarantor or insurer, there is typically a delay 

in the mortgage lender’s receipt of reimbursement. Some losses may be shifted back to 

the mortgage lender, such as those stemming from its own failure to adhere to industry 

guidelines. Meanwhile, nonbank lenders tend to rely on revolving credit facilities, such 

as warehouse lines of credit, to finance new originations. These lines of credit may be 

reduced or even terminated, effectively ending the nonbank lender’s operations. In times of 

financial market distress, multiple credit line reductions or terminations have the potential 

to cause a widespread credit market freeze. 

More broadly, nonbank lending may increase market complexity and risk by decentralizing financial activity, leading to “market fragmentation, interconnectedness, and opacity, 

60. Mortgage Lending: Concerns Over Nonbank Lenders, 51 No. 23 Mortgage & Real Est. Execu

Rep. L 7 (2019

61. You Suk Kim et al., Liquidity Crises in the Mortgage Market, 2018 Brookings Papers on Econ. Activity 347, 350–51, available at https://www.brookings.edu/wp-content/uploads/2018/03/KimEtAl_Tex

62. Fed. Deposit Ins. Corp., Bank and Nonbank Lending Over the Past 70 Years, 13 FDIC Q. no. 4 3

34 (2019).

63. Fed. Deposit Ins. Corp., 2019 Risk Review 34 (2019), available at https://www.fdic.gov/

analytical/risk-review/full.pdf.
17

which make it difficult for market participants to effectively process information.” 64 In a 

2015 speech, Stanley Fischer, then-Vice Chairman of the Board of Governors of the FRS, 

summarized the concern as follows: “With the growth of nonbank lending, intermediation 

chains have lengthened, often involving both banks and other nonbank financial institutions.” 65 As a result, risks are able to quietly accumulate over time, leading to panic and 

overcorrection when those risks are suddenly revealed. 66 In other words, as several commentators recently observed, “the activities of some non-bank entities can create bank-like 

risks to financial stability.” 67 Some commentators further suggest that, without protection 

against runs, these risks pose an even greater threat. 68

b. Benefits associated with increased nonbank lending activity.

At the same time, there are important benefits associated with increased nonbank lending 

activity. For one thing, nonbank lending has the potential to increase economic efficiency. 

This is primarily achieved through a feature known as “disintermediation.” In traditional 

financial intermediation, the intermediary acts as a middleman, profiting from the interest 

rate differential between what is paid on deposits and what is charged to borrowers. 

According to disintermediation, the elimination of a middleman in a nonbank lending 

structure reduces costs to borrowers. 69 And during periods of tight margins and increased 

regulatory burdens, nonbank lenders may be nimble and agile enough to enter markets that 

traditional banks either will not or cannot enter.

Nonbank lenders also tend to succeed in leveraging digital technology to interact with 

prospective borrowers, allowing them access to markets that are underserved by traditional 

banks. 70 In the residential lending market, mortgages originated by nonbanks tend to be 

lower credit quality than those originated by banks, 71 with credit extended to borrowers 

who “are more likely to have lower incomes and wealth, are less likely to hold Bachelor’s 

64. Schwarcz, supra note 38, at 628 (citing Dan Awrey, Complexity, Innovation and the Regulation of 

Modern Financial Markets, 2 Harv. Bus. L. Rev. 235 (201

65. The Importance of the Nonbank Financial Sector, Bk. Compl. Gd. 6298014 (C.C.H.), 2015

6298014 (2019).

66. Schwarcz, supra note 38, at 629.

67. Peter J. Green, Jeremy C. Jennings-Mares, & Lewis Lee, Out of the Shadows and Into the Light, 14 

No. 05 2013 WGL Derivatives: Financial Products Report, *1, Ja

68. Concerns of this sort are examined in JC Reindl, Quicken Loans may need temporary emergency 

funding amid coronavirus pandemic, Detroit Free Press, Mar. 24, 2

69. For instance, when special purpose entities (SPEs) are used in nonbank lending, they do not typically 

charge higher rates of interest. See Comm. on Bankr. and Corp. Reorganization of the Ass’n of the Bar of the 

City of N.Y., New Developments in Structured Finance, 56 Bus. Law. 95, 132 (2000

70. This benefit is emphasized in a recent white paper published by an influential trade group. See

Mortgage Bankers Ass’n, The Rising Role of the Independent Mortgage Bank—Be

Implications (2019), available at http://mba-pa.informz.net/mba-pa/data/images/IMB22219.pdf

71. Servicing: Freddie Mac Financing Nonbanks, 51 No. 8 Mortgage & Real Est. Executives Rep

4 (2018). 
18

degrees, and are more likely to be non-white.” 72 Although there is certainly a risk of predatory lending, some data suggest that nonbank lending activity serves to enhance consumer 

welfare and economic parity by increasing the financial products available to a wider range 

of consumers. 73 This, in turn, may contribute to economic growth.

More broadly, nonbank lending has the potential to distribute losses among many 

smaller market participants rather than among a handful of large institutions. As Professor 

Steven Schwarcz observed, decentralization of this sort may ultimately “mitigate the ‘too 

big to fail’ problems.” 74 In other words, as nonbank lending activity increases, we may find 

that, at least in specific branches of the financial market, there is no one financial institution 

that is so large and interconnected that its failure would wreak havoc across the entire 

economy. However, as the following section explores, there may still be opportunities to 

enhance the regulatory structure. 

B. Overview of the Regulatory Background 

1. Key Changes in the Regulatory Environment

Federal and state statutes and regulations generally provide that only “banks” may accept 

deposits. Under these federal and state laws, any person accepting and holding deposits 

for future withdrawal by the depositor is engaged in the activity of banking and becomes 

subject to a host of regulatory requirements. 75 A complex network of banking rules 

imposes, among other things, licensing requirements, capital ratios, disclosure obligations, 

and restrictions on certain lending and collection activities. 76 These and other laws and 

regulations are designed to ensure the safety and soundness of the financial system and 

protect borrowers and communities from aggressive and predatory lending. 77

To the extent these and other requirements fail to reach nonbank lenders, opportunities 

are created for regulatory arbitrage by such lenders. That nonbank lenders have traditionally 

been subject to little or no regulatory oversight of their own further compounds matters. For 

many decades, no dedicated federal agency was authorized to supervise nonbank lenders, 

leaving the market subject to “fragmented jurisdiction” by a handful of agencies that 

72. Id.

73. However, some studies reach the opposite conclusion. For a review of literature focused on the 

so-called fintech sector, see Vincent Di Lorenzo, Fintech Lending: A Study of Expectations Versus Market 

Outcomes, 38 Rev. Banking & Fin. L. 725 (2019

74. Schwarcz, supra note 38, at 628.

75. See John L. Douglas, New Wine Into Old Bottles: Fintech Meets the Bank Regulatory World, 20 N.C

Banking Inst. 17, 23–24 (2016) (making this point via a prototypical set of state banking laws

76. For a list of banking regulations, see Regulations, Bd. of Governors of the Fed. Res. Sys.,

www.federalreserve.gov/supervisionreg/reglisting.htm.

77. The principal goals of financial regulation are: “(a) safety and soundness of financial institutions, 

(b) mitigation of systemic risk, (c) fairness and efficiency of markets, and (d) the protection of customers 

and investors.” Group of Thirty, The Structure of Financial Supervision: Approaches and

Global Marketplace 21–22 (200
19

possessed limited power to act. For instance, the Federal Trade Commission has always 

possessed the power to prosecute nonbanks, but the agency does not have the authority or 

the means to engage in regular ongoing supervision. 78 General supervisory authority, to the 

extent it existed at all, was typically vested in state regulators. And, while the Conference 

of State Bank Supervisors (CSBS) is, at the time of this writing, working to establish a set 

of uniform regulatory standards for the nonbanks that its members oversee, such efforts are 

in an early stage of development. 79

Of course, the legal and regulatory environment shifted in both dramatic and subtle 

ways following the financial crisis of 2007–08. As part of the Act, Congress established 

the Consumer Financial Protection Bureau (CFPB) to investigate predatory conduct in the 

consumer finance market, within the traditional banking and burgeoning nonbank lending 

sectors. In July 2013, the CFPB issued a final procedural rule 80 detailing the agency’s 

authority to regulate certain nonbank entities engaged in consumer finance transactions. 81

CFPB regulatory oversight extends to nonbanks that are engaged in mortgage-related 

services, including loan origination, servicing, and modification. 82 Additionally, the CFPB 

has the power to supervise nonbanks that are “engaging, or ha[ve] engaged, in conduct that 

poses risks to consumers with regard to the offering or provision of consumer financial 

products or services.” 83 The creation of the CFPB has, at least to some degree, reduced 

regulatory arbitrage. As Professors William Bratton and Adam Levitin recently observed, 

“mortgage lenders and servicers must now play by the same set of rules.” 84 New substantive 

rules impacting the residential lending sector include, among other things, a requirement 

that all lenders—including nonbank lenders—take certain steps to verify the borrower’s 

ability to satisfy its obligations. 85

Meanwhile, broader policy shifts have also had an impact on nonbank lenders to the 

extent such reforms have generated “greater transparency, less leverage, and more stable 

forms of liquidity transformation.” 86 Initiatives such as the Large Institution Supervision 

Coordinating Committee (LISCC) are said to reflect a new “macroprudential perspective 

78. See David H. Carpenter, Cong. Research Serv., R42572, The Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Title X: The Consumer Financial Protection Bureau 3 (2013).

79. See Vision 2020, Conference of State Bank Supervisors, https://www.csbs.org/vi

80. Procedural Rule to Establish Supervisory Authority over Certain Nonbank Covered Persons Based 

on Risk Determination, 78 Fed. Reg. 40352 (2013), codified at 12 C.F.R. pt. 1091.

81. For a discussion of the CFPB’s role in monitoring nonbanking entities, see David Reiss, Consumer 

Protection Out of the Shadows of Shadow Banking: The Role of the Consumer Financial Protection Bureau, 

7 Brook. J. Corp. Fin. & Com. L. 131 (

82. 12 U.S.C. § 5514(a)(1)(A)–(E).

83. Id. at § 5514(a)(1)(C).

84. William W. Bratton & Adam J. Levitin, A Tale of Two Markets: Regulation and Innovation in PostCrisis Mortgage and Structured Finance Markets, 2020 U. Ill L. Rev. 47, 

85. 15 U.S.C. § 1639c(a)(1).

86. The Importance of the Nonbank Financial Sector, Bk. Compl. Gd. 6298014 (C.C.H.), 2015

6298014 (2019).
20

to supervision and regulation,” pursuant to which regulators engage with complex financial 

institutions “not...as standalone entities, but...with consideration of how their actions 

could affect other firms and activities in a highly connected financial system.” 87 In a similar 

way, accounting standards and prudential regulations now mandate that banks identify 

their direct and indirect links to nonbanks. These and other initiatives take into account 

the growing interconnectedness of traditional banking and more cutting-edge financial 

activities.

Finally, the Act established the FSOC to provide for more centralized systemic risk 

oversight. The FSOC has, over the years, designated certain nonbank entities as systemically 

important financial institutions, rendering them subject to enhanced supervision by the 

FSB. 88 And in a recent report, the FSOC identified nonbank residential mortgage lending 

as a potential source of instability in the U.S. financial system. 89

But despite these important reforms and initiatives aimed at reducing opportunities 

for regulatory arbitrage, recent market data show that banks have further scaled back their 

presence in the residential lending market, while nonbanks have gained a larger share. 90

This development may relate to the continued regulatory gap between the traditional 

banking sector and the nonbank lending sector, notwithstanding the formation of the CFPB, 

LISCC, and FSOC and the enactment of new substantive rules that apply equally across 

the residential lending market. In fact, some argue that the gap has grown even wider in 

the wake of the financial crisis of 2007–08. 91 These commentators cite factors such as the 

lack of any official requirement for nonbanks to hold the same capital cushions and adhere 

to the same prudential standards as traditional banking institutions. The following section 

explores these and other facets of the existing regulatory scheme.

87. Id.

88. See, e.g., Fin. Oversight Stability Council, Basis of the Financial Stability Oversight Council’s Final 

Determination Regarding American International Group, Inc. 1 (2013); Fin. Oversight Stability Council, 

Basis for the Financial Stability Oversight Council’s Final Determination Regarding General Electric Capital 

Corporation, Inc. 1 (2013); Fin. Oversight Stability Council, Basis for the Financial Stability Oversight Council’s 

Final Determination Regarding Prudential Financial, Inc. 1 (2013). But one commentator argued that it is 

“exceedingly difficult to designate a shadow bank as systemically important but easy to undo a designation,” 

reflecting an overall “bias against strong regulation of shadow banks.” Gregg Gelzinis, A Stronger Regulatory 

Framework for Shadow Banks, Ctr. for Am. Progress (July 18, 2019), https://www.americanprogress.org/

issues/economy/reports/2019/07/18/471436/fact-sheet-stronger-regulatory-framework-shadow-banks/.

89. Fin. Stability Oversight Council, supra note 49, at 

90. See supra notes 60 through 62 and sources cited therein.

91. See, e.g., Gary Bechtel, BankThink: Nonbanks Need to Get Serious About Self-Regulation, Amer

Banker (Dec. 14, 2018), https://www.americanbanker.com/opinion/nonbanks-need-to-get-serious-aboutself-regulation (“Nonbank lending has existed for decades, but the burgeoning alternative lending spac

came into prominence in large part thanks to two sweeping pieces of financial regulation: the Dodd-Frank 

Act and Basel III capital reforms”).
21

2. Nonbanks in the Existing Regulatory Scheme 

As the previous section explains, recent regulatory changes have attempted to reduce 

opportunities for regulatory arbitrage by nonbank lenders. However, many commentators 

continue to assert that these reforms have not completely closed the regulatory gap between 

the traditional banking sector and the nonbank lending sector. This lingering gap may be the 

result of other reforms tightening credit conditions and increasing capital requirements for 

traditional banks, thereby restricting bank lending to the most creditworthy borrowers in 

the years following the financial crisis of 2007–08. And, because nonbanks fall beyond the 

scope of these regulations, they have arguably received a distinct competitive advantage.

The Basel III reforms, 92 which are an internationally agreed-upon set of measures 

developed by the Basel Committee on Banking Supervision and implemented in the United 

States via rules finalized in 2013, expanded existing bank risk management standards by 

instituting a number of new capital and liquidity measures. Specifically, Basel III raised 

both the quality and quantity of capital that banks are required to hold, increasing bank 

liquidity while decreasing bank leverage. It accomplished this by imposing new minimum 

leverage ratios that account for the risk levels associated with various asset classes, and 

that prioritize the common equity component of so-called tier one capital. Under Basel III, 

the largest banks are also subject to ratios that consider potential losses derived from offbalance sheet transactions. The overall effect of these reforms is that banks are required to 

hold more capital. 

As implemented in the United States, Basel III also placed significant restrictions on 

the amount of mortgage servicing rights banks could retain. Mortgage servicing rights 

were subject to a regulatory cap equal to ten percent of common equity tier one capital; 

investments in mortgage servicing rights in excess of this cap would subject the bank to 

deductions from regulatory capital. Restrictions of this sort are intended to factor in the 

risks inherent in otherwise profitable servicing rights: when a borrower defaults, even if the 

associated losses may be insured or guaranteed, mortgage servicers are required to advance 

the amount of the anticipated payments to the investors and then seek reimbursement. 

To the extent there is a wave of borrower defaults, a mortgage servicer may be rendered 

insolvent by the obligation to advance funds.

Notwithstanding these risks, some banks complained that such a strict regulatory standard would have the effect of squeezing banks out of the mortgage servicing market altogether.93 In response to these critiques, the rule was recently modified, raising the cap to 

25%. At the same time, however, regulators phased in a previously adopted standard subjecting mortgage servicing rights to higher risk-weighting. The net result of the regulatory 

92. Basel Comm. on Banking Supervision, Bael III: A Global Regulatory

Resilient Banks and Banking Systems (2010), available at https://www.bis.org/publ/bcbs189_dec2010.

93. See, e.g., MidFirst Bank, Punitive Treatment of Mortgage Servicing Rights Under Basel III Needs to Be 

Revisited, available at https://www.banking.senate.gov/download/midfirst-bank-mortgage-servicing-rightsunder-basel-iii-senate-banking-committee-rflp-june-2017pdf.
22

shifts, according to at least one commentator, is “higher capital requirements for some banks 

that have mortgage servicing rights portfolios.”94

Some scholars link the growth in nonbank lending to Basel III and other similar 

regulatory changes. Recent finance literature suggests that, across the globe, heightened 

capital standards and increased supervisory activity have caused banks to retreat from the 

residential lending market, allowing nonbank lenders to assume greater market share. 95

And in the United States specifically, evidence suggests that implementation of Basel 

III’s liquidity rules has given nonbank lenders a higher market share for mortgage loans, 

particularly those backed by Ginnie Mae. 96 Similar effects have been observed in the 

corporate debt market: a recent study found that banks increasingly sell their corporate 

loans—typically to nonbank entities—in order to comply with stricter capital requirements. 97

Of course, market participants fill some of the regulatory void, imposing a host of 

capital and liquidity standards on nonbank lenders. For instance, the warehouse lending 

facilities that are the lifeblood of the nonbank lending sector are typically contingent on the 

nonbank’s initial and ongoing compliance with financial covenants addressing net worth 

and liquidity. Failure to maintain the required ratios constitutes a default, entitling the 

lender to terminate the credit line. Similarly, mortgage lenders that sell to or service loans on 

behalf of government owned or supported credit agencies must agree to comply with terms, 

requirements, and conditions set forth in extensive and regularly updated guidelines. 98 These 

guidelines address virtually all areas of the business, with specific provisions focusing on 

capitalization, profitability, liquidity, and funding sources. 99 Requirements of this sort are 

continually refined. 100 Ginnie Mae recently tightened its liquidity and capital requirements, 

and has even considered implementing a stress testing regime for nonbank lenders. 101

94. Amanda Garnett, New Capital Rule Changes Treatment of Mortgage Servicing Rights, Fin. Insts.

Blog (July 2, 2019), https://blogs.claconnect.com/financialinstitutions/new-capital-rule-changes-treatmentof-mortgage-servicing-rights/.

95. Greg Buchak et al., Fintech, Regulatory Arbitrage, and the Rise of Shadow Banks, 130 J. Fin. Econ.

453 (2018).

96. Pedro Gete & Michael Reher, Liquidity Regulations in Mortgage Markets. The Regulatory Premium 

Channel and the Rise of the Nonbanks (2018), https://sipa.columbia.edu/sites/default/files/Pedro%20Gete%20

Paper%20Session%202.pdf.

97. Rustom Irani et al., The Rise of Shadow Banking: Evidence from Capital Regulation (2020), https://

rirani.web.illinois.edu//IraniIyerMeisenzahlPeydro_CapitalShadowBanking.pdf.

98. See Motion of Fed. Home Loan Mortg. Corp. for Relief from the Automatic Stay Pursuant to 11 U.S.C. 

§ 362(D) and Request for Emergency Hearing, In re Taylor, Bean & Whitaker Mortg. Corp., No. 09-07047 

(Bankr. M.D. Fla. Aug. 25, 2009) (describing requirements of this sort).

99. Id. at 3.

100. See, e.g., Seller/Servicer Guide, FreddieMac, https://sf.freddiemac.com/tools-learning/sellerservicerguide/overv

101. Press Release, Ginnie Mae, Ginnie Mae Solicits Feedback on its Stress Testing Framework (July 23, 

2019), available athttps://www.ginniemae.gov/newsroom/Pages/PressReleaseDispPage.aspx?ParamID=172. 
23

Nonetheless, a regulatory gap appears to continue, leading the authors of a recent 

Brookings report to warn that nonbank lenders are subject to relatively lax standards that 

leave them poorly equipped to handle financial shocks. 102 And if we learned anything from 

the financial crisis of 2007–08, it is that financial institutions have the potential to fail 

spectacularly, sending shockwaves through the economy. The following section considers 

whether and to what extent adequate systems are in place to facilitate the orderly liquidation 

or reorganization of financially distressed nonbank lenders.

3. Approaches to Managing Firm-Specific Nonbank Failures

Like all sectors of the economy, the residential lending market has its peaks and troughs. 

For most of the last decade, low interest rates and strong growth in home values buoyed 

the residential lending market, providing ample business for nonbank lenders. But in the 

last few years, as housing inventory has contracted and home sales have weakened in 

many parts of the country, purchase loan originations have declined. At the same time, the 

loan refinancing market has contracted during periods of rising interest rates. 103 Although 

the FRS has, at the time of this writing, made emergency rate cuts in response to the 

COVID-19 public health crisis, 104 the residential lending market will likely face severe 

challenges in the months and years to come. Borrowers who are struggling with income 

losses are likely to face difficulty making loan payments, while a federal moratorium on 

most foreclosures will hamstring mortgage lenders seeking to enforce remedies. And, since 

mortgage lenders are expected to advance payments to investors even when the borrower 

defaults, nonbanks with sizable servicing portfolios face even greater risks. 105 For these 

reasons, the Mortgage Bankers Association recently called upon the FRS to establish a 

temporary liquidity backstop for mortgage servicers. 106

These market forces place considerable pressure on both bank and nonbank lenders. 

However, the concerns are only magnified when we consider that nonbanks tend to 

originate and service loans with higher credit risks. And even before the COVID-19 public 

health crisis, multiple sources of data suggested that nonbank mortgage lenders have been 

struggling financially, with nearly one-third of nonbank mortgage lenders losing money as 

102. Kim, supra note 61.

103. See, e.g., Christina Rexrode, Retreat of Smaller Lenders Adds to Pressure on Housing, Wall St. J

(Nov. 22, 2018), available for a fee at https://www.wsj.com/articles/rising-rates-are-roiling-nonbankmortgage-lenders-1542891600.

104. David Goldman, Federal Reserve Cuts Rates to Zero to Support the Economy During the Coronavirus 

Pandemic, NN (Mar. 16, 2020), https://www.cnn.com/2020/03/15/economy/federal-reserve/index.htm

105. The issue is examined in Andrew Ackerman, Mortgage Firms Brace for Wave of Missed Payments 

as Coronavirus Slams Homeowners, Wall St. J. (Mar. 23, 2020), available for a fee at https://www.wsj

com/articles/mortgage-firms-brace-for-wave-of-missed-payments-as-coronavirus-slams-homeowners11585017857.

106. Reindl, supra note 68.
24

of 2018. 107 Against these pressures, some nonbank lenders have already used the federal 

bankruptcy process to reorganize or liquidate. They have been able to do so because 

nonbank lenders are not covered by language in the Bankruptcy Code that renders “banks” 

ineligible for bankruptcy protection. 108

One of the first high-profile nonbank lender bankruptcy cases occurred in 2007, 109

when New Century Financial Corporation, a prominent subprime mortgage lender, filed 

under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of 

Delaware. 110 In recent years, other nonbank lenders—large and small—have followed in 

New Century’s footsteps. The following sections analyze three such cases: In re Taylor, 

Bean & Whitaker Mortgage Corp., In re Ditech Holding Corp., and In re Stearns Holdings, 

LLC. The case studies reveal how bankruptcy courts have had to grapple not only with the 

usual questions concerning due process and fair and equitable treatment of creditors, but 

also with novel questions that relate specifically to the debtor’s status as a nonbank lender. 

For instance, what is the role of the bankruptcy court, federal agencies, the debtor’s financial 

contract counterparties, and other stakeholders in ensuring that the nonbank’s failure does 

not threaten financial stability? How can courts ensure that a nonbank lender’s bankruptcy 

does not cause severe disruptions in the debtor’s business operations or otherwise unduly 

burden other financial institutions or cause immediate and substantial harm to consumers? 

The following sections shed light on these and other important questions. 

a. In re Taylor, Bean & Whitaker Mortgage Corp.

Headquartered in central Florida, Taylor, Bean & Whitaker Mortgage Corporation was, 

prior to its stunning collapse, the largest nonbank mortgage lender in the United States. The 

company employed thousands of people in offices around the country, engaging in a high107. Sam Fleming & Joe Rennison, US Non-bank Mortgage Lenders Come Under Scrutiny, Fin. Time

(Apr. 9, 2019), available for a fee at https://www.ft.com/content/d9329ee4-5549-11e9-91f9-b6515a54c5b1.

108. See 11 U.S.C. § 109(b), (d) (stating that banks are ineligible for bankruptcy). Instead, banks are 

subject to regulatory seizure. For an enlightening discussion, see Richard M. Hynes & Steven D. Walt, 

Why Banks Are Not Allowed in Bankruptcy, 67 Wash. & Lee L. Rev. 985 (2010). Of course, bank holdin

companies have effectively used federal bankruptcy process to liquidate or reorganize. This Working Group 

previously considered CIT Group Inc.’s chapter 11 case in Admin. Office of the U.S. Courts, Third Report 

Pursuant to Section 202(e) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, at 

Appendix B (2013), as well as Lehman Brothers Holdings Inc. and Washington Mutual, Inc. in Admin. Office 

of the U.S. Courts, Second Report Pursuant to Section 202(e) of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act of 2010 (2012).

109. We do not focus on New Century in this Report because it predates the financial crisis of 2007–08. 

The Working Group has previously analyzed a number of financial company bankruptcies from this time 

period. See supra note 108 and sources cited therein.

110. Jonathan Stempel, New Century Files for Chapter 11 Bankruptcy, Reuters (Apr. 2, 2007), https:/

www.reuters.com/article/idUSN0242326420070402.
25

volume loan origination and servicing business. 111 In 2008, it originated approximately 

$30 billion in new mortgage loans, 112 funding commitments through several large warehouse 

lending facilities. In August 2009, the company and certain of its affiliates (collectively, 

Taylor Bean) filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code in 

the U.S. Bankruptcy Court for the Middle District of Florida. 113 We have chosen to profile 

the case because it highlights the potential for serious conflicts regarding the ownership 

of mortgage assets, as well as the importance of protecting consumer mortgage payments 

and ensuring timely reconciliation of accounts during the pendency of a nonbank lender 

bankruptcy case.

Characterizing Taylor Bean’s fall as “sudden and dramatic,” newly retained managers 

explained in court filings that, just a few weeks prior to the bankruptcy, the company—

along with its former chairman and majority owner—became the subject of federal scrutiny 

in relation to certain dealings with Colonial Bank (Colonial), Taylor Bean’s warehouse 

lender. Specifically, in early 2009, Taylor Bean announced that it had arranged a muchneeded $300 million equity investment in Colonial’s holding company that would enable 

the commercial bank to receive federal Troubled Asset Relief Program funds. 114 Following 

the announcement, the stock price of Colonial’s publicly traded parent soared. However, 

contrary to Taylor Bean’s representations, it had not actually lined up any investors. 115 The 

equity transaction would later fall through, causing Colonial’s stock price to fall. 116

In early August 2009, Colonial was placed into receivership by the FDIC, where federal 

examiners discovered evidence suggesting a longstanding pattern of fraud and misrepresentation with respect to Taylor Bean’s mortgage lending business. 117 When these allegations came to light, Freddie Mac and other government owned or supported credit agencies 

took immediate action, rescinding Taylor Bean’s approvals to originate and service loans 

on their behalf and effectively “deal[ing] a death blow to [its] business operation.” 118 The 

final nail in the coffin came when multiple states issued cease and desist orders, prohibiting 

the company from engaging in mortgage-related activities.

Although Taylor Bean filed under chapter 11 of the Bankruptcy Code, all signs pointed 

to a liquidation plan. In one of its earliest declarations to the court, the debtor characterized 

111. Debtor’s Emergency Motion for Entry of Interim and Final Orders Authorizing Use of Cash Collateral 

and Granting Replacement Liens at 2, In re Taylor, Bean & Whitaker Mortg. Corp., No. 09-07047 (Bankr. 

M.D. Fla. Aug. 24, 2009).

112. Id. at 5.

113. See, e.g., Voluntary Petition of Taylor, Bean & Whitaker Mortg. Corp., In re Taylor, Bean & Whitaker 

Mortg. Corp., No. 09-07047 (Bankr. M.D. Fla. Aug. 24, 2009).

114. Id. at 7.

115. Press Release, SEC, SEC Charges Former Chairman of Major Mortgage Lender with $1.5 Billion 

Securities Fraud and Related TARP Scheme (June 16, 2010), available at https://www.sec.gov/news/

press/2010/2010-102.htm.

116. See id.

117. Id.

118. Debtor’s Emergency Motion, supra note 111, at 6–7.
26

its ongoing business operations during the pendency of the case as “primarily limited to 

conserving as much as possible the value of its servicing rights.” 119 Despite allegations of 

fraud and mismanagement, no trustee was appointed in the bankruptcy case. Instead, the 

previous officers and directors resigned, and new, independent directors were appointed. 

One of the earliest conflicts concerned the debtor’s access to cash collateral. In first-day 

filings, the debtor asked the court to grant an emergency motion to use cash collateral, 120

which consisted of funds on deposit in various bank accounts and numerous accounts/notes 

receivable. 121 While requests of this sort are met with resistance in many cases, the matter 

is much thornier where the debtor’s cash includes receipts from individual borrowers’ 

mortgage payments. 

Predictably, the motion drew multiple objections. One of Taylor Bean’s creditors 

argued that the debtor had failed to inform anyone of the value of the collateral, both prior 

to and following the commencement of the bankruptcy case. 122 Hinting that there was more 

to the story than the typical conflict over the debtor’s use of cash collateral, the creditor 

complained that “[t]he Debtor’s motion does not identify where the bank accounts are 

located containing the alleged cash collateral, nor any identification of the source of cash 

in such accounts.” 123 And, although the debtor designated some cash as “operating cash,” 

the previous managers were “compromised by certain alleged improprieties,” while the 

“existing ‘management’ could not possibly have assessed or analyzed the actual character 

and nature of funds that may be on deposit.” 124

The FDIC, as receiver for Colonial, objected on similar grounds and, with respect to 

bank accounts maintained by Colonial, reminded the court that, pursuant to the Federal 

Deposit Insurance Act (FDIA), “no court may take any action...to restrain or affect the 

exercise of powers or functions” of the agency when it is acting as a receiver for a failed 

institution. 125 But the FDIC’s objection also highlighted severe disruptions in the debtor’s 

business operations, which clearly had the potential to impact residential borrowers and 

other financial institutions. 

Specifically, in the weeks following Colonial’s suspension of the debtor’s accounts, 

mortgage payments were received by Colonial and the debtor but not deposited into the 

appropriate accounts. The FDIC explained that it felt compelled to perform duties that 

are outside of the agency’s normal jurisdiction in order to “protect[] the interests of the 

119. Id. at 16.

120. The court may authorize a debtor’s use of cash collateral under 11 U.S.C. § 363(c)(2).

121. Debtor’s Emergency Motion, supra note 111, at 16.

122. RBC Bank (USA) Successor by Merger to Fla. Choice Bank’s Objection to Debtor’s Emergency 

Motion at 3, In re Taylor, Bean & Whitaker Mortg. Corp., No. 09-07047 (Bankr. M.D. Fla. Aug. 27, 2009).

123. Id. at 4.

124. Id.

125. Limited Objection of FDIC, as Receiver for Colonial Bank, to Debtor’s Motion for Orders Authorizing 

Use of Cash Collateral at 1–2, In re Taylor, Bean & Whitaker Mortg. Corp., No. 09-07047 (Bankr. M.D. Fla. 

Aug. 26, 2009) (citing 12 U.S.C. § 1821(j)).
27

investors in the mortgage loans and determin[e] what payments need to be made on their 

behalf.” 126 For instance, “[n]otwithstanding the lack of jurisdiction,” the agency “attempted 

to work with the Debtor to reach an agreement regarding the transition of mortgage 

servicing...to a successor servicer, as well as an interim solution for borrower payments 

that have accumulated in the pipeline.” 127 Such steps were critical because, without prompt 

processing of borrower payments, timely payment of property insurance premiums and real 

estate taxes would not occur. But these early efforts were largely unsuccessful, allegedly 

because the debtor failed to “provide necessary assistance and information.” 128 Then, once 

the debtor entered bankruptcy, the FDIC ceased all efforts to collect files and transfer 

servicing rights so as not to run afoul of the automatic stay. 129

An objection filed by Freddie Mac painted what is perhaps the clearest picture of the 

immediate consequences of the nonbank lender’s failure. The agency described the debtor’s 

possession of certain funds belonging to Freddie Mac but not yet transferred to it. These 

funds—which included at least 4,220 checks that had been received by Colonial but not 

deposited into the appropriate accounts, as well as at least 30,000 unendorsed checks that 

had been sent by borrowers to Taylor Bean—constituted borrower principal and interest 

payments, taxes, and insurance escrow funds that should have been timely applied to the 

borrowers’ obligations and released to the respective investors. 130 Meanwhile, at least 

35,000 automated clearing house payments for borrowers’ payments had not been debited 

as scheduled. 131

The agency warned that the consequences of continued delay with respect to these 

borrower payments would be substantial: “loan remittances may not be correctly credited 

and loan pay-offs may not be properly applied in a manner discharging the loan. Borrower 

insurance policies will lapse for non-payment, and real property tax bills will go unpaid, 

resulting in increased tax liabilities and possible tax deed/foreclosure sales.” 132 Like the 

FDIC, Freddie Mac detailed its efforts to work with the debtor: employees spent weeks 

at the debtor’s premises attempting to collect payments and mortgage files and transfer 

servicing duties to interim servicers. 133 However, these and other efforts were largely 

unsuccessful. In the weeks prior to the bankruptcy filing, progress was slowed by the fact 

126. Id. at 2.

127. Id.

128. Id.

129. Motion of FDIC, as Receiver for Colonial Bank, for Relief from the Automatic Stay Pursuant to 

11 U.S.C. § 362(D) and Request for Emergency Hearing, No. 09-07047 (Bankr. M.D. Fla. Aug. 28, 2009).

130. Objection of Fed. Home Loan Mortg. Corp. to Debtor’s Emergency Motion for Authority to Use 

Cash Collateral, In re Taylor, Bean & Whitaker Mortg. Corp. at 5–6, No. 09-07047 (Bankr. M.D. Fla. Aug. 

25, 2009).

131. Id. at 8.

132. Id. at 7.

133. Id. at 5–6.
28

that the debtor had already terminated many of its employees; once the bankruptcy case 

was filed, Freddie Mac—like the FDIC—had to be mindful of the automatic stay. 134

Concerned about the potential harm to individual borrowers, the FDIC135 and Freddie 

Mac 136 each petitioned the court to lift the automatic stay so that they could collect 

records, payments, and other property relating to loans serviced by Taylor Bean. But other 

stakeholders opposed these efforts, with one large secured creditor asserting that, since 

neither the debtor nor any other party “can state with certainty who owns the Mortgage 

Loans,” they should remain property of the estate until all of the various claims, interests, 

rights, and entitlements could be identified. 137 The debtor resisted the stay motions as well, 

even going so far as to file its own motion requesting that the court order the FDIC to turn 

over all of the funds in its possession relating to Taylor Bean’s accounts at Colonial. 138

Ultimately, the debtor reached settlements with these and other stakeholders. First, 

the debtor and the FDIC agreed that the debtor could retain access to records and funds in 

its possession, as well as gain access to information in the FDIC’s possession, in order to 

reconcile borrower accounts. 139 Both parties agreed to work collaboratively to complete 

the account reconciliation process in an expedited manner, with the debtor also promising 

to deliver final and interim progress reports to the court. Taylor Bean reached a similar 

agreement with Freddie Mac, promising that it would cooperate fully with the agency 

to transfer servicing rights to designated third parties. 140 Regarding the use of cash in its 

possession, the debtor agreed that it would not use cash receipts from individual borrowers’ 

mortgage payments, and would follow an agreed-upon budget. 141

But this would not be the last skirmish. Within days of court approval of the settlements, 

another creditor filed a motion for an order authorizing Rule 2004 examinations of the 

134. See Motion of Fed. Home Loan Mortg. Corp. for Relief from the Automatic Stay Pursuant to 11 U.S.C. 

§ 362(d) and Request for Emergency Hearing, In re Taylor, Bean & Whitaker Mortg. Corp., No. 09-07047 

(Bankr. M.D. Fla. Aug. 25, 2009).

135. See Motion of FDIC, supra note 129.

136. See Motion of Fed. Home Loan Mortg. Corp., supra note 134.

137. Bank of America’s Response to the FDIC’s Motion for Relief from the Automatic Stay at 8–9, In re

Taylor, Bean & Whitaker Mortg. Corp., No. 09-07047 (Bankr. M.D. Fla. Sept. 10, 2009).

138. Emergency Motion for Turnover, Approval of Procedures for the Maintenance and Use of Borrower 

Payments, and Immediate Resolution of Related Issues, In re Taylor, Bean & Whitaker Mortg. Corp., No. 09-

07047 (Bankr. M.D. Fla. Aug. 31, 2009).

139. Notice of Filing Stipulation Between Debtor Taylor, Bean & Whitaker Mortg. Corp. and FDIC, as 

Receiver For Colonial Bank, In re Taylor, Bean & Whitaker Mortg. Corp., No. 09-07047 (Bankr. M.D. Fla. 

Sept. 14, 2009).

140. Stipulation of Settlement by and Between Fed. Home Loan Mortg. Corp. and the Debtor Regarding 

Stay Relief and Transfer of Loan Servicing, In re Taylor, Bean & Whitaker Mortg. Corp., No. 09-07047 

(Bankr. M.D. Fla. Sept. 20, 2009).

141. Order Authorizing Interim Use of Cash Collateral, In re Taylor, Bean & Whitaker Mortg. Corp., 

No. 09-07047 (Bankr. M.D. Fla. Sept. 9, 2009).
29

debtor and other third parties, including the FDIC and Freddie Mac. 142 In an objection 

that emphasized the importance of “triage” in complex bankruptcy cases, the unsecured 

creditors committee urged restraint, noting that “reconciliations that will benefit all parties 

in interest are already underway and the type of discovery requested...would materially 

and prejudicially interfere with the existing reconciliations.” 143 No examiner was ever 

appointed, and the debtor filed its final reconciliation report in July 2010. 144 The court 

confirmed the debtor’s plan in July 2011, establishing a trust to pursue avoidance actions 

and other claims of the estate on behalf of Taylor Bean’s creditors. 145

b. In re Ditech Holding Corp.

In February 2019, the nationwide nonbank lender Ditech Holding Corp., along with 

certain of its affiliates (collectively, Ditech), commenced its second chapter 11 bankruptcy 

in the U.S. Bankruptcy Court for the Southern District of New York. 146 The company, 

which originated and serviced residential mortgage loans, had completed a prepackaged 

bankruptcy reorganization just one year earlier. In first-day filings, the debtor explained 

that it intended to actively market and attempt to sell substantially all of its assets, but 

that it would continue to fully operate its business during the pendency of the case in 

order to preserve the option of a reorganization transaction. 147 With operations spanning a 

broad spectrum of the residential mortgage market, the company’s portfolio included an 

emphasis on so-called reverse mortgage loans marketed to senior citizens. 

We have chosen to profile this case because it reveals the unique concerns that arise when 

consumer creditors hold substantial claims against a nonbank lender debtor and attempt 

to participate in the proceedings individually and collectively to protect their interests. 

Indeed, one of the most complicated issues in the case concerned the representation and 

ultimate plan treatment of the debtor’s consumer mortgage borrowers, many of whom held 

claims and defenses against the debtor arising out of its alleged misconduct in originating 

and/or servicing mortgage loans. 

142. Deutsche Bank, AG’s Motion for an Order Authorizing 2004 Examinations of Taylor, Bean & 

Whitaker Mortg. Corp. and Certain Third Parties Pursuant to Bankr. Rule 2004 and Section 105(a), In re

Taylor, Bean & Whitaker Mortg. Corp., No. 09-07047 (Bankr. M.D. Fla. Sept. 16, 2009).

143. Joinder of the Official Comm. of Unsecured Creditors to the Objections of FDIC and Freddie Mac, 

In re Taylor, Bean & Whitaker Mortg. Corp., No. 09-07047 (Bankr. M.D. Fla. Oct. 15, 2009).

144. Final Reconciliation Report, In re Taylor, Bean & Whitaker Mortg. Corp., No. 09-07047 (Bankr. 

M.D. Fla. July 1, 2010).

145. Order Confirming Chapter 11 Plan, In re Taylor, Bean & Whitaker Mortg. Corp., No. 09-07047 

(Bankr. M.D. Fla. July 21, 2011). 

146. See, e.g., Voluntary Petition of Ditech Holding Corp., In re Ditech Holding Corp., No. 19-10412 

(Bankr. S.D.N.Y. Feb. 25, 2019).

147. Declaration of Gerald A. Lombardo at 4–6, In re Ditech Holding Corp., No. 19-10412 (Bankr. 

S.D.N.Y. Feb. 25, 2019).
30

Within a few days of the debtor’s filing, the U.S. Trustee formed an official committee 

of unsecured creditors to represent these and other claimants. 148 Weeks later, as it became 

apparent that consumer borrowers would be the largest class of unsecured creditors 

and would play a significant role in the case, the U.S. Trustee appointed two additional 

consumer creditors to the committee. 149 In April 2019, advocates from the Bluhm Legal 

Clinic at Northwestern Pritzker School of Law filed a letter on behalf of three consumers 

with potential claims and defenses against Ditech, requesting the appointment of a special 

committee to represent the interests of all similarly situated mortgage borrowers. 150

Stressing the importance of adequate representation in the case, the advocates reminded 

the court that many of the debtor’s borrowers are “elderly, disabled, and lack the financial 

means to obtain representation.” 151 The initial request was joined by an attorney claiming 

that he and several other law firms collectively represented approximately eight hundred 

of the debtor’s consumer borrowers. 152 He argued that the unsecured creditors committee 

could not possibly provide adequate representation for this unique constituency: “nonconsumer creditors will rely on income generated by loans to existing and new consumer 

creditors who need relief from abusive loans. This creates an irreconcilable conflict.” 153

In response to these requests, the U.S. Trustee promptly appointed an official committee 

to represent all consumer creditors in the case. 154 But the debtor and several other 

stakeholders soon objected, urging the court to either disband the committee or impose a 

strict cap on the committee’s fees and expenses. 155 The court declined to do either, leaving 

the committee intact and authorizing it to exercise the full range of powers granted to 

statutory committees. 156 Then, demonstrating the diversity and complexity of the consumer 

creditor class, consumers victimized by a reverse-mortgage fraud scheme continued to 

intervene in the case as an ad hoc group. 157

148. Notice of Appointment of Official Comm. of Unsecured Creditors, In re Ditech Holding Corp., 

No. 19-10412 (Bankr. S.D.N.Y. Feb. 27, 2019).

149. Motion to Disband Comm. at 3, In re Ditech Holding Corp., No. 19-10412 (Bankr. S.D.N.Y. 

May 8, 2019).

150. Letter, In re Ditech Holding Corp., No. 19-10412 (Bankr. S.D.N.Y. Apr. 19, 2019).

151. Id. at 2.

152. Letter, In re Ditech Holding Corp., No. 19-10412 (Bankr. S.D.N.Y. Apr. 23, 2019).

153. Id.

154. Notice of Appointment of Official Comm. of Consumer Creditors, In re Ditech Holding Corp., 

No. 19-10412 (Bankr. S.D.N.Y. Apr. 22, 2019).

155. The committee’s history is described in Motion to Disband Comm, supra note 149.

156. Order Denying Debtors’ Motion to (I) Disband the Official Comm. of Consumer Creditors Appointed 

by the U.S. Trustee or, Alternatively, (II) Limit the Scope of Such Comm. and Cap its Fees and Expenses, In 

re Ditech Holding Corp., No. 19-10412 (Bankr. S.D.N.Y. Sept. 12, 2019).

157. See, e.g., The Diamond Victims’ Joinder in the Objection of the Official Comm. of Consumer 

Creditors to the Debtors’ Amended Joint Chapter 11 Plan and Sale of the Debtors’ Forward and Reverse 

Businesses, In re Ditech Holding Corp., No. 19-10412 (Bankr. S.D.N.Y. July 18, 2019).
31

Meanwhile, the debtor proposed to sell, pursuant to a chapter 11 plan, substantially all 

of its assets “free and clear” of consumer creditor claims and defenses. 158 The consumer 

creditors committee complained that the sale would therefore seemingly release claims 

arising out of such actions as the debtor “overstating and failing to correct borrower 

accounts, improperly servicing borrower accounts in contravention of applicable regulations 

and statutes, demanding payments barred by confirmed plans or the discharge injunction 

in borrowers’ prior chapter 13 cases, improperly applying funds paid by borrowers, and 

wrongfully foreclosing on borrowers’ properties,” 159 in essence “preclud[ing] consumer 

creditors from asserting their fundamental rights to seek to correct overstated accounts, 

defend themselves against wrongful foreclosures, and/or exercise recoupment and set-off 

rights.” 160

The committee raised section 363(o) of the Bankruptcy Code, which was enacted in 

response to a “wave of bankruptcy filings by mortgage companies that had engaged in 

predatory lending practices and...where the mortgage companies were able to sell their 

assets free and clear of all consumer claims.” 161 That section provides that, to the extent 

a debtor sells an interest in a consumer credit transaction pursuant to section 363, then 

the purchaser remains subject to consumer claims to the same extent as if the purchase 

had occurred outside of bankruptcy. The provision, the committee argued, explicitly 

protects claims by consumer borrowers against Ditech, and ought to apply even where 

the debtor proposes to sell the assets pursuant to a confirmed plan as opposed to a preconfirmation sale. 162

In a widely publicized decision163 that held that the plan could not be confirmed primarily 

because it failed the best interests test, 164 the bankruptcy court disagreed with the committee 

that section 363(o) applies to sales conducted pursuant to a chapter 11 plan. However, 

notwithstanding the inapplicability of section 363(o), the court explained that consumer 

creditors would retain many of the claims they sought to protect. For one thing, “[t]he 

doctrine of recoupment is a creature of non-bankruptcy law, and a defense—sometimes 

asserted affirmatively—that does not give rise to a claim or debt that is dischargeable in 

bankruptcy, or a right to demand payment.” 165 In other words, claims and defenses of this 

sort would survive with or without explicit, protective language in the plan or Bankruptcy 

158. In re Ditech Holding Corp., 606 B.R. 544 (Bankr. S.D.N.Y. 2019).

159. Objection of the Official Comm. of Consumer Creditors to the Debtors’ Amended Joint Chapter 11 

Plan and Sale of the Debtors’ Forward and Reverse Businesses at 1, In re Ditech Holding Corp., No. 19-

10412 (Bankr. S.D.N.Y. July 18, 2019).

160. Id. at 3.

161. Id. at 2.

162. Id. at 2–5. See also In re New 118th Inc., 398 B.R. 791, 794 (Bankr. S.D.N.Y. 2009) (“A trustee may 

sell property prior to confirmation, 11 U.S.C. § 363, or through a plan.”).

163. See, e.g., Joao F. Magalhaes, The SDNY’s Exposition of the Code’s Asset-Sale Provisions, 2020 Am.

Bankr. Inst. J. 40 (analyzing the “sweeping decision

164. 11 U.S.C. § 1129(a)(7).

165. In re Ditech Holding Corp., 606 B.R. 544, 600 (Bankr. S.D.N.Y. 2019).
32

Code. Meanwhile, as to setoff rights, the court acknowledged that the parties had already 

reached an agreement that the plan would not affect common-law setoff rights preserved 

by section 553 of the Bankruptcy Code. 166

Following the court’s decision, the parties resumed negotiations and ultimately reached 

an agreement regarding certain monetary and nonmonetary protections for consumer 

borrowers. 167 Such protections included a provision explicitly preserving borrowers’ rights 

to “raise issues associated with their accounts and to pursue remedies to correct those 

accounts if they are misstated or invalid,” as well as the establishment of “a cash reserve 

to maximize the likelihood that any other claims that would have been protected under 

section 363(o) outside the chapter 11 plan context—but which would otherwise not be 

covered by the language allowing consumer borrowers to correct their loan accounts—

would be satisfied in full.” 168 The court ultimately confirmed the plan in September 2019, 

paving the way for the company to finalize the sale transaction.

As a final note, one remarkable aspect of the case was that it featured a high level 

of involvement by consumer borrowers, many of whom appeared pro se. Although it 

is a fundamental principle of bankruptcy law that all parties in interest should have an 

opportunity to participate in the proceedings, it can be difficult for consumers to understand 

the precise contours of the bankruptcy court’s jurisdiction. As a result, some filings 

by consumer borrowers in Ditech reflect attempts to challenge foreclosure actions and 

otherwise use the bankruptcy forum to litigate claims arising out of the debtor’s origination 

or servicing of a mortgage loan. 169 We discuss this phenomenon in more detail in Part IV.C.

c. In re Stearns Holdings, LLC

In July 2019, Stearns Holdings, LLC, the parent company to nonbank lender Stearns 

Lending, along with certain of its affiliates (collectively, Stearns), filed voluntary petitions 

for relief under chapter 11 in the U.S. Bankruptcy Court for the Southern District of 

New York. 170 At the time, Stearns was the 20th largest mortgage lender in the U.S. 171 The 

166. Id. at 597. Section 553(a) provides, subject to certain exceptions, that the Bankruptcy Code “does not 

affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the 

commencement of the case under this title against a claim of such creditor against the debtor that arose before 

the commencement of the case.”

167. Statement of the Official Comm. of Consumer Creditors in Support of the Debtors’ Third Amended 

Joint Chapter 11 Plan, In re Ditech Holding Corp., No. 19-10412 (Bankr. S.D.N.Y. Sept. 18, 2019).

168. Id. at 4.

169. See, e.g., Debtors’ Objection to Motion to Discharge Borrower, In re Ditech Holding Corp., No. 19-

10412 (Bankr. S.D.N.Y. Sept. 30, 2019).

170. See, e.g., Voluntary Petition of Stearns Holdings, LLC, In re Stearns Holdings, LLC, No. 19-12226 

(Bankr. S.D.N.Y. July 9, 2019).

171. Declaration of Stephen Smith, President and Chief Fin. Officer of Stearns Lending, LLC in Support 

of Chapter 11 Petitions and First Day Pleadings at 3, In re Stearns Holdings, LLC, No. 19-12226 (Bankr. 

S.D.N.Y. July 9, 2019).
33

company focused almost exclusively on mortgage originations, having previously sold its 

mortgage servicing business. We have chosen to profile this case because it demonstrates 

how the bankruptcy process encourages the consensual allocation of losses between a 

nonbank lender’s equity owners and creditors. 

In first-day filings, an officer of the debtor explained that 70% of the company’s 

equity interests were owned by funds managed by Blackstone Group, a private equity firm 

(Blackstone), with the balance of interests owned by the nonbank’s founder and a handful 

of other individuals. 172 In addition to the typical warehouse financing facilities, Stearns 

also had $183 million of outstanding capital market debt in the form of senior notes secured 

by substantially all of the debtor’s assets. 173 Approximately 67% of the outstanding note 

indebtedness—which was scheduled to mature in August 2020—was held by various funds 

affiliated with Pacific Investment Management Company LLC (PIMCO). 174

In the years leading up to the bankruptcy filing, the company faced increased financial 

strain caused by a variety of market forces. And, while the company took steps to reduce 

costs and streamline its operations, its warehouse lenders grew increasingly concerned 

about the company’s financial position. Their concerns were only exacerbated by the fastapproaching maturity date for the senior secured notes, as well as a requirement that the 

company use proceeds from the sale of its servicing business to pay down the notes rather 

than fund working capital and shore up liquidity. 175

In 2018, after failing to find a new lender to refinance the senior secured notes, Stearns 

attempted an out-of-court restructuring with PIMCO. But the parties could not agree on 

terms. 176 Stearns had hoped that PIMCO would agree to extend the maturity date and 

relax the tender requirement, but PIMCO, sharing warehouse lenders’ concerns about the 

debtor’s liquidity and refusing to subject its investment to unnecessary risk, stood firm 

in its insistence that the company honor its contractual promise to use sale proceeds to 

pay down the notes. It also refused to extend the maturity date unless Blackstone made 

an additional capital contribution of $50 million. 177 Following the failed negotiations, 

Stearns enlisted the help of an investment advisory firm to explore its strategic alternatives, 

including a sale of the company, but these efforts were also unsuccessful. 178 Meanwhile, 

Stearns’ warehouse lenders “began reducing advance rates, increasing required collateral 

accounts and increasing liquidity covenants, further contracting available working capital 

necessary to operate the business.” 179 Eventually, two of the warehouse lenders refused to 

make additional advances and the debtor filed for bankruptcy.

172. Id. at 5.

173. Id. at 6–7.

174. Id. at 7.

175. Id. at 8–9.

176. Id. at 9–10.

177. Id. at 8–13.

178. Id. at 9–11.

179. Id. at 11.
34

Along with its voluntary petitions, Stearns filed a request to use cash collateral and 

borrow $35 million on a post-petition, senior secured superpriority basis from Blackstone. 

Additionally, because Stearns intended to preserve its business as a going concern, it 

arranged post-petition warehouse financing, seeking and obtaining an order from the court 

that not only authorized the borrowing, but also modified the automatic stay so that the 

warehouse lenders would have, during the pendency of the case, the customary rights and 

remedies associated with a repurchase facility of this sort. 180 The debtor also sought and 

obtained an order authorizing it to provide assurances of future performance to Fannie 

Mae, Freddie Mac, and Ginnie Mae, and modifying and lifting the automatic stay to the 

extent necessary to enforce the company’s obligations and commitments to these credit 

agencies. 181

The company also filed a draft proposed plan sponsored by Blackstone. The plan, 

which essentially sought to give PIMCO the economic equivalent of the liquidation 

process it allegedly demanded outside of bankruptcy, contemplated a cash-only auction 

of sponsorship rights to a reorganization plan that would retire PIMCO’s secured debt 

position. 182 The debtor proposed a thirty-day auction period, with Blackstone’s $60 million 

offer serving as the stalking horse bid.

No creditors committee was appointed in the case, but PIMCO waged its own 

battle against the debtor’s proposal. The firm alleged that Stearns’ request to use cash 

collateral and enter into the proposed debtor-in-possession financing would “den[y] the 

Noteholders access to their bargained-for collateral through excessive priming liens and a 

complete disregard of adequate protection,” putting “Blackstone in a preferred position of 

control.” 183 PIMCO also alleged that, through the proposed plan, the debtor and Blackstone 

“have engineered a plot to deliver assets to Blackstone at a discounted price.” 184 Indeed, 

the firm suggested that the company was worth far more than the $60 million stalking 

horse bid. 185 Finally, PIMCO emphasized its strong preference for an orderly wind-down, 

complaining that the debtor’s proposed auction process was commercially unreasonable: in 

PIMCO’s view, the compressed timeline, coupled with unduly burdensome procedures and 

180. See, e.g., Final Order (A) Authorizing Debtors to Enter Into Repurchase Agreement Facilities and 

Related Documents; (B) Authorizing Debtors to Sell And Repurchase Mortgage Loans in the Ordinary 

Course of Business; (C) Granting Backup Liens and Superpriority Administrative Expense Claims; (D) Modifying the Automatic Stay; and (E) Granting Related Relief, In re Stearns Holdings, LLC, No. 19-12226 

(Bankr. S.D.N.Y. July 31, 2019).

181. Final Order (I) Authorizing the Debtors to Continue Origination of Mortgage Loans in the Ordinary 

Course and Granting Related Relief and (II) Modifying the Automatic Stay on a Limited Basis to Facilitate the 

Debtors’ Ongoing Operations, In re Stearns Holdings, LLC, No. 19-12226 (Bankr. S.D.N.Y. July 31, 2019).

182. Joint Chapter 11 Plan of Reorganization, In re Stearns Holdings, LLC, No. 19-12226 (Bankr. S.D.N.Y. 

July 9, 2019).

183. Objection of Pac. Investment Management Company LLC at 2, In re Stearns Holdings, LLC, No. 19-

12226 (Bankr. S.D.N.Y. July 10, 2019).

184. Id. 

185. Id. at 7.
35

requirements, would make it difficult to attract serious bidders, while the refusal to allow 

credit bidding would hamstring its own ability to participate. 186

The debtor insisted that the proposed auction procedures were both reasonable and 

necessary, reminding the court that the goal of bringing all possible suitors to the table 

must be balanced against the need to move quickly so as to preserve key relationships—

including, in particular, its critical relationships with the government owned or supported 

credit agencies. 187

Notwithstanding these early conflicts, the parties would soon find a way to allow the 

restructuring to proceed without the costs and delays of protracted litigation. 188 Under the 

terms of a settlement approved by the court in September 2019, the debtor and Blackstone 

agreed to pay PIMCO’s professional fees and cancel the proposed auction, instead 

advancing a plan that would distribute to the noteholders $65 million cash, replacement 

notes with a face amount of up to $15 million, and a small equity stake entitling them to 

share in any upside. At the time, the total value of the proposed distributions was estimated 

to be a 41% recovery for the noteholders. 189 In exchange, PIMCO agreed to support the 

debtor’s amended plan proposal and waive not only its unsecured claims, but also its right 

to make a section 1111(b) election. The court confirmed the plan in October 2019, paving 

the way for the company to exit bankruptcy. 190

C. Potential Takeaways from the Case Studies

The case studies discussed in Part IV.B.3 suggest that the Bankruptcy Code has been generally 

effective in facilitating the orderly liquidation and reorganization of nonbank lenders, and 

would likely be effective in meeting the needs of most other failed nontraditional financial 

intermediaries. In each of the three cases, the debtor was able to advance a confirmable 

plan and exit bankruptcy within a reasonable period, minimizing disruptions and preserving 

value. In Stearns Holdings, the parties were able to resolve major conflicts and agree to 

a fair, rules-based allocation of losses between the firm’s equity owners and creditors in 

less than two months. It seems that the inherent flexibility of chapter 11 of the Bankruptcy 

Code, when coupled with the strong restructuring expertise of the bankruptcy bench and 

186. Objection of Pacific Inv. Mgmt. Co. to the Debtors’ Motion for an Order (A) Approving the Plan 

Sponsor Selection Procedures; (B) Establishing Notice Procedures; and (C) Granting Related Relief, In re

Stearns Holdings, LLC, No. 19-12226 (Bankr. S.D.N.Y. July 17, 2019).

187. Debtors’ Reply to Objection of Pacific Inv. Mgmt. Co., In re Stearns Holdings, LLC, No. 19-12226 

(Bankr. S.D.N.Y. July 22, 2019).

188. Debtors’ Motion for Order (I) Authorizing Entry Into the Restructuring Support Agreement; and (II) 

Granting Related Relief, In re Stearns Holdings, LLC, No. 19-12226 (Bankr. S.D.N.Y. Sept. 11, 2019).

189. Amended Disclosure Statement with Respect to the Amended Joint Chapter 11 Plan at 3, In re Stearns 

Holdings, LLC, No. 19-12226 (Bankr. S.D.N.Y. Sept. 11, 2019).

190. Findings of Fact, Conclusions of Law, and Order Confirming the Amended Joint Chapter 11 Plan of 

Reorganization, In re Stearns Holdings, LLC, No. 19-12226 (Bankr. S.D.N.Y. Oct. 24, 2019).
36

bar, affords these uniquely situated debtors a highly responsive and agile legal regime that 

takes into account broader concerns relating to financial stability.

One advantage may be that bankruptcy naturally reflects the interconnectedness of the 

theoretical framework. This is because the Bankruptcy Code grants powerful substantive 

and procedural rights to creditors and other contractual counterparties to ensure the fair 

and equitable allocation of economic burdens. In the case of nonbank lenders, these large 

stakeholders often include traditional banks and government owned or supported credit 

agencies, which play a key role in the bankruptcy case. Indeed, Stearns Holdings also 

reveals the strong role that traditional financial intermediaries—such as banks extending 

warehouse credit facilities and other capital market creditors—play in monitoring nonbank 

lenders for signs of potential distress and helping to nudge these firms into bankruptcy 

when there is still time to pursue an orderly liquidation or reorganization process. 

At the same time, chapter 11’s broad party-in-interest standing provision allows other 

interested parties to intervene individually or in ad hoc groups, 191 while provisions authorizing the formation of statutory committees 192 afford claimants effective and efficient 

collective representation. In Ditech, widely dispersed and fragmented groups, such as the 

debtor’s consumer mortgage borrowers and its reverse-mortgage fraud scheme claimants, 

had a strong economic interest in the outcome of the case and were able to participate meaningfully and effectively on an individual and ad hoc committee basis, as well as through a 

special statutory committee.

But the case studies also highlight several important considerations. 193 For one thing, 

Taylor Bean and Ditech highlight the unique concerns that arise with respect to servicing 

rights. Although such rights are often valuable assets of the estate, their current treatment 

under the Bankruptcy Code may not fully consider the risks of disruptions in the debtor’s 

business operations. Notably, any delay or misappropriation by the debtor with respect to 

borrower records or payments has the potential to cause immediate and substantial harm to 

hundreds or even thousands of borrowers. Of course, the bankruptcy court has the power 

to implement appropriate checks and balances during the pendency of the case, such as the 

reconciliation and reporting process implemented in Taylor Bean. However, in that case, the 

judicial solution was the product of expensive and time-consuming stay litigation. Perhaps 

that solution might provide a template for case protocols or even statutory guidance for 

future nonbank bankruptcy cases.

The Bankruptcy Code itself suggests another tool that might be useful in nonbank 

bankruptcy cases, namely the appointment of a consumer creditor ombudsman to monitor 

the quality of the debtor’s loan servicing and represent the interests of consumer creditors 

191. 11 U.S.C. § 1109.

192. Id. at § 1102.

193. Neither the AOUSC nor the Judicial Conference of the United States has taken a position on any 

proposed legislative changes to the Bankruptcy Code, the Act, or any other relevant statute. It is, of course, 

for Congress to decide whether any legislative changes are necessary to facilitate the orderly liquidation and 

reorganization of nonbank lenders. 
37

in the case. 194 This approach might help address the potential for loan servicing quality 

issues in any given case and provide a more streamlined approach to representing the interests of consumer creditors in the bankruptcy case. An advocate of this sort might eliminate 

the need for an additional statutory committee and foster a sounding board for consumer 

borrowers. In Ditech, some filings by consumer borrowers reflect attempts to challenge 

foreclosure actions and otherwise use the bankruptcy forum to litigate claims arising out 

of the debtor’s origination or servicing activities. There are at least two potential risks 

associated with this activity: first, the consumer who attempts to litigate issues of this sort 

through the bankruptcy docket may neglect to timely file her claims and/or raise defenses 

in the proper forum (typically state court); and second, a flurry of irrelevant or misdirected 

filings has the potential to disrupt the bankruptcy proceedings and further strain the estate’s 

limited resources. An ombudsman might help address these and related issues by providing 

consumer guidance, consultation, and assistance regarding the impact of a mortgage lender’s bankruptcy on their rights and obligations. 

One further consideration is whether more structure would streamline proposed transactions in nonbank bankruptcy cases. Although the bankruptcy process—as opposed to a 

regulatory or administrative resolution—appears to effectively manage nonbank lender 

distress, it can occasionally afford too much leeway, leading to intense conflicts and a 

lack of consistency, certainty, and uniformity. In Taylor Bean and Ditech, the parties engaged in extensive negotiations and litigation to determine how the debtor should go about 

selling certain mortgage loan pools and servicing rights, including whether such assets 

would be sold free and clear of claims and defenses. In contrast, the FDIC, in its capacity 

as receiver for failed institutions, typically conducts sales of this sort pursuant to a clearly 

defined sealed bid sale process, using standard forms of transaction documents that are 

readily available for review. 195 A more structured bankruptcy auction process, modeling 

more closely the forms and processes used by the FDIC, might benefit all parties involved 

in a nonbank bankruptcy case. In addition, clarifying the role of section 363(o) of the Bankruptcy Code in cases involving assets sales under a confirmed plan might assist the process. 

In the meantime, existing bankruptcy laws appear to be accommodating these nonbank 

bankruptcies, providing a scheme that minimizes disruption, preserves value, and treats all 

parties as fairly as possible. More broadly, these findings suggest that the existing bankruptcy system is well-equipped to address a wide range of shadow banking entity failures, 

with laws and procedures already in place to effectively manage potential impacts on the 

broader financial markets. 

194. See 11 U.S.C. § 333, which provides for the appointment of a patient care ombudsman in health 

care business bankruptcies, and id. at § 332, which provides for the appointment of a consumer privacy 

ombudsman to the extent a debtor’s estate includes certain personally identifiable information.

195. Loan Sales Announcements & FAQs, Fed. Deposit Ins. Corp., https://www.fdic.gov/buying/lo
38

V. Conclusion

Nonbank lenders present unique challenges for policy makers. As firms and regulators 

work to identify risks and weigh the costs and benefits of expanded supervision, the 

bankruptcy courts are already responding to and managing the consequences of nonbank 

failures. Thanks, in large part, to the inherent flexibility of chapter 11 of the Bankruptcy 

Code, the existing bankruptcy laws appear to provide a scheme that minimizes disruption, 

preserves the most value, and treats all parties as fairly as possible. Moreover, recent case 

studies offer important lessons on key disputes in, and identify opportunities for enhancing, 

the resolution or reorganization of nonbank lenders under the Bankruptcy Code. Although 

the report is focused on nonbank lending, the findings suggest that the existing bankruptcy 

system is well-equipped to address a wide range of nontraditional financial intermediaries.
39

Appendix A: List of Defined Terms Used in Report

Defined Acronyms and Abbreviations

Act Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 

AOUSC Administrative Office of the United States Courts

Bankruptcy Code Title 11 of the United States Code

CFPB Consumer Financial Protection Bureau

CSBS Conference of State Bank Supervisors

Fannie Mae Federal National Mortgage Association 

FDIA Federal Deposit Insurance Act

FDIC Federal Deposit Insurance Corporation

FHA Federal Housing Administration 

Freddie Mac Federal Home Loan Mortgage Corporation

FRS Federal Reserve System

FSB Financial Stability Board

FSOC Financial Stability Oversight Council

Ginnie Mae Government National Mortgage Association 

LISCC Large Institution Supervision Coordinating Committee

OLA Orderly Liquidation Authority

TLAC Total Loss Absorbing Capacity

Other Defined Key Terms

COVID-19: the abbreviated version of the official name given by the World Health Organization in February 2020 to the disease causing the 2019 novel coronavirus pandemic.

Nonbank lenders: generally refers to U.S. lenders that lack the traditional features of 

banks and operate outside of the traditional banking system.

Regulatory arbitrage: generally refers to institutional evolution and structural innovations 

to reduce or eliminate costs associated with supervision and regulation. 

Shadow banking: refers broadly to financial intermediation involving entities and activities 

outside of the regular banking system.

Systemically important financial institutions: generally refers to nonbank institutions 

that the FSOC determines to be “systemically important” and banks with more than 

$50 billion in assets.

Traditional banks: refers to depository institutions, including commercial banks, thrifts, 

credit unions, industrial loan companies, and federal savings banks.
40

Appendix B: Annotated Bibliography

1. U.S. Treasury, Orderly Liquidation Authority and Bankrupt

https://home.treasury.gov/sites/default/files/2018-02/OLA_REPORT.pdf. 

This report concludes that bankruptcy should be the resolution method of first resort and 

recommends modest changes to OLA and a new chapter 14 of the Bankruptcy Code for 

financial institutions. Together the two resolution methods would reduce the need for taxpayer bailouts, strengthen market discipline of the largest financial institutions, and reduce 

the likelihood of ring-fencing requirements and interference by non-U.S. authorities, while 

preserving a predictable, impartial adjudication of claims between creditors in bankruptcy.

Recommended OLA statutory and regulatory modifications were aimed at eliminating 

opportunities for ad hoc disparate treatment of similarly situated creditors, tightening the 

terms of Orderly Liquidation Funding (OLF) (i.e., limiting duration of advances to OLF; 

preference for loan guarantees over direct loans and providing premium interest rates for 

direct loans; lending only on a secured basis; expedition of OLF industry-wide backstop 

assessment); and strengthening judicial review of the decision to invoke OLA. Other 

modifications would provide for adjudication of claims against the receivership by the 

bankruptcy court; clarify the statutory tests for determining when a financial company is 

in “default or in danger of default”; and repeal the tax-exempt status of bridge companies. 

Chapter 14 recommendations include that: no asset threshold define which companies are eligible for chapter 14; the definition of “covered financial corporation” under 

chapter 14 be consistent with the definition of “financial company” in Title II and the 

FDIC implementing regulations; statutory standing be provided to domestic regulators to 

be heard in any chapter 14 bankruptcy case; courts be given the authority to grant standing to foreign regulators; consideration be given to requiring that courts give deference 

to Federal Reserve determinations as to the financial stability implications of transfers to 

bridge companies; the Chief Justice designate a set of bankruptcy judges to preside over 

chapter 14 cases and the applicable Chief Judge of the Court of Appeals assign judges to 

cases (with consideration of the alternative approach of designating district court judges); 

and the definition of “capital structure debt” include all secured debt for borrowed money 

other than qualified financial contracts (QFCs) (as provide in recent House and Senate 

bills), but also include a secured lender’s unsecured deficiency claim for an under-secured 

debt (as in the Hoover Institution’s proposal). 
41

2. Exec. Order No. 13,772, 82 Fed. Reg. 9965, Core Principles for Regulating the United 

States Financial System (Feb. 3, 2017), https://www.whitehouse.gov/presidential-actions/

presidential-executive-order-core-principles-regulating-united-states-financial-system/.

This Executive Order sets forth seven Core Principles to guide reform on the U.S. 

financial regulatory system, including to: “(a) empower Americans to make independent 

financial decisions and informed choices in the marketplace, save for retirement, and build 

individual wealth; (b) prevent taxpayer-funded bailouts; (c) foster economic growth and 

vibrant financial markets through more rigorous regulatory impact analysis that addresses 

systemic risk and market failures, such as moral hazard and information asymmetry; 

(d) enable American companies to be competitive with foreign firms in domestic and foreign 

markets; (e) advance American interests in international financial regulatory negotiations 

and meetings; (f) make regulation efficient, effective, and appropriately tailored; and 

(g) restore public accountability within Federal financial regulatory agencies and rationalize 

the Federal financial regulatory framework.”

3. Memorandum from President Donald Trump to the Sec’y of the Treasury Dep’t, 

Orderly Liquidation Authority (Apr. 21, 2017), https://www.govinfo.gov/content/pkg/

DCPD-201700266/pdf/DCPD-201700266.pdf. 

This Presidential Memorandum directed the Secretary of the U.S. Treasury to examine the 

OLA to propose recommendations for reforms guided by the Core Principles in Executive 

Order 13772 and to examine whether a new chapter of the Bankruptcy Code for financial 

companies was warranted.

4. The Economic Growth, Regulatory Relief, and Consumer Protection Act, Pub. L. 

No. 115-174 (2018), https://www.congress.gov/bill/115th-congress/senate-bill/2155.

With bipartisan support, the Economic Growth, Regulatory Relief, and Consumer Protection 

Act of 2018 (EGRRCPA) repealed or altered many of the Act’s provisions. Specifically, it: 

a. raised the threshold at which bank holding companies are subject to enhanced 

prudential standards and enhanced supervision by the Federal Reserve Board (FRB) 

from $50 billion to $250 billion in total consolidated assets and gave the FRB the 

authority to impose enhanced supervision on a case-by-case basis for bank holding 

companies with between $100 billion and $250 billion in consolidated assets;

b. raised the threshold at which the FSOC may designate a nonbank financial 

institution as a systemically important financial institution (SIFI), and thus subject 

it to enhanced prudential standards and enhanced supervision;

c. eliminated the supervisory stress tests for bank holding companies with less than 

$100 billion in total consolidated assets and made the supervisory stress tests for 
42

bank holding companies with more than $100 billion but less than $250 billion in 

total consolidated assets periodic rather than annual;

d. required company-run stress tests by bank holding companies with $250 billion in 

total consolidated assets and SIFIs periodically rather than semi-annually; and

e. raised the asset threshold for required company-run stress tests for all financial 

institutions from $10 billion to $100 billion and made the requirement periodic 

rather than annual. 

The EGRRCPA also provided regulatory relief to community banks, defined as those 

having less than $10 billion in assets by (a) exempting them from the Volcker Rule (§ 619 

of the Act) and its proprietary trading prohibitions; and (b) simplifying their capital compliance requirements, defining “well capitalized” by reference to the “Community Bank 

Leverage Ratio” (CBLR), rather than the more demanding Basel III capital requirements. 

In addition, the EGRRCPA amended the Truth in Lending Act to allow a depository institution or credit union with assets of less than $10 billion to forgo certain ability-to-pay 

requirements regarding residential mortgage loans and to exempt mortgage loan applications in rural communities involving property valued at less than $400,000 from an independent appraisal under certain circumstances.

5. Financial CHOICE Act, H.R. 10, 115th Cong. (2017), https://www.congress.gov/

bill/115th-congress/house-bill/10.

As passed by the House on June 8, 2017, the Financial CHOICE Act would repeal provisions of the Act and other laws, and nullify any rule issued or revised pursuant to a repealed 

provision. Among other things, it would:

a. repeal the orderly liquidation authority of the FDIC; 

b. replace the OLA with a new subchapter V under chapter 11 of the Bankruptcy Code;

c. eliminate the FSOC’s authority to designate nonbank financial institutions and financial market utilities as “systemically important” and repeal previous designations;

d. repeal FDIC authority to provide emergency guarantees and narrow the Fed’s 

emergency lending authority;

e. reduce the frequency of living will submissions to every two years and eliminate 

FDIC’s role in the process;

f. overhaul the stress test regime for banking organizations by extending the Comprehensive Capital Analysis and Review (CCAR) cycle to every two years and 

eliminating the Act’s stress tests for banking organizations that are not holding 

companies;

g. revoke the Volcker Rule; and
43

h. exempt financial institutions with a simple leverage ratio of 10% or high from a 

number of regulatory provisions, including certain “enhanced prudential standards” 

established by the Act. 

Appendices B and C of the U.S. Treasury, Orderly Liquidation Authority and Bankruptcy Reform (2018) provide a useful summary of the subchapter V pro

these provisions would:

a. permit voluntary filings by covered financial corporations;

b. define covered financial corporations as bank holding companies of any size and 

nonbank holding companies engaged in activities that are financial in nature with 

assets of $50 billion or greater;

c. define “financial in nature” by reference to section 4(k) of the Bank Holding Company 

Act of 1956, such that covered financial corporations do not include broker-dealers, 

commodity brokers, insurance companies, and depository institutions;

d. institute a 48-hour stay of QFC counterparties to facilitate transfers to a bridge 

company;

e. permit transfer to a bridge company upon judicial determination by a preponderance 

of the evidence that transfer is “necessary to prevent serious adverse effects on 

financial stability in the United States” and provide for the appointment of a special 

trustee to distribute the assets;

f. define “capital debt structure” to include all unsecured debt for borrowed money 

other than QFCs but to exclude secured lenders’ unsecured deficiency claims for 

under-secured debts;

g. permit conversion to chapter 7 under specified circumstances; and 

h. permit specified federal financial regulatory agencies to appear and be heard. 

The Chief Justice of the United States would designate a set of bankruptcy judges to 

hear the cases and the Chief Judge for the applicable court of appeals would randomly 

assign one such judge to any specific case.

6. Financial Institution Bankruptcy Act of 2017, H.R. 1667, 115th Cong. (2017), https://

www.congress.gov/bill/115th-congress/house-bill/1667.

Passed by the House on April 5, 2017, this bill amends the Bankruptcy Code to allow certain large financial institutions to elect a new “subchapter V” bankruptcy process specific 

to such institutions. Under the new process, a debtor institution may request the bankruptcy 

court to order the transfer of the debtor’s assets to a newly formed bridge company. The 

court may order the transfer only if it determines, by a preponderance of the evidence, that 

“transfer is necessary to prevent serious adverse effects on financial stability in the United States.” The bill imposes a temporary stay on actions to terminate or modify contracts 
44

with institutions that file under the subchapter. Regulatory agencies, including the SEC 

and FDIC, have standing to be heard in the cases. Under specified situations, cases may 

be converted to chapter 7. The bill amends the Federal Judicial Code to require the Chief 

Justice of the United States to designate at least ten bankruptcy judges to hear the cases. 

Earlier bills include: Financial Institution Bankruptcy Act of 2016, H.R. 2947, 114th Cong. 

(2016) and Financial Institution Bankruptcy Act of 2014, H.R. 5421, 113th Cong. (2014). 

Appendices B and C of the U.S. Treasury, Orderly Liquidation Authority and Bankruptcy Reform (2018) provide

7. Taxpayer Protection and Responsible Resolution Act, S. 1841, 114th Cong. (2015), 

https://www.congress.gov/bill/114th-congress/senate-bill/1841.

Introduced in the Senate, this bill amends the Bankruptcy Code to add “Chapter 14 - 

Liquidation, Reorganization, or Recapitalization of a Covered Financial Corporation” and 

provides that no funds appropriated to the federal government may be paid to a covered 

financial corporation or to any of its creditors to satisfy a claim in a case under chapter 14. 

The bill’s bankruptcy provisions are substantially similar to those in the 2017 House bills. 

However, this bill does not include asset restriction for non-holding companies in its 

definition of “covered financial corporation.” Also, the 2013 version of the bill would permit 

the filing of an involuntary petition by the FRB (Taxpayer Protection and Responsible 

Resolution Act, S. 1861, 113th Cong.). Appendices B and C of the U.S. Treasury

Liquidation Authority and Bankruptcy Reform (2018) provide a useful summar

chapter 14 provisions in this bill.

8. Kenneth E. Scott & John B. Taylor, eds., Bankruptcy No Bailo

Chapter 14 (Hoover 2012), https://www.hoover.org/research/bankruptcy-not-bailoutspecial-chapter-1

This book proposes a new chapter 14 to be added to the Bankruptcy Code. It discusses the 

shortcomings of the current Bankruptcy Code as well as those of the OLA.

9. Kenneth E. Scott, A Guide to the Resolution of Failed Financial Institutions, in Kennet

E. Scott & John B. Taylor, eds., Bankruptcy NotBailout: A Spec

(Hoover 2012), https://www.hoover.org/sites/default/files/research/docs/scott_taylor_

bankruptcy_not_bailout_ch01.pdf.

This chapter outlines the differences between the OLA and the new chapter 14 proposed 

within the book. Four central concepts are covered within this section: (1) financial 

institutions that are covered; (2) commencement of proceedings; (3) the resolution 

procedure; and (4) systemic risk. This is not an exhaustive list of differences between the 

Act and chapter 14, but it is a list of what distinctions are perceived as the most important 

to the Resolution Project. The conclusion lays out the possible policy choices that may be 
45

made including repealing the OLA, enacting an alternative resolution process similar to 

that of chapter 14, or leaving Title II of the Act as is.

10. Thomas H. Jackson, Bankruptcy Code Chapter 14, in Kenneth E. Scott & John

Taylor, eds., Bankruptcy Not Balout: A Special Chapter 14 (Hoover 2012

www.hoover.org/sites/default/files/research/docs/scott_taylor_bankruptcy_not_bailout_

ch02.pdf..

This chapter proposes a new chapter 14 of the Bankruptcy Code to improve the current 

system of handling the failures of large financial institutions. This chapter discusses the 

Bankruptcy Code provisions the new chapter 14 would change or replace, addresses the 

perceived issues in the provisions it would change or replace, and lays out the ways in 

which the new chapter 14 provisions would better address these issues.

11. William F. Kroener III, Comment on Orderly Liquidation Under Title II of DoddFrank and Chapter 14, in Kenneth E. Scott & John B. Taylor, eds., Bank

Bailout:A Special Chapter 14 (Hoover 2012), https://www.hoover.org/sites/def

files/research/docs/scott_taylor_bankruptcy_not_bailout_ch03.pdf.

This chapter argues that the new chapter 14 would provide a better bankruptcy alternative 

than the OLA. Mr. Kroener contends that the FDIC’s counterfactual presentation on how 

the FDIC would have conducted the orderly liquidation of Lehman overstates how much 

creditors are expected to receive in the Lehman Bankruptcy. Under the proposed chapter 14, 

creditors could be better protected and the “too big to fail” concerns could be avoided in 

the event of a SIFI failure. This is because chapter 14 allows for continued management 

participation, promotes more extensive creditor involvement, and removes FDIC discretion 

to choose which creditors prevail during a liquidation.

12. Kimberly Anne Summe, An Examination of Lehman Brothers’ Derivatives Portfolio 

Postbankruptcy, in Kenneth E. Scott & John B. Taylor, eds., Bank

Bailout:A Special Chapter 14 (Hoover 2012), https://www.hoover.org/sites/def

files/research/docs/scott_taylor_bankruptcy_not_bailout_ch04.pdf.

This chapter analyzes how the Lehman Brothers’ bankruptcy unfolded and explores 

whether the bankruptcy would have occurred differently if the OLA had been in place in 

September of 2008. It concludes, as a practical matter, that there likely would not have 

been a significant difference because the treatment of derivatives post-bankruptcy has not 

significantly changed under the Act.
46

13. Darrell Duffie & David Skeel, A Dialogue on the Costs and Benefits of Automatic Stays 

for Derivatives and Repurchase Agreements, inKenneth E. Scott & John B. Taylor,

Bankruptcy Not Bailot: A Special Chapter 14 (Hoover 2012), https://www

org/sites/default/files/research/docs/scott_taylor_bankruptcy_not_bailout_ch05.pdf.

This chapter provides a cost-benefit analysis of automatic stays in bankruptcy proceedings 

for QFCs in the context of SIFIs. Professors Duffie and Skeel provide their views on whether 

automatic stays should be applied to different types of QFCs (repos, uncleared derivatives, 

cleared OTC derivatives) within the context of the proposed chapter 14 and the OLA.

14. Kenneth E. Scott & Thomas H. Jackson, The Going-Concern Value of a Failed SIFI, 

in Kenneth E. Scott & John B. Taylor, eds., Bankruptcy No Bailo

Chapter 14 (Hoover 2012), https://www.hoover.org/sites/default/files/research/doc

scott_taylor_bankruptcy_not_bailout_ch06.pdf.

The FDIC claims that the OLA is a superior alternative to the Bankruptcy Code for handling the resolution of large financial institutions in distress. According to the FDIC, the 

OLA achieves the goal of maintaining a firm’s going-concern value better than the procedures under the existing Bankruptcy Code. This chapter seeks to analyze whether the new 

chapter 14 would better address the failures of large financial institutions and maintain 

these firms’ going-concern values than would the procedures under Title II. 

15. Kenneth E. Scott, Dodd-Frank: Resolution or Expropriation?, in Kenneth E. Scott

John B. Taylor, eds., Bankruptcy Not Bilout: A Special Chapter 14 (Ho

https://www.hoover.org/sites/default/files/research/docs/scott_taylor_bankruptcy_not_

bailout_ch07.pdf.

This chapter discusses the constitutional issues that arise under the OLA. It argues that the 

procedure does not provide financial institutions adequate due process rights. Consequentially, without adequate safeguards, the administrative authority has too much power.

16. Kevin M. Warsh, Regulatory Reform, in Kenneth E. Scott & John B. Taylor,

Bankruptcy Not Bailot: A Special Chapter 14 (Hoover 2012), https://www

org/sites/default/files/research/docs/scott_taylor_bankruptcy_not_bailout_ch08.pdf.

This chapter argues that regulatory discipline alone is not enough to prevent the failure of 

large financial institutions—capital standards and market discipline must also be revived 

(the other two “pillars” of prudential supervision). Furthermore, remodeling the current 

Bankruptcy Code to include chapter 14 and other reforms may better mitigate the “too big 

to fail” problem within the financial system and allow for more prudential supervision.
47

17. Andrew Crockett, A Macroeconomic Perspective, in Kenneth E. Scott & John

Taylor, eds., Bankruptcy Not Balout: A Special Chapter 14 (Hoover 2012

www.hoover.org/sites/default/files/research/docs/scott_taylor_bankruptcy_not_bailout_

ch09.pdf..

Allowing companies to be “too big to fail” leads to undesirable risk taking by these institutions. To protect against such risk taking and bad business judgment in general, institutions 

must face a credible threat of failure if they engage in such activities. This chapter discusses how to solve the “too big to fail” problem within the financial system.

18. Thomas Jackson, Kenneth E. Scott & John B. Taylor, eds., Making Failur

(Hoover 2015), https://www.hoover.org/research/making-failure-feasible.

This book builds upon the 2012 book proposing that a new chapter 14 be added to the 

Bankruptcy Code to deal with the reorganization or liquidation of the nation’s large financial institutions. The contributors expand on their proposal to improve the prospect that 

these financial institutions, particularly with prebankruptcy planning, could be successfully reorganized or liquidated and, in doing so, make resolution planning pursuant to Title I 

of the Act more fruitful and reliance on administrative proceedings pursuant to the OLA 

largely unnecessary. 

19. Kenneth E. Scott, The Context for Bankruptcy Resolutions, in Thomas Jackson, Kenneth E. Scott & John B. Taylor, eds., Making Failure Feasible (Hoover 2015)

www.hoover.org/sites/default/files/research/docs/makingfailurefeasible-ch1.pdf.

This chapter provides an overview of the problems associated with the OLA and the 

existing Bankruptcy Code and explains how the revised chapter 14 proposal addresses these 

issues. Specific topics explored include capital debt, liquidity, due process, international 

coordination, and the problem of systemic risk.

20. Thomas H. Jackson, Building on Bankruptcy: A Revised Chapter 14 Proposal for 

the Recapitalization, Reorganization, or Liquidation of Large Financial Institutions, 

in Thomas Jackson, Kenneth E. Scott & John B. Taylor, eds., Maki

Feasible (Hoover 2015), https://www.hoover.org/sites/default/files/research/docs/

makingfailurefeasible-ch2.pdf.

This chapter introduces the Resolution Project Working Group’s revised chapter 14 

proposal (Chapter 14 2.0). Chapter 14 2.0 is similar to the original proposed chapter 14 

(Chapter 14 1.0) in that it provides for conventional reorganization of operating companies, 

but it differs in that it allows for the facilitation of a two-entity recapitalization of a holding 

company. The first part of this chapter outlines the resolution procedure under Chapter 14 

1.0 and the appendix discusses how Chapter 14 2.0 further amends the Bankruptcy Code.
48

21. David A. Skeel Jr., Financing Systemically Important Financial Institutions in 

Bankruptcy, in Thomas Jackson, Kenneth E. Scott & John B. Taylor, eds

Failure Feasible (Hoover 2015), https://www.hoover.org/sites/default/files/research

docs/makingfailurefeasible-ch3.pdf. 

This chapter tackles the issue of financing a SIFI in bankruptcy. It discusses different 

financing options for SIFIs including Title II’s single-point-of-entry resolution, Chapter 11 

of the Bankruptcy Code, and the “quick sale” approach under Chapter 14 2.0. It argues that 

the “pessimism about a SIFI’s ability to borrow sufficient funds—sufficiently quickly—to 

finance a resolution in Chapter 11 is substantially overstated.” Professor Skeel contends 

that this pessimism is overstated because the structure of large banks has changed since 

the financial crisis and the enactment of the Act. He further argues that the quick sale 

resolutions would require less new liquidity. This chapter proceeds by first discussing the 

financing options available to a SIFI if it were to file for bankruptcy at the time this book 

was written. It then goes on to analyze whether prearranged financing would allow a SIFI 

to increase its liquidity upon bankruptcy. Finally, it examines whether there is a need for 

additional government financing.

22. Darrell Duffie, Resolution of Failing Central Counterparties, in Thomas Jackson, Kenneth E. Scott & John B. Taylor, eds., Making Failure Feasible (Hoover 2015)

www.hoover.org/sites/default/files/research/docs/makingfailurefeasible-ch4.pdf.

This chapter explores alternative “insolvency and failure resolution regimes” for central 

counter parties (CCPs). It concludes with a discussion of certain steps that should take 

place in an administrative CCP failure resolution process.

23. Simon Gleeson, The Consequences of Chapter 14 for International Recognition of US 

Bank Resolution Action, in Thomas Jackson, Kenneth E. Scott & John B. T

eds., Making Failure Feasible (Hoover 2015), https://www.hoover.org/sites/defau

files/research/docs/makingfailurefeasible-ch5.pdf.

This chapter considers the issues that arise under the OLA in the international context and 

argues that replacing the OLA with chapter 14 may lead to increased enforceability of 

cross-border resolutions.

24. Thomas F. Huertas, A Resolvable Bank, in Thomas Jackson, Kenneth E. Scott & 

B. Taylor, eds., Making Failure Feasible (Hoover 2015), https://www.hoove

sites/default/files/research/docs/makingfailurefeasible-ch6.pdf.

This chapter discusses what is necessary for the creation of a resolvable bank. A resolvable 

bank is one that does not need a taxpayer funded bailout upon failure and does not lead to 

systemic disruption of the economy or financial industry. In order to analyze resolvable 
49

banks, this chapter explores various different types of resolvable banks, including a single 

unit bank, a bank subsidiary with branches, a unit bank with a parent holding company, 

the parent company, and a parent holding company with domestic and foreign subsidiaries.

25. Emily Kapur, The Next Lehman Bankruptcy, in Thomas Jackson, Kenneth E. Scot

John B. Taylor, eds., Making Failure Feasible (Hoover 2015), https://www.h

org/sites/default/files/research/docs/makingfailurefeasible-ch7.pdf. 

This chapter provides a theoretical analysis of how chapter 14 could prevent bank runs that 

are usually a result of chapter 11 bankruptcy proceedings. It also analyzes how chapter 14 

may address the problem of moral hazard often created by bailouts. The rest of the chapter 

attempts to answer whether the Lehman Brothers’ failure would have turned out differently 

if the company went through chapter 14 rather than chapter 11 bankruptcy. 

26. William F. Kroener III, Revised Chapter 14 2.0 and Living Will Requirements Under 

the Dodd-Frank Act, in Thomas Jackson, Kenneth E. Scott & John B. Taylor

Making Failure Feasible (Hoover 2015), https://www.hoover.org/sites/default/file

research/docs/makingfailurefeasible-ch8.pdf.

This chapter argues that Chapter 14 2.0 would allow financial companies to meet the living 

will requirement under Title I of the Act. It contends that Chapter 14 2.0 would “improve 

pre-failure resolution planning” and thus better facilitate the satisfaction of the living will 

requirement under Title I of the Act.

27. Jacopo Carmassi & Richard Herring, The Cross-Border Challenge in Resolving Global 

Systemically Important Banks, in Thomas Jackson, Kenneth E. Scott & Joh

Taylor, eds., Making Failure Feasible (Hoover 2015), https://www.hoover.org/s

default/files/research/docs/makingfailurefeasible-ch9.pdf.

This chapter analyzes the specific issues faced by global systematically important banks 

(G-SIBs) in the context of cross-border resolutions. It discusses the scope of the problem 

as highlighted by the financial crisis. It also provides data on the “organizational complexity and the international legal structure” of existing G-SIBs and how this complexity affects orderly resolution. Additionally, this chapter explores why international cooperation 

is necessary for an orderly resolution and how the lack of such cooperation would impact 

cross-border resolutions.
50

28. CHOICE Act 2.0 Passes the House: What is the ‘CHOICE’?, Sherman & Ster

(July 20, 2017), https://www.shearman.com/perspectives/2017/07/choice-act-2-passesthe-house-what-is-the-choice.

This article provides a useful summary of the Financial CHOICE Act, H.R. 10, 115th 

Cong. (2017–2018), as passed by the House.

29. Bruce Grohsgal, Case in Brief Against “Chapter 14”, Am. Bank. Inst. J. (May 2014

http://blogs.harvard.edu/bankruptcyroundtable/files/2014/05/ABI-feature6-May-2014.pdf.

The author argues that Chapter 14, as proposed by the Hoover Institute and S. 1841, to 

replace the OLA does not reconcile the Act’s purposes of mitigating systemic risk and 

minimizing moral hazard with the Bankruptcy Code’s contrasting aims of reorganizing 

troubled companies, preserving going concerns, and maximizing payments to creditors. The 

Act already encourages failing financial institutions to file bankruptcy, which has proved to 

be an adequate tool, and the need for Title II receivership as a last resort continues.

30. Randall D. Guynn, Are Bailouts Inevitable?, 29 Yale J. on Reg. 121 (2012), https:/

digitalcommons.law.yale.edu/yjreg/vol29/iss1/5/.

This essay examines solutions focused on reducing the likelihood of SIFI failure and 

reducing social costs, should one occur, and analyzes why liquidation of SIFIs under the 

Bankruptcy Code, particularly one with significant cross-border operations, could result in 

disorderly liquidation (i.e., “fire-sale liquidations” or “value-destroying reorganizations”). 

It establishes an economic model for testing when a proposed solution is credible and 

applies that test to the proposed chapter 14 to the Bankruptcy Code, concluding it does not 

go far enough, and to the FDIC’s combined existing and new resolution powers under the 

Act, concluding this combined resolution authority, if properly used, provides a credible 

solution to recapitalize the systemically important and viable parts of a failed institution 

and liquidate the rest without cost to taxpayers.

31. Thomas H. Jackson & David A. Skeel, Jr., Dynamic Resolutions of Large Financial 

Institutions, 2 Harv. Bus. L. Rev. 435 (2012), https://www.hblr.org/wp-content/uplo

sites/18/2012/11/HLB202_Dynamic-Resolution.pdf.

This article considers alternatives for the resolution of systemically important financial 

institutions, including the OLA, bankruptcy, a European-style bail-in process, and coerced 

mergers. It concludes that four changes to Bankruptcy/OLA framework would make it 

more effective: (1) removing the liquidation mandate from the OLA, (2) requiring financial 

institutions and regulators to follow the living will provision; (3) establishing a strong 

presumption that regulators would not remove a financial institution from the bankruptcy 

process; and (4) eliminating the special treatment of derivatives and other QFCs in 
51

bankruptcy. It also endorses adopting the Hoover Institute’s chapter 14 proposal, which 

authorizes regulators to file involuntary cases; resolves some, although not all, issues 

related to debtor-in-possession funding; and requires that cases be heard by an Article III 

District Court Judge.

32. Thomas W. Joo, Lehman 10 Years Later: The Dodd-Frank Rollback, 50 Loy. U. Ch

L.J. 561 (2019), https://research.luc.edu/media/lucedu/law/students/publications/llj

pdfs/vol50/issue-3/12_Joo_(561-597).pdf.

This article describes the changes that the Economic Growth, Regulatory Relief, and 

Consumer Protection Act of 2018 (EGRRCPA) made to the Act, and analyzes EGRRCPA’s 

direct and indirect effects on the deregulation of large banks, community banks, mortgage 

lending standards, and consumer protection in the industry. It argues that EGRRCPA ignores 

the risk factors associated with the 2007–2008 financial crisis and is better explained as 

part of a larger deregulatory agenda that aims to make the financial sector, and industry 

generally, less accountable to customers and to society at large.

33. Marc Labonte et al., Cong. Res. Serv., The Finncial CHOICE Ac

Congress: Selected Policy Issues (2017), https://fas.org/sgp/crs/misc/R4483

This report analyzes policy issues related to the Financial CHOICE Act (H.R. 10), as passed 

by the House in June 2017 and as incorporated in two FY 2018 appropriations bills (H.R. 

3280 and H.R. 3354). 

34. Stephen J. Lubben, Resolution, Orderly and Otherwise: B of A in OLA, 81 U. Cin. L. R

485, 51619 (2013), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2037915.

Using the legal and financial structure of Bank of America (BoA) as a model, Professor 

Lubben critiques the adequacy of the OLA, the existing Bankruptcy Code, and the proposed 

chapter 14 for resolving SIFIs. His analysis assumes the OLA will be invoked and explores 

its limitations, noting that other insolvency regimes would be invoked to resolve some of 

BoA’s subsidiaries and OLA is incomplete in its preemption of those regimes; that OLA 

applies only domestically; that OLA could decrease the time the FDIC has to prepare for 

insolvency proceedings due to premature disclosure of the debtor’s plans; and that OLA 

could cause financial contagion among similar institutions. He concludes that relative to 

the proposed chapter 14, the OLA procedures offer more realistic funding mechanisms and 

speed (although with limited due process); that the relative expertise of a district judge 

(chapter 14) and the FDIC (OLA) is a draw; and that neither OLA nor chapter 14 does much 

to solve the international component, although bankruptcy is somewhat more “global.”
52

35. Stephen J. Lubben, What’s Wrong with the Chapter 14 Proposal, N.Y. Times (Ap

10, 2013), https://dealbook.nytimes.com/2013/04/10/whats-wrong-with-the-chapter14-proposal/.

Professor Lubben identifies significant problems with the Hoover Institute’s proposed 

chapter 14, including (1) replacing experienced bankruptcy judges with federal district 

court judges; (2) assuming that private debtor-in-possession financing will be available; 

(3) subordinating DIP financers’ claims to the extent financing is used to “overpay” 

creditors, which discourages financing and penalizes the provision of too much stability; 

and (4) failing to address the need for speed.

36. Stephen J. Lubben & Arthur E. Wilmarth, Jr., Too Big and Unable to Fail, 69 Florida 

Rev. 1205 (2017), http://www.floridalawreview.com/wp-content/uploads/2-Lubben_

Wilmarth.pdf. 

This article expresses significant doubt about the ability of the financial regulatory scheme 

to meet its explicit goal of enabling a SIFI to fail without requiring a government bailout. 

The “single point of entry” (SPOE) resolution strategy, which focuses all resolution efforts 

on a SIFI’s parent holding company, is unlikely to work as intended during a global crisis 

that involves multiple failing SIFIs operating thousands of subsidiaries across dozens of 

national boundaries. The FRB’s TLAC rule creates an opaque way to impose the costs of 

resolving failed SIFIs on ordinary citizens, because most TLAC debtholders are likely to 

be retail investors in brokerage accounts, mutual funds, and pension funds. Recommended 

regulatory reforms include requiring SIFIs to provide detailed disclosures when selling 

TLAC debt to investors and strengthening the TLAC rule by requiring either a prefunded 

Orderly Liquidation Fund or a self-funded resolution fund held by each holding company. 

Proposed Bankruptcy Code revisions for large financial companies should not tie the use 

of bankruptcy to SPOE and should not lock financial institutions into any one resolution 

mechanism. Revisions should include provisions addressing the specific challenges of 

financial institution insolvency (e.g., providing regulators standing and ability to institute 

involuntary bankruptcies, statutory ability to conduct short notice § 363 sales to bridge 

companies, and a short stay on financial claims covered by safe harbors). Because private 

DIP financing will not always be available, the Bankruptcy Code should be revised to work 

in tandem with OLA.

37. Memorandum from Arnold & Porter, Passage of the Economic Growth Act Modifies 

the Dodd-Frank Act and Provides Other Financial Regulatory Relief (June 1, 2018), 

https://www.arnoldporter.com/en/perspectives/publications/2018/06/passage-of-theeconomic-growth-act-modifies.

This memorandum provides a comprehensive summary of The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018.
53

38. Memorandum from Cleary Gottlieb, Treasury Recommends Retaining Orderly 

Liquidation Authority (Feb. 28, 2018), https://www.clearygottlieb.com/-/media/files/

alert-memos-2018/treasury-recommends-retaining-orderly-liquidation-authority.pdf.

This memorandum provides a useful summary of the report on the OLA that was issued by 

the U.S. Treasury Department on February 21, 2018.
54

Appendix C: Additional Background on Recent Reporting on Financial 

Intermediation Data and the Growth of the Shadow Banking Sector

As we acknowledge in the body of the report, no universally accepted definition of “shadow banking” exists. Typical of the many measures employed in the literature, however, 

is the approach taken by Adrian, Ashcraft, and Cetorelli 196 who analyze the liabilities of 

financial business in the context of four major categories: traditional maturity transformation, traditional credit transformation, shadow maturity transformation, and shadow credit 

transformation. Their measures are compiled from the Financial Accounts of the United 

States. 197 

Total traditional transformation has grown from $748 billion in 1960 to $51 trillion 

in the third quarter of 2019. Over the same time period, total shadow transformation has 

grown from $40 billion to just under $39 trillion. Within traditional transformation, maturity 

transformation has grown from $331 billion to $19 trillion while credit transformation has 

grown from $388 billion to $32 trillion. Shadow maturity transformation has grown from 

$6.5 billion to $7.9 trillion while shadow credit transformation has grown from $34 billion 

to $31 trillion. See Figure 1 and Table 1.

196. Tobias Adrian, Adam B. Ashcraft & Nicola Cetorelli, Shadow Bank Monitoring (Federal Reserve 

Bank of New York Staff Report No. 638, Sept. 2013) available at https://www.newyorkfed.org/medialibrary/

media/research/staff_reports/sr638.pdf.

197. Both Figures 1 and 2 and Table 1 are based on data taken from the Board of Governors of the Federal 

Reserve System, Federal Reserve Statistical Release z.1, Financial Accounts of the United States published 

quarterly. The release can be downloaded from https://www.federalreserve.gov/releases/z1/20191212/z1.pdf

and the data from https://www.federalreserve.gov/releases/z1/20191212/z1_csv_files.zip. Most of the series 

are taken from Table L.108 except as noted. Traditional maturity transformation includes bank deposits 

(lines 31 and 32) and interbank liabilities (line 30). Traditional credit transformation includes bank and bank 

holding company term debt (line 40 plus Table L.213 lines 4 and 9) and reserves of pension funds (Table 

L.227 line 1 minus line 4) and life insurance companies (line 45). Shadow maturity transformation includes 

money market mutual funds line (33), repos (line 34), open market paper (line 36), and security broker-dealer 

credit (Table L.130 line 29) and payables (table L.130 line 30). Shadow credit transformation includes GSEs 

(line 37), nonbank term debt (line 38 minus Table L.213 lines 4 and 9), mutual fund shares (line 43), REIT 

mortgage debt (line 42) and “other” loans (line 41).
Figure 1: Traditional and Shadow Credit and Maturity Transformation. Broader Definition after Adr

Cetorelli (2013).

55
56

Date

Shadow 

Maturity 

Transformation

Shadow Credit 

Transformation

Total Shadow 

Transformation

Traditional 

Maturity 

Transformation

Traditional 

Credit 

Transformation

Total 

Traditional 

Transformation

9/30/1960 6.5 33.9 40.4 345.6 402.3 747.9

9/30/1970 52.3 116.8 169.2 721.7 867.6 1,589.2

9/30/1980 396.8 456.6 853.4 1,856.1 2,139.3 3,995.4

9/30/1990 1,731.1 2,555.8 4,287.0 3,881.2 5,441.7 9,322.9

9/30/2000 5,160.9 12,314.6 17,475.5 5,374.3 12,516.7 17,891.0

9/30/2001 5,964.4 12,103.3 18,067.7 5,778.7 12,451.9 18,230.7

9/30/2002 6,014.9 12,607.3 18,622.2 6,225.3 12,734.9 18,960.2

9/30/2003 6,278.9 14,549.8 20,828.7 6,632.3 13,842.5 20,474.9

9/30/2004 6,650.1 16,167.1 22,817.3 7,143.2 15,086.8 22,230.1

9/30/2005 7,350.0 17,886.2 25,236.2 7,831.5 16,370.0 24,201.5

9/30/2006 8,532.4 19,806.8 28,339.2 8,446.1 17,481.6 25,927.6

9/30/2007 9,627.8 23,232.6 32,860.4 9,024.6 19,025.0 28,049.7

9/30/2008 9,920.6 22,746.1 32,666.7 10,313.4 19,433.1 29,746.5

9/30/2009 8,157.9 21,618.9 29,776.8 11,397.9 20,019.7 31,417.6

9/30/2010 7,314.4 21,332.4 28,646.7 11,538.0 21,302.0 32,840.0

9/30/2011 7,280.9 21,179.1 28,460.0 13,154.7 21,867.7 35,022.5

9/30/2012 7,250.5 22,684.1 29,934.6 13,527.9 23,300.4 36,828.3

9/30/2013 7,050.9 24,213.7 31,264.6 15,356.1 25,217.8 40,573.9

9/30/2014 6,944.8 25,868.7 32,813.5 16,563.3 26,715.0 43,278.3

9/30/2015 6,919.1 25,686.9 32,605.9 16,759.6 27,132.9 43,892.5

9/30/2016 6,964.1 27,027.3 33,991.3 17,309.6 28,436.6 45,746.2

9/30/2017 6,878.2 28,975.9 35,854.1 17,942.8 29,822.6 47,765.3

9/30/2018 6,808.8 30,449.7 37,258.5 18,413.2 31,041.3 49,454.6

9/30/2019 7,944.3 30,971.2 38,915.5 18,872.4 31,882.5 50,754.8

Table 1: Traditional and Shadow Maturity and Credit Transformation. Annual Data 

as of September 30 ($ Billions).

Compositionally, shadow transformation has grown from 5.1% of the transformation 

total in 1960 to 43.4% as of the third quarter of 2019. Over the same time period, traditional 

transformation has fallen from 94.9% to 56.6% of the transformation total. In 1960, 

traditional maturity transformation accounted for 43.8% of the total, while traditional credit 

transformation accounted for 51%. By contrast, shadow maturity and credit transformation 

accounted for just 0.8% and 4.3% of the total, respectively. By 2019 traditional maturity 

and credit transformation respectively accounted for 21% and 35.6% of total transformation 

while shadow maturity and credit transformation accounted for 8.9% and 34.5% of the 

total. See Figure 2.
Figure 2: Composition of Total Financial Sector Liabilities. Traditional and Shadow Maturity and Cr

Transformation. Quarterly Data 1960Q1–2019Q3.

57
58

The growth rates for the shadow banking segments have been extraordinary. Over the 

period from 1960 to present, shadow maturity transformation has grown at a compound 

annual rate of 12.8% and shadow credit transformation has grown at the rate of 12.3%. By 

way of comparison, traditional maturity transformation has grown at the rate of 7.1% and 

traditional credit transformation at 7.8%. Compounded over the period, the differences 

are quite large. Whereas traditional transformation in 2019 was 68 times its 1960 level, 

shadow transformation was 964 times its 1960 level. 

Growth in shadow maturity and credit transformation was fairly uniform from 1960 to 

the mid-2000s. Shadow credit transformation peaked in 2007 followed by a peak in shadow maturity transformation in 2008. From its 2007 peak, shadow credit transformation declined each year until it resumed growth in 2012. Shadow maturity transformation trended 

down from its 2008 peak through 2018. However, from 2018 to 2019 it jumped 17%.

Traditional credit and maturity transformation has trended up over the entire period 

from 2000 through 2019 with the exception of a 1% decline in the latter from 2009 to 2010.