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[¶11,932] In the Matter of Cross Country Bank, Wilmington, Delaware, Docket No.
02-035b (5-15-02).
A cease and desist order was issued, based on findings by the FDIC that
it had reason to believe that respondent had engaged in unsafe and
unsound practices.
(This order was modifed by order of the FDIC dated 3-5-04; see ¶16,372.)
[.1] Loans—Subprime Lending Allowed—Restrictions Specified
[.2] Loan Policy—Credit Underwriting Standards—Preparation or Revision of
Policy Required
[.3] Assets—Charge-off or Collection
[.4] Loan Loss Reserve—Establishment of or Increase Required
[.5] Capital Plan—Minimum Requirements
[.6] Board of Directors—Oversee Implementation of Capital Plan
[.7] Management—Qualifications Specified
[.8] Dividends—Dividends Restricted
[.9] Assets—Total Assets, Limitations Imposed on Increase of
[.10] Brokered Deposits—Restricted
[.11] Bank Operations—New Lines of Business Restricted
[.12] Bank Operations—Transactions—Restricted
[.13] Risk Management Program—Minimum Requirements
[.14] Residual Asset Valuation Model—Preparation of Required
[.15] Interagency Guidance on Subprime Lending—Compliance with Policy Required
[.16] Interagency Guidelines Establishing Standards for Safety and
Soundness—Compliance with Policy Required
[.17] Funds Management and Liquidity—Preparation of Report Required
[.18] Board of Directors—Responsible for Compliance with Cease and Desist Order
In the Matter of
CROSS COUNTRY BANK
WILMINGTON, DELAWARE
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-02-035b
Cross Country Bank, Wilmington, Delaware ("Bank"), having
been advised of its right to a Notice of Charges and of Hearing
detailing the unsafe or unsound banking practices and violations of law
and/or regulations alleged to have been committed by the Bank and of
its right to a hearing on the alleged charges under section 8(b)(1) of
the Federal Deposit Insurance Act ("Act"), 12 U.S.C.
§1818(b)(1), and having waived those rights, entered into a
STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST
("CONSENT AGREEMENT") with counsel for the Federal Deposit
Insurance Corporation ("FDIC"), dated May 15, 2002, whereby,
solely for the purpose of this proceeding and without admitting or
denying the alleged charges of unsafe or unsound banking practices and
violations of law and/or regulations, the Bank consented to the
issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.
The FDIC considered the matter and determined that it had reason to
believe that the Bank had engaged in unsafe or unsound banking
practices, and had committed violations of law and/or regulations. The
FDIC, therefore, accepted the CONSENT AGREEMENT and issued the
following.
ORDER TO CEASE AND DESIST
IT IS HEREBY ORDERED that the Bank, its successors, assigns,
directors, officers, employees,
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agents, and other
"institution-affiliated parties," as defined in section 3(u) of
the Act, 12 U.S.C. §1813(u), CEASE AND DESIST from the following
unsafe or unsound banking practices and violations as follows:
(a) engaging in hazardous lending and underwriting practices;
(b) operating with a large volume of poor quality loans;
(c) operating with an inadequate allowance for loan and lease losses;
(d) operating with inadequate capital in relation to the kind and
quality of assets held by the Bank;
(e) operating in violation of section 23B of the Federal Reserve Act,
12 U.S.C. §371c-1, made applicable to State nonmember banks by
section 18(j)(1) of the Act, 12 U.S.C. §1828(j)(1); and
(f) operating with policies and practices that are detrimental to the
Bank and jeopardize the safety of its deposits.
IT IS FURTHER ORDERED that the Bank, its institution-affiliated
parties, and its successors and assigns take affirmative action as
follows:
[.1]1. The Bank may continue to engage in "subprime lending," only as
long as:
(a) the Bank complies with paragraph 2 and subparagraphs (a)
through (d) of paragraph 3 herein; and
(b) the Bank:
(i) has achieved a sufficient level of capital to provide for a
Total Risk-Based Capital Ratio of eight (8.0) percent, calculated in
accordance with the risk-weighting of subprime assets specified in
paragraph 6(a); or
(ii) has filed, and the Regional Director has approved, the Bank's
Capital Plan in accordance with paragraph 6.
(c) As used in this ORDER, the terms:
(i) "subprime lending" is extending credit to borrowers who
exhibit characteristics indicating a significantly higher risk of
default than traditional bank lending customers, as defined in the
March 1, 1999 Interagency Guidance on Subprime Lending and the January
31, 2001 Interagency Expanded Guidance for Subprime Lending Programs,
including:
(1) issuing new credit cards to any subprime borrower;
(2) renewing existing credit cards to any subprime borrower;
(3) providing credit line increases to any existing subprime borrower;
and
(4) issuing any new subprime credit card program for, or on behalf of
any third parties.
(ii) "extension of credit" is used as the term is defined
in section 215.3 of Regulation O of the Board of Governors of the
Federal Reserve System, 12 C.F.R. §215.3 ("Regulation O").
(d) This paragraph shall not apply to the issuance of any credit
card or the increase of any credit line that the Bank is contractually
or legally obligated to honor to the extent that the contractual or
legal commitment accrued prior to the effective date of this ORDER,
that evidence of such accrual is maintained, and that minutes of the
Bank's board of directors document the amount and nature of any such
extensions of credit.
[.2]2. Within ten (10) days from the effective date of this ORDER, the
Bank's board of directors shall approve credit underwriting standards
that are to be incorporated into the Bank's written loan policy that
are acceptable to the Regional Director. At a minimum, the loan policy
must include the following:
(a) minimum acceptable credit criteria for approvals. The minimum
factors to be considered shall include the applicant's credit history,
minimum income, employment history, residency, and co-borrower
qualifications;
(b) portfolio targets and limits for each credit grade or class; and
(c) a framework for pricing decisions and profitability analysis that
considers all costs associated with the loan, including origination
costs, administrative/servicing costs, expected charge-offs, and
capital.
(d) Until such time as new credit underwriting standards acceptable to
the Regional Director are approved, reinstatement of the credit
underwriting standards adopted and in effect as of December 18, 2000,
shall be deemed to satisfy the requirements contained herein.
3. Within ten (10) days from the effective date of this ORDER, the
Bank shall comply with subparagraphs (a) through (d) below, and within
thirty (30) days from the effective date of this ORDER, the Bank shall
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comply with subparagraphs (e) through (f) below:
[.3]3. (a) eliminate from its books, by charge-off, collection, or specific
reserve, all credit card receivables past due 120 days or more;
(b) eliminate from its books, by charge-off or collection, all first
payment default accounts past due 60 days or more;
(c) restore the allowance for loan and lease losses to an amount
ranging from $450 million to $500 million, after deducting the
principal portion of the credit card accounts specified in (a) and (b)
of this paragraph;
(d) establish a reserve for uncollectible accrued fees and finance
charges in an amount ranging from $50 million to $75 million, after
reversing the accrued fees and finance charges associated with the
accounts specified in (a) and (b) of this paragraph;
(e) amend its December 31, 2001, and March 31, 2002, Reports of
Condition and Income to reflect that all credit card receivables past
due 120 days or more and all first payment default accounts past due 60
days or more as of the respective report dates had been charged off or
specifically reserved for as of the respective report dates, including
the reversal of all accrued fees and finance charges associated with
those accounts; and
(f) amend its December 31, 2001, and March 31, 2002, Reports of
Condition and Income to reflect that any expenses necessary to
establish the allowance and/or reserves required by Subparagraphs 3(c)
and 3(d) had been taken as of the respective report dates.
[.4]4. Within thirty (30) days from the effective date of this ORDER, the
Bank shall submit to the Regional Director for review and prior
supervisory non-objection, a description of its methodology for
maintaining an adequate allowance for loan and lease losses and an
adequate reserve for uncollectible accrued fees and finance charges.
The methodology required by this paragraph shall provide for an
allowance for loan and lease losses sufficient to absorb estimated
principal losses over a 12-month period as well as a separate reserve
sufficient to offset that portion of accrued fees and finance charges
on the Bank's books that are likely uncollectible. The methodology
shall be consistent with the prevailing instructions for the
Consolidated Reports of Condition and Income, the March 1, 1999
Interagency Guidance on Subprime Lending, the January 31, 2001
Interagency Expanded Guidance for Subprime Lending Programs, and the
July 25, 2001 Interagency Policy Statement on Allowance for Loan and
Lease Losses Methodologies.
5. After satisfying the requirements of paragraphs 3 and 4, the Bank,
through charges to current operating income, shall thereafter maintain
an allowance for loan and lease losses sufficient to absorb estimated
principal losses over a 12-month period and a reserve for uncollectible
accrued fees and finance charges sufficient to offset that portion of
fees and finance charges accrued on the Bank's books that are likely
uncollectible. Prior to the submission of the Bank's Consolidated
Reports of Condition and Income, the Bank's board of directors shall
review the adequacy of the Bank's allowance for loan and lease losses
and the Bank's reserve for uncollectible accrued fees and finance
charges. The minutes of the board meetings at which each review is
undertaken shall indicate the results of the review, the amount of any
increase to the allowance and/or reserve, and the basis for the amounts
of the allowance and reserve.
[.5]6. Within thirty (30) days from the effective date of this ORDER, the
Bank shall submit to the Regional Director, for review and approval, a
Capital Plan in compliance with Part 325 of the FDIC's Rules and
Regulations, 12 C.F.R. Part 325. The Capital Plan shall include:
(a) specific plans to achieve, by September 30, 2002, and
thereafter maintain, a Total Risk-Based Capital Ratio (as defined in 12
C.F.R. Part 325) of 8.0 percent or greater after the Bank's subprime
assets, excluding securitized credit card receivables not owned by the
Bank, are risk-weighted at 300 percent (the FDIC will consider
documentation submitted by the Bank to support the use of a different
risk weighting for specific assets), consistent with the January 31,
2001 Interagency Expanded Guidance for Subprime Lending Programs;
(b) specific plans to achieve, by March 31, 2003, and thereafter
maintain, a Total Risk-Based Capital Ratio (as defined in 12 C.F.R.
Part 325) of 10.0 percent or greater after the Bank's subprime assets,
excluding securitized credit card receivables not owned by the Bank,
are risk-weighted
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at 300 percent (the FDIC will consider documentation
submitted by the Bank to support the use of a different risk weighting
for specific assets), consistent with the January 31, 2001 Interagency
Expanded Guidance for Subprime Lending Programs;
(c) specific plans by the Bank for compliance by December 31, 2002,
with the FDIC's regulatory capital treatment in 12 C.F.R. Part 325 of
recourse, direct credit substitutes and residual interests in asset
securitizations (66 Fed. Reg. 59614, November 29, 2001), especially
with respect to compliance with
(1) the leverage capital requirements for credit-enhancing
interest-only strips ("IO strips") in 12 C.F.R. §325.5(f), and
(2) the risk-based capital standards in Appendix A of Part 325
including, but not limited to, the concentration limit on IO strips and
the dollar-for-dollar capital treatment of IO strips and other residual
interests in section II.B.5(f) of Part 325, Appendix A;
(d) projections for growth and capital requirements based upon a
detailed analysis of the Bank's assets, liabilities, earnings, fixed
assets, off-balance sheet activities, as well as the impact of an early
amortization of any securitizations outstanding and the risk inherent
in any litigation against the Bank;
(e) the primary sources and timing from which the Bank will obtain
additional capital to meet the Bank's current and future capital needs
as well as secondary sources should the primary sources not be
available;
(f) analysis of the bank's projected capital position under different
scenarios by stress testing, among other things, delinquency rates,
charge-off rates, and utilization rates; and
(g) a Contingency Plan detailing alternative proposals identified by
the Bank to minimize losses to insured depositors in the event of the
Bank's failure to successfully implement its Capital Plan.
[.6]7. Upon receipt of the Regional Director's notice of approval under
paragraph 6, the Bank shall adopt, implement, and adhere to the Capital
Plan. The Bank's board of directors shall ensure that the Bank has
processes, personnel, and control systems sufficient to ensure
implementation of, and adherence to, the Capital Plan. The Bank's
board of directors shall review the Bank's implementation of, and
adherence to, the Capital Plan on a monthly basis with copies of the
reviews provided to the Regional Director. If the FDIC determines,
after taking into consideration any information provided to the FDIC by
the Bank, that the Bank has failed to implement or adhere to the
Capital Plan, then, within ten (10) business days of receiving written
notice from the Regional Director of such fact, the Bank's board of
directors shall direct that one or more of the proposals recommended in
the Contingency Plan required under paragraph 6(g) be implemented.
[.7]8. Within sixty (60) days from the effective date of this ORDER, the
Bank's board of directors shall cause to be undertaken an in-depth
analysis and review of the Bank's managerial requirements and cause to
be provided a written report to the Regional Director regarding the
Bank's management needs. The board of directors' review and report
shall, at a minimum, assess the sufficiency of Bank management, in both
number and expertise, to:
(a) comply with the requirements of this ORDER;
(b) improve and thereafter maintain the Bank in a safe and sound
condition, including asset quality, capital adequacy, liquidity
adequacy, and earnings adequacy; and
(c) comply with all applicable State and Federal laws and regulations.
9. During the life of this ORDER, the Bank shall:
(a) notify the Regional Director in writing of any resignations
and/or terminations of any members of its board of directors and/or any
of its senior executive officer(s); and
(b) comply with Section 32 of the Act, 12 U.S.C. §1831i, regarding
the proposed addition of any individual to the board of directors or
the employment of any individual as a senior executive officer of the
Bank.
[.8]10. Until such time as the Bank achieves the Total Risk-Based Capital
Ratio of 10.0 percent or greater as described in paragraph 6(b), the
Bank shall not, without the prior approval of the Regional Director,
make any capital or dividend distributions, pay any management fee to
any person having control of the Bank, pay compensation to any senior
executive officer at a rate exceeding
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that officer's average rate of
compensation (excluding bonuses, stock options, and profit-sharing)
during the 12 calendar months preceding the calendar month of issuance
of this ORDER, or pay, award, or issue any bonus, stock option, or
profit-sharing to any senior executive officer.
[.9]11. While this ORDER is in effect, the Bank shall not permit its
average Total Assets or average Total Deposits to increase by more than
one (1.0) percent during any consecutive three month period unless both
the Bank's resulting Total Risk-Based Capital Ratio (as defined in 12
C.F.R. 325), calculated in accordance with paragraph 6(a), and the
proposed growth are consistent with the Bank's Capital Plan approved
by the Regional Director for purposes of paragraph 6. The Regional
Director may grant a waiver to the restrictions in this paragraph after
review and consent to a request received not less than 30 days prior to
such anticipated growth. Any request shall detail the Bank's funding
plans as well as the anticipated use of the funds.
[.10]12. While this ORDER is in effect, the Bank shall not renew Brokered
deposits or obtain new brokered deposits without the prior written
approval of the Regional Director. Any request for approval to renew
brokered deposits or obtain new brokered deposits shall be made in
accordance with the waiver provision of Section 337.6(c) of the FDIC
Rules and Regulations, 12 C.F.R. §337.6(c). For purposes of this
ORDER, brokered deposits are defined as described in Section 337.6(a)
of the FDIC Rules and Regulations, 12 C.F.R. §337.6(a).
[.11]13. While this ORDER is in effect, the Bank shall not, without the
prior written approval of the Regional Director, directly or
indirectly, acquire any interest in any company (other than permissible
investment grade securities) or engage in any new line of business. The
FDIC's consideration of any proposal under this paragraph shall be
based on whether or not such proposal is consistent with the Bank's
Capital Plan approved by the Regional Director for purposes of
paragraph 6.
[.12]14. While this ORDER is in effect, the Bank shall not enter into or
renew any transaction, contract or agreement, written or otherwise,
with any of its affiliates, as defined in 12 U.S.C. §371c, without
documenting compliance with sections 23A and 23B of the Federal Reserve
Act, 12 U.S.C. 371c and 371c-1, and without providing 30 days advance
notice of an details regarding such proposed transaction to the
Regional Director.
[.13]15. Within sixty (60) days from the effective date of this ORDER, the
Bank's board of directors shall cause to be developed, and thereafter
adopt, cause to be implemented, and ensure Bank adherence to a written
risk management program including, at a minimum, the following:
(a) policies, procedures or standards that limit the degree of risk
the Bank is willing to incur, consistent with the Bank's financial
condition including, but not limited to, an analysis which limits the
risks associated with any new lines of business. The program shall
ensure that strategic direction and risk tolerances are effectively and
appropriately limited and communicated to appropriate Bank personnel
and describe the actions to be taken when noncompliance with risk
policies is identified; and
(b) measurement systems to measure and control risks within the Bank by
product, marketing initiative, delinquency status and vintage. The Bank
shall generate reports to analyze asset quality in terms of portfolio
dimensions, composition, and performance. Reports shall include risk
levels and trends relating to product profitability, volumes,
delinquencies, charge-offs, recoveries, bankruptcies, fraud,
overlimits, credit line increases, re-issues, renewals, re-agings, debt
management programs, aggregation, and other appropriate areas.
[.14]16. Within sixty (60) days from the effective date of this ORDER, the
Bank's board of directors shall adopt and implement a residual asset
valuation model that comports with industry practice, prevailing
instructions for the Consolidated Reports of Condition and Income,
Generally Accepted Accounting Principles, and the December 13, 1999
Interagency Guidelines on Asset Securitization. The Bank shall prepare
policies, procedures, and controls for use with the residual asset
valuation model to fully document and maintain every quantitative and
qualitative assumption used to determine residual asset valuation. Any
deviations from the policy's calculation process
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shall be fully
documented and maintained by the Bank. The policies, procedures, and
controls shall, at a minimum, also require:
(a) a back-testing procedure to validate the accuracy of estimates
relative to actual performance;
(b) a written analysis of the results of each such back-testing;
(c) the retention of all documentation pertaining to each such
back-testing; and
(d) formal approval by Bank senior management before making changes to
the residual asset valuation assumptions.
[.15]17. The Bank shall comply with the March 1, 1999 Interagency Guidance
on Subprime Lending, and the January 31, 2001 Interagency Expanded
Guidance for Subprime Lending Programs.
[.16]18. The Bank shall comply with the Interagency Guidelines Establishing
Standards for Safety and Soundness set forth at Appendix A to Part 364
of the FDIC's Rules and Regulations, 12 C.F.R. Part 364, Appendix A.
[.17]19. Immediately, and until further notice, the Bank shall prepare and
submit to the Regional Director, a bi-weekly liquidity report that
reflects the amount of deposit and other liabilities coming due in the
next thirty (30) days, together with any unfunded credit card
commitments, and the level of liquid assets available for payment of
these deposit and other liabilities. The liquidity report shall also
identify all potential securitization early amortization triggers and
assess the financial impact on the Bank arising from early amortization
or any securitization, including, but not limited to, scenario analyses
in which total cash collections on the affected securitization are
directed to the master trust while new advances on the credit card
accounts are required to be funded by the Bank.
20. Within thirty (30) days from the effective date of this ORDER, and
monthly for the next three months and then quarterly thereafter, the
Bank's board of directors shall submit a written progress report to
the Regional Director setting forth, in detail, any actions taken to
comply with each paragraph of this ORDER and the results of those
actions. The Bank shall continue to submit the quarterly progress
reports until notice from the Regional Director in writing.
21. All correspondence related to this ORDER, and any information,
reports or documentation required herein shall be sent to:
Daryl P. Stum
Regional Director
Federal Deposit Insurance Corporation
20 Exchange Place
New York, New York 10005
A complete copy of any submission shall be sent to:
Federal Deposit Insurance Corporation
Risk Management and Applications
Section
Room 5092
550 17th Street N.W.
Washington, D.C. 20429
22. Although the Bank's board of directors is, by this ORDER,
required to submit certain proposed actions and programs for the review
or approval of the Regional Director, the Bank's board of directors
has the ultimate responsibility for proper and sound management of the
Bank.
23. Nothing contained in this ORDER shall in any way inhibit, estop,
bar or otherwise prevent the FDIC from pursuing any supervisory,
administrative and/or enforcement action authorized by law.
24. Any time limitations imposed by this ORDER shall begin to run from
the effective date of this ORDER. Such time limitations may be extended
in writing by the Regional Director for good cause shown upon written
application by the Bank.
[.18]25. All members of the Bank's board of directors shall ensure
adherence to, and compliance with, each and every obligation contained
in this ORDER. This responsibility shall include, but not be limited
to:
(a) authorizing and adopting, on behalf of the Bank, such actions
as may be necessary for the Bank to accomplish all obligations and/or
undertakings required by the terms of this ORDER;
(b) requiring timely reporting by Bank management of all action taken,
pursuant to board direction, to assure compliance with the terms of
this ORDER;
(c) timely monitoring for any non-compliance; and
(d) requiring corrective action when any non-compliance occurs.
26. This ORDER shall be effective immediately upon issuance and
shall remain effective and enforceable except to the extent that, and
until such time as, any provisions
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of this ORDER shall have been
modified, terminated, suspended, or set aside by the Regional Director.
The provisions of this ORDER shall be binding upon the Bank, its
successors, assigns, directors, officers, employees, agents, and other
institution-affiliated parties.
Pursuant to delegated authority.
Dated this 15th day of May, 2002.
