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   [5011] FDIC Docket No. FDIC-81-10b(8-9-82).

   Bank director ordered to cease and desist from an unsafe or unsound banking practice by serving as an officer and director of a bank while simultaneously holding employment with certain mortgage-banking companies which originated loans and presented them to the bank for funding.
   [.1] Directors—Outside Employment
   It is an unsafe or unsound banking practice for an officer or director of a bank to hold employment with certain mortgage-banking companies not affiliated with the bank which originate loans and present them to the bank for funding.

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In the matter of: * * * (Insured State
Nonmember Bank) and * * *, an
individual, * * *, an individual



DECISION AND ORDER
TO CEASE AND DESIST

FDIC-81-10b

   Pursuant to its authority under Section 8(b) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1818(b), the Federal Deposit Insurance Corporation issued a Notice of Charges against the above-named bank and individuals on March 30, 1981. The Notice charged the bank and the individuals with engaging in certain unsafe or unsound practices.
   The bank and individual defendant * * * have entered into consent agreements with the FDIC, thereby disposing of all charges against them.
   On November 17, 1981, Administrative Law Judge Erwin C. Salyers held a hearing on the charges against * * *. At the start of the hearing, Mr. * * * stipulated that he would consent to enter into an agreement with the FDIC pursuant to which he would admit to certain violations of law. The violations pertain to extension of credit to Mr. * * * by the Bank in excess of the amount legally permitted; extension of credit in the form of overdrafts to Mr. * * * in excess of the legal limits; and allowing Mr. * * * to become indebted to the Bank in an excessive amount.
   The hearing dealt with the remaining charge against Mr. * * *. The FDIC alleged that Mr. * * * had engaged in an unsafe or unsound practice in that the Bank had, directly or indirectly, paid him excessive fees for the origination of loans.
   The parties filed proposed findings of fact, proposed conclusions of law, and legal briefs. Judge Salyers issued his recommended decision on April 15, 1982.
   The Board of Directors of the FDIC, having considered the matter, concludes that Mr. * * * has violated Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 215 (1980), and Section 22 of the Federal Reserve Act, 12 U.S.C. Section 375b (Supp. IV 1980), which is made applicable to state nonmember banks by Section 18(j) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1828(j) (Supp. IV 1980).

FINDINGS OF FACT

   1. * * * State Bank is a corporation existing and doing business under the laws of the * * *. It has its principal place of business at * * *. At all times pertinent to this proceeding it has been, and it currently remains, an insured state nonmember bank.
   2. Mr. * * * has been at all pertinent times, and currently remains, a stockholder, director, and executive officer of the Bank. In addition, Mr. * * * was a member of the Bank's loan committee at all times pertinent to this proceeding.
   3. From September 1977 through March 1979, Mr. * * * was employed by * * * Mortgage Company ("* * *"), a whollyowned subsidiary of the Bank. * * * paid Mr. * * * an annual salary of $24,000. The Bank itself did not pay him anything.
   4. * * * collected all loan-origination fees on its own behalf from borrowers, and incurred all the expenses of originating loans. * * * was not profitable.
   5. * * * presented all the loans it originated to the Bank for funding. Mr. * * * could originate more loans on behalf of * * * than the Bank could fund out of its deposits and other revenues. The Bank made a practice of borrowing money to fund the loans that * * * originated.
   6. The FDIC examined the Bank in the summer of 1978. The examiners criticized the Bank both for * * * heavy expenses and for the Bank's practice of using borrowed money to fund loans originated by * * *.
   7. After the examination, the FDIC representatives discussed their findings and recommendations with officials of the Bank. The Bank officials suggested the possibility of terminating * * *, and using independent mortgage-banking companies to originate loans.
   8. Independent mortgage-banking companies customarily collect fees for originating loans. The fees are paid by the would-be borrowers, not by the institutions that fund the loans. The fees are used to pay the costs of originating the loans.
   9. On March 21, 1979, the Bank's board of directors voted to terminate * * *. The directors voted to have the Bank accept and fund loans originated by outside mortgagebanking companies. The directors explicitly recognized that some of these companies {{4-1-90 p.A-128}}would be owned by officers and directors of the Bank.
   10. The directors intended that the outside companies would receive the loan-origination fees previously collected by * * *, and that the companies would absorb the expenses previously incurred by * * *. The directors also intended that, whenever the Bank funded a loan presented by an outside company, the Bank would receive a fee ranging from one-half of one percent to one percent of the amount of the loan. The directors believed that it would be preferable for the Bank to receive a net fee with no expenses, rather than a gross fee subject to offset by the expenses of origination.
   11. It is not a common practice for the officers or directors of a bank to receive fees or other benefits—such as a salary—from an independent company for originating loans on behalf of that company, which loans are then to be presented to the bank for funding. The practice is risky because it can cloud the credit judgment of the officer or director.
   12. The FDIC examined the Bank in June 1979 and May 1980, at which times the Bank's new arrangements were in effect. The FDIC examiners were aware of the practices, or should have been aware of them, but neither questioned nor censured them. But the examiners did not entice the Bank or its officers into engaging or continuing in the practices.
   13. Mr. * * *, a stockholder and officer of the Bank, was part-owner of * * *. * * * was a company engaged in originating loans. Mr. * * * was never at any time a stockholder in * * *.
   14. In December 1978, Mr. * * * invited Mr. * * * to work for * * *. Mr. * * * agreed to do so. He began work for * * * in January 1979.
   15. Nevertheless, Mr. * * * continued to be employed—and paid—by * * * until March 23, 1979, at the rate of $24,000 per year.
   16. * * * did not begin to pay Mr. * * * a salary until April 1, 1979. During the remainder of 1979, * * * paid a total of $39,380 to Mr. * * *. Mr. * * * salary did not vary with the volume of business he generated, and in particular did not vary according to the volume of loans that he presented to the Bank for funding. Mr. * * * ceased to be employed by * * * on December 31, 1979.
   17. * * * originated loans and presented them to many lenders, including (but not limited to) the Bank. During 1979 * * * received a total of $52,698 in fees for loans funded by the Bank. In particular, the loans that Mr. * * * originated were presented to a variety of lenders.
   18. In February, 1980, Mr. * * * helped his wife establish a new mortgage-banking company called * * * . After an initial period as a proprietorship, the company was incorporated, and all the stock was put in the name of Mr. * * * wife. The company was not profitable. From February 1 to December 31, 1980, it lost $14,597; from January 1 to June 30, 1981 it lost $634.
   19. Mr. * * * was employed by * * *, but he received no salary or other compensation from it. Mrs. * * * received total benefits from the company of approximately $6,000 from the time of the company's inception to the time of the hearing. Over the same interval, Mr. * * * made loans to the company, which the company repaid in part; but at the time of the hearing the company continued to owe him $18,454.
   20. Like * * * , * * * originated loans and presented them to many lenders. About one-third of its loans were funded by the Bank. From the time of its inception to the time of the hearing, * * * received origination fees in the amount of $38,063 for loans funded by the Bank.
   21. * * * and * * * together originated 119 loans that the Bank subsequently funded. The two companies collected fees in the amount of $90,761 for these loans. The Bank would have collected these fees itself had it originated the loans on its own behalf.
   22. * * * and * * * incurred all the costs of originating the loans. Had the Bank originated the loans, it would likewise have incurred these costs.
   23. When * * * originated loans on behalf of the Bank, * * * costs averaged $750 per loan. Had the Bank paid the expenses of origination for the 119 loans, it would have incurred costs of approximately $89,250. The Bank's fees would have exceeded its origination costs by approximately $1,500.
   24. On March 3, 1979, the Bank made three loans to the * * * ("the * * *"). Each loan was in the amount of $30,000, and each was secured by a parcel of land. The parcels were located 200 miles from the Bank's office. It is not usual for a bank the {{4-1-90 p.A-129}}size of * * * ($8.5 million assets) to make a loan secured by real estate located so far away, at least not to a real-estate developer. There is no evidence, however, that the documentation supporting the loans was improper or that the security for the loans was inadequate at the time the credit was extended. None of the three loans ever became formally delinquent, although the three loans may have been refinanced the following year (see Finding 26).
   25. Subsequently, at a time when Mr. * * * was employed by * * * , * * * originated loans on behalf of certain would-be buyers of * * * property, which loans were funded by the Bank. * * * received fees for originating the loans. Two of the loans became delinquent. The record does not establish that Mr. * * * was involved in originating these loans, however.
   26. On January 17, 1980, after Mr. * * * employment by * * * had ended, the Bank funded a loan for $75,000 to the * * * . The record does not show whether this loan represented a refinancing of the original set of three loans. The loan became delinquent almost immediately. The Bank charged off $65,000 as a loss.
   27. The record does not show either that Mr. * * * originated the January 1980 loan on behalf of * * * , or that he approved it as a member of the Bank's loan committee.
   28. The FDIC examined the Bank in January 1981. Then, for the first time, the FDIC examiners objected to the Bank's practice of dealing with outside companies in which Bank officers were financially interested.
   29. In response to the FDIC's criticism, Mr. * * * ceased to collect origination fees on behalf of * * * , but instead began turning all such fees over to the Bank. Mr. * * * began absorbing the origination expenses personally. His practice of absorbing the fees goes beyond his obligations as an official of the Bank. The Bank has derived substantial benefits from Mr. * * * actions in this regard.
   The Board of Directors of the FDIC also concludes that Mr. * * * has engaged in an unsafe or unsound practice in that, while serving as an official of the Bank, he has held positions of employment with mortgage-banking firms not affiliated with the Bank, which firms have originated loans for funds by the Bank.

FINDINGS OF FACT AND
CONCLUSION OF LAW

   Accordingly the Board of Directors adopts the Findings of Fact appended hereto. In addition, the Board of Directors adopts the following conclusion of law:
   A. The FDIC has jurisdiction over Mr. * * * and the subject matter of this proceeding.
   B. Mr. * * * has violated Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 215 (1980), and section 22(h) of the Federal Reserve Act, 12 U.S.C. Section 375b (Supp. IV 1980), which is made applicable to nonmember banks by section 18(j) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1828(j) (Supp. IV 1980), and * * * Rev. Stat. Ann. Section 287.280(2).

   [.1] C. Mr. * * * has engaged in unsafe or unsound banking practices in that he has served as an officer and director of the Bank while simultaneously holding employment with certain mortgage-banking companies not affiliated with the Bank, which companies originated loans and presented them to the Bank for funding.

ORDER TO CEASE AND DESIST

   NOW THEREFORE LET IT BE ORDERED that the respondent Mr. * * * cease and desist from the violations and the unsafe or unsound practices set forth in the Findings of Fact and Conclusions of Law above.
   The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, the Board of Directors of the FDIC may modify, terminate, suspend or set aside the provisions.
   This ORDER shall become effective at the expiration of 30 days after the ORDER has been served upon the respondent.
   By order of the Board of Directors of the FDIC, dated August 9, 1982.

/s/ Hoyle Robinson
Executive Secretary

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RECOMMENDED DECISION

FDIC-81-10b

APPEARANCES:

   * * *, Esquire, * * *, and James L. Meador, Esquire, Washington, D.C., on behalf of Federal Deposit Insurance Corporation, * * * , on behalf of * * *
   This matter is before the undersigned Administrative Law Judge as a result of charges filed by the Federal Deposit Insurance Corporation ("FDIC") against * * * ("Bank"), * * * and * * * under the Federal Deposit Insurance Act ("Act") [12 U.S.C. 1818(b)]. The Bank is a corporation authorized to operate under the laws of the * * *, * * * and * * * and * * *, at all pertinent times, have been officers and directors of the Bank. A hearing was held in * * *, on November 17, 1981.
   At the time of the hearing, it was announced that all matters with respect to the Bank and * * * had been resolved by consent decree. It was further announced that * * * would enter into a consent decree admitting the charges contained in paragraph 9 of the Notice of Charges1 (Tr. 5-6) and will cease and desist from these practices in the future. However, * * * does not admit but specifically denies he has committed the acts charged in paragraph 8 of the Notice which reads as follows:

       8. The Bank and Individual Respondents * * * and * * * have engaged in an unsafe and unsound practice in that the Bank has paid directly or indirectly to Individual Respondents * * * and * * *, excessive fees for origination of mortgage loans.
       The issues to be resolved in this case are:
   1. Did * * *, while serving as an officer, director and loan officer of the Bank and as an employee of independent mortgage companies, engage in "unsafe and unsound practices" within the meaning of the Act?
   2. Is the FDIC estopped from asserting the alleged violations of the Act because of certain acts and assertions made by its agents?
   3. If the alleged violations are established, is the remedy proposed by the FDIC appropriate under the circumstances reflected in the record?
   The following will constitute my findings:

   PROPOSED FINDINGS OF FACT

   A. The Bank, a corporation existing and doing business under the laws of the * * * and having its principal place of business at * * * , * * * , is and has been at all times pertinent to this proceeding an insured State nonmember bank. * * * is and has been at all pertinent times a director and officer of the Bank. (Notice at 1; Answer at 1).
   * * * began to acquire stock in the Bank in June 1977 (Tr.18). Prior to his acquisition of the stock, * * * had been in the mortgage business (Tr.18). As of the date of the hearing, * * * owned approximately one-third of the outstanding stock of the Bank (Tr.18). In July 1977 he became secretary-treasurer of the Bank (Tr. 16–17). In 1981 he became vice-president (Tr. 16). He has been an executive officer and director continuously since July of 1977 until the date of the hearing (Tr. 17). At all relevant times, * * * was on the Bank's loan committee (Tr. 41, 119).
   C. It is not a common practice for bank officers and directors to receive fees or other benefits for loans acquired by their banks through independent mortgage companies owned and operated by the officers and directors (Tr. 218, 221). It is a risky practice because it can cloud the credit judgment of the officer or director (Tr. 219–220). However, the payment of fees for the origination of mortgage loans by independent companies is a common and accepted practice in the banking industry (Tr. 134, 273–274). These fees are customarily paid by the borrowers and not by the banks (Tr. 27, 124). These fees are necessary to cover the cost of originating loans (Tr. 273–274). The average cost for originating loans is $750 (Tr. 289).
   D. From September 1977 through March 1979, * * * was employed by * * * , a wholly owned subsidiary of the Bank, from which he received an annual salary of $24,000 (Tr. 17, 20). During this period all fees derived from originating loans went directly to the Bank, but the Bank was obligated to cover all costs of this operation including * * * salary, car rentals, secretarial help, etc. Because of the expenses the operation was not a profit-making venture for the Bank.


1 These charges include extension of credit to * * * by the Bank in excess of the amount legally permitted; extension of credit in the form of overdrafts to Porter in excess of the legal limits; and allowing * * * to become indebted to the Bank in an excessive amount.
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   E. In the fall of 1978 the Bank was examined by agents of FDIC who were critical of the Bank's operation of its subsidiary mortgage company. The principal objection was that the operation was costly and produced little, if any, income to the Bank (Tr. 103; FDIC Ex. 9). As a result of this criticism, the Bank's directors voted to phase out the subsidiary mortgage operation and turn this function over to independent mortgage loan companies, some of which were owned by officers and directors of the Bank (FDIC ex. 9). Thus, the expenses previously incurred by the Bank would be absorbed by the independent mortgage companies reducing the overhead to the Bank (Tr. 103-104). In exchange for this reduction of expenses to the Bank, the independent mortgage companies would receive a fee paid by the borrower (Tr. 27) and the Bank would also receive a fee ranging from one-half to one percent of the amount of the loan (Tr.124). The directors of the Bank believed it was better for the Bank to "receive a net fee with no expenses rather than gross fees and absorbing all of the expenses involved with the origination of loans" (Tr. 33).
   F. During the course of the 1978 examination of the Bank, agents of FDIC and Bank officials discussed the mortgage loan problem and possible solutions thereto, including the practice of using independent mortgage companies owned by Bank offices to originate loans (Tr. 265–267). In subsequent examinations of the Bank, at times when the practice was in effect, FDIC's representatives were aware of the practices but neither questioned nor censured the practice (Tr. 138–139). The evidence does not show, however, that FDIC representatives enticed the Bank or its officers into engaging in the practice or committed any other acts of "affirmative misconduct."
   G. Shortly after the Bank examination in the fall of 1978, * * * was approached by * * * , who at the time was an officer and shareholder of the Bank (Tr. 20–21). * * * was also a part owner of * * *, ("* * *"), a company engaged in the origination of mortgage loans. In late December 1978, while both * * * and * * * were connected with the Bank, * * * was hired by * * * to go to work for * * * (Tr. 60). * * * began work for * * * in January 1979 at a time when he was still on salary at the Bank (Tr. 62-63). Commencing April 1, 1979, * * * began to receive a salary from * * * and during 1979 was paid a total of $39,380 (Tr. 63). During 1979 * * * received a total of $52,698 in fees for origination of loans made or acquired by the Bank (Tr. 56; FDIC Ex. 4 at 3). These fees, however, were paid by the borrower, not the Bank (Tr. 27–28; FDIC Ex. 5–6). * * * was not at any time while employed by * * * a stockholder of * * * .
   H. * * * ceased operations in late 1979. * * * was a company owned by * * * wife, * * * (Tr. 25, 52). From January of 1980 through November 10, 1981, * * * received fees in the amount of $38,063 for origination of loans made or acquired by the Bank (Tr. 81). * * * received benefits from * * * of approximately $6,000 (Tr. 280). * * * made loans to * * * and received payments in satisfaction of these loans. However, over a 17-month period his loans to * * * exceeded payments received in the amount of $18,454 (FDIC Ex. 4).
   1. As a result of the practices, as more fully set forth in paragraphs G and H above, fees paid to * * * and * * * totaled $90,761. These fees would have gone to the Bank had the Bank brokered the loans. During the period in question, the Bank had a total of 119 transactions with * * * and * * * . All costs of originating these loans were paid by the independent mortgage companies. The average cost of each origination is approximately $750. Had the Bank paid these expenses, it would have incurred costs of approximately $89,250.
   J. * * * became obligated to the Bank on March 3, 1979. * * * was 200 miles away from the Bank (Tr. 161). It is not normal for a bank this size to make a loan secured by real estate that far away (Tr. 162, 167). The * * * loan was secured by three parcels of land (Tr. 214–215). Subsequently, and at a time when * * * was employed by * * * , the Bank loaned funds to certain purchasers of * * * properties, which loans were originated by * * * and for which * * * received fees. The Bank later wrote off as a loss $65,000 of the loan to * * * (Tr. 40; FDIC Ex. 3 at 3-a-1).
   K. The Bank could not handle all the mortgage business that * * * could do (Tr. 33). The Bank borrowed money to enable it to warehouse mortgage loans (Tr. 96–99, 225). Due to this practice the Bank had excessive interest expense from borrowing {{4-1-90 p.A-132}}which contributed to the earnings problem of the Bank (Tr. 224–226).
   L. Since the January 1981 FDIC examination, * * * has turned over all fees from brokering loans directly to the Bank. * * * personally is now absorbing all expenses in brokering these loans (Tr. 270). The current situation is not typical of the banking business, and * * * is performing extraordinary duties (Tr. 116–117, 132–134).

   Unsafe or Unsound Practice

   Resolution of the first issue has been complicated due to the language used in the charge. A literal reading of the charge would require FDIC to prove that * * * , while serving as an officer and director of the Bank and as an employee of independent mortgage companies, (1) received fees either directly or indirectly for origination of loans (2) which fees were excessive and (3) which fees were paid by the Bank. The record does not support a finding that * * * received fees for origination of loans at any time during the period in question nor is there any evidence to reflect that the fees in question were "excessive." The evidence is also uncontradicted that the fees in question were paid by the borrowers, not the Bank. Under these circumstances, it appears FDIC has alleged more than it could or had to prove. What the record does show is that * * * , while serving in a dual capacity as an officer and director of the Bank and as an employee of independent mortgage loan companies, placed himself in a position of dual loyalties, raising a conflict of interest which could and probably did cloud his credit judgment. Bank officers must scrupulously avoid such a situation. The evidence also shows * * * accepted and received personal benefits in the form of an increase in salary while working in a dual role as an officer and director of the Bank and an employee of * * *.
   The term "unsafe or unsound practice" is not defined in the Act nor can it be defined in such a way that the definition would cover all possible situations. What may be unsafe or unsound in the case of bank operating with limited or marginal reserves may not be unsafe or unsound for a bank with a strong reserve position. In general terms, a practice will be considered unsafe or unsound when it is contrary to accepted standards and places the bank in danger of loss or abnormal risk. See Hearings on S. 3158 Before the House Comm. on Banking and Currency, 89th Cong. 2d Sess., 49-50 (1966).
   In the instant case several factors tend to show that * * * , acting alone or in concert with other officers and directors, has placed the Bank in danger of lost or abnormal risk. The Bank is a small bank with minimal reserves as demonstrated by the fact that the Bank borrowed excessively in order to warehouse mortgage loans during the period when * * * served in a dual capacity (Tr. 96–99, 225). The further fact that * * * produced more loans than the Bank could handle (Tr. 33) lends support to the reasonable inference that * * * may have influenced Bank decisions to borrow excessively, thereby increasing interest expense to the Bank. The Bank's imprudent dealings with * * * while * * * was employed by * * * raises strong suspicions that * * * credit judgment may have been unduly influenced in the making of these loans. Even though the evidence does not show that * * * directly received fees as a result of these transactions, it shows conclusively he received additional personal benefits through a raise in salary from $24,000 to $39,000 when he joined * * *. This fact, standing alone, is sufficient to sustain the charge.
   The cases relied upon by FDIC, while differing factually somewhat from the instant case, are persuasive. In First National Bank of LeMaroue v. Smith, 436 F. Supp. 824 (S.D. Tex. 1977), aff'd 610 F.2d 543, the court found that a practice of diverting income from the sale of credit life insurance to the personal benefit of bank officers and directors was a breach of fiduciary duty and, therefore, prohibited conduct. Likewise, in Fleishbacker v. Blum, 109 F.2d 543 (9th Cir. 1940), the court held "that a bank officer who receives a bonus or other considerations for procuring a loan of the bank's funds commits a breach of trust." 109 F.2d at 545-546. See also First National Bank of Eden v. Department of the Treasury, 586 F.2d 610 (8th Cir. 1978).
   While the evidence does not show that * * * acted in bad faith or with intent to divert funds from the Bank to the Bank's detriment, * * *'s dual role in the Bank's transactions with * * * and * * * and his acceptance of personal benefits (increased salary) constitute an unsafe and unsound practice within the meaning of the Act.

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The Estoppel Question

   Respondent * * * maintains that FDIC should be estopped from asserting violations in this case because he and other Bank officials were misled by certain acts, a failure to act, or assertions made by agency personnel during the course of bank examinations conducted by the agency prior to the issuance of formal charges on March 30, 1981.
   The Bank was examined by FDIC in the late summer or early fall of 1978 at a time when the Bank was operating the * * * , a wholly owned subsidiary of the bank engaged in the origination of mortgage loans. The examiners were critical of * * * since the expense of operation were considered excessive2 and the subsidiary was producing little, if any, income to the Bank (Tr. 103; FDIC Ex. 9). As a result of this criticism and pressure from the bank examiners, a decision was made to phase out * * * . Events leading up to this decision are described in * * * testimony as follows:

       A. I believe it might have been in the late summer of '78. We were in the small building and we had several buildings in what we called the Board Room, a small house across the street from the bank where the examination was primarily taking place. The examiners were, again, very unfamiliar with mortgage banking activities, mortgage loan servicing, warehousing, the Freddy Mack programs, escrow accounts and a number of items. I thought we had an army of examiners there, one of which was Mr. * * * who was, I think, based in * * * , and Mr. * * * and * * *. At a meeting where * * * and * * * , 3 and I were present, we sat around a table and I think * * * posed the question to the examiners, "Since the bank is always coming under fire from the fact that we have possibly five, six, seven automobiles, and more employees than a bank our size should have," because they couldn't get the perspective of a wholly owned mortgage subsidiary having offices elsewhere outside the confines of the bank. We discussed and discussed and discussed the format, the structure, the fee arrangement, the expenses, the projections, the income, the expenses, the projections over and over. The issue was raised that was if [sic], instead of the bank owning this entity, that we take the obligations individually and take the liability of the automobile leases, etc. off the bank's books. What if, instead of the bank having to wonder from one profit and loss statement to the next on a monthly basis. What if the bank were to receive a net fee for the origination of these loans. Mr. * * * chimed in very enthusiastically that, "that's what you guys should do."
       Q. Who was Mr. * * *?
       A. He was, I think, the Assistant Director of the FDIC.
       Q. Was he in charge of the examination?
       A. Yes.
       Q. What did you do in response to that meeting?
       A. Well, we pursued discussion with he [sic] and with, I believe the fellow who was the mortgage expert or had some experience with mortgage originations was * * *. We spoke back and forth on several different occassions [sic], not just that occassion [sic], but several occassions [sic] during this same examination. And talked about structure and script and script and verse to, "Okay, maybe that's the way for us to go. We don't know exactly when or how, but we need to talk about it and reformulate the program that we're under." So, that's what was done. And in the meeting in March, we had had several individual meetings prior to the meeting in March and at the Board Meeting in March we proposed to the Board to wind down the activities of the * * * insofar as originations were concerned. We, individually, I primarily absorbed seven automobile leases, two long term leases of office space, one in * * * and one in * * * , telephone bills, employee obligations, any number of ongoing liabilities that the * * * would have had. (Tr. 265–267)
   In addition to * * * claim that agents of the FDIC condoned the questionable practice at its inception, * * * also alleges that FDIC acquiesced in the practice in subsequent examinations. His testimony in this regard is as follows:

2 Included in these expenses were officers' salaries, car rentals, office rent, telephone bills, etc.

3 * * * and * * * were Bank officers and directors at the time.
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       A. . . . Subsequently, the bank was examined twice by the FDIC. I, personally, handed them many HUD 1 statements.4 Personally directed them to the minutes of the bank that reflect this March meeting,5 and they were fully aware of the operations of the bank, the "brokered loan arrangement" situation and didn't object. In fact, they gave no indication that this practice is wrong."
       Q. Did you assume because they didn't object that there wasn't anything wrong with it?
       A. Well, I assumed that since they had told us to do it, and they didn't object—
       Q. Therefore, it was all right?
       A. Yeah. (Tr. 268)
   It is well established that a party seeking to assert the defense of estoppel has the burden of proving all the elements of this defense. U.S. v. Harvey, 661 F.2d 767 (CA 9th 1981). These elements are as follows:
       (1) Whether the party to be estopped knew the facts;
       (2) Whether the party to be estopped intended or could justifiably be perceived as intending its conduct to induce reliance;
       (3) Whether the party asserting the estoppel was ignorant of the facts;
       (4) Whether the party asserting estoppel relied upon the government's conduct; and
       (5) Whether the government engaged in affirmative misconduct. (Id. at 774)
   Even though the estoppel claim is based primarily upon the self-serving testimony of * * * , credence is added by evidence appearing elsewhere in the record. FDIC witness, * * * , an officer and director of the Bank, corroborates the fact that the Bank's mode of operating was changed in March 1979 to "alleviate the concern of the FDIC" with respect to its mortgage transactions (Tr. 102). Nothing in his testimony indicates either he or * * * attempted to conceal from the FDIC the plan outline in the Bank's minutes (FDIC Ex. 9) to turn over the mortgage origination function of the Bank to independent companies, some of which were owned by Bank officers and directors. The fact that the Bank was subsequently examined by the FDIC sometime in 1980 when the practice was in use but did not stop the practice further supports * * * assertion that FDIC acquiesced in the practice.
   However, even when viewing all the facts in a light most favorable to * * * , the record falls short of sustaining a defense of estoppel. The conversations occurring between Bank officers and FDIC's examiners in 1978 took place some six months before the change was actually put in effect. There is no clear showing that * * * or any other Bank officers at any time made a full disclosure to FDIC that under the practice income was being diverted from the Bank to entities where officers of the Bank received benefits, directly or indirectly (in * * * case, a higher salary). Nor does the record show any "affirmative misconduct" on the part of FDIC examiners an essential element of the defense.
   In California Pacific Bank v. S.B.A., 557 F.2d 218 (9th Cir. 1977), the Court refused to impose estoppel against the government under facts considerably stronger than those presented here. The S.B.A., in California Pacific Bank, supra, had actually given its approval of an illegal scheme and, thereafter, approved a series of loans under the illegal scheme without comment or censure. The Court found that while certain acts of the S.B.A. "come very close to the required showing" (for proving estoppel), there had been no showing of "affirmative misconduct" (Id. at 224) and this failure of proof was fatal to the defense.
   The evidence is insufficient to invoke the doctrine of estoppel against FDIC.

The Relief

   Having found that * * * has engaged in unsafe or unsound practices and that FDIC is not estopped from asserting these charges, I must now consider appropriate relief under the facts of this case. FDIC seeks both a cease and desist order to restrain * * * from all future engagement in unsafe or unsound practices and restitution of all funds diverted from the Bank during the period in question which are attributable to * * * commission of the illegal acts.
   The law is clear that FDIC is entitled to injunctive relief prohibiting the illegal acts in the future, and an appropriate order


4 These statements reflect the recipients of all fees paid in the origination of a mortgage loan (See FDIC Exs. 5 and 6).

5 FDIC Ex. 9.
{{4-1-90 p.A-135}}should be issued. There is also strong support for the proposition that upon a finding of violations of the Act, affirmative action may be required to "fashion relief in such a form as to prevent future abuses." Gross National Bank v. Comptroller of Currency, 573 F.2d 889 (CA 5th 1978).
   Granting FDIC the full measure of relief sought, under the facts of this case, would be inequitable. The evidence establishes that * * * actions, while improper and unwise, resulted in no personal gain to * * * except for the modest salary increase he received while employed at * * * . Additionally, * * * has invested and lost substantial sums of his own personal funds to keep the operation functioning and to prevent additional losses to the Bank.
   If FDIC had proved what it set out to prove, i.e., * * * diverted fees from the Bank for his own personal gain at the expense of the Bank, the proposed remedy (full restitution) might well be appropriate. However, the evidence does not support a conclusion that the questionable practice resulted in substantial loss to the Bank. It is true when the Bank originated its own loans through its subsidiary, the Bank received the full fees paid by the borrowers. It is also true, however, that during that period the Bank bore the costs of origination and that these expenses averaged $750 per loan. In essence, when the Bank elected to phase out its mortgage origination function, the costs previously borne by the Bank were shifted to the independent companies, thereby reducing the Bank's overhead. While * * * was engaged in his dual role, the Bank had a total of 119 transactions with companies with which he was affiliated (84 with * * * and 35 with * * *). Using the average cost of $750 per loan, it is reasonable to conclude it would have cost the Bank at least $89,250 in costs to originate these loans while receiving fees of $90,761, a difference of a mere $1,511.
   Another factor must be considered in framing an appropriate remedy in this case, and that is the role played by FDIC agents during the course of examinations conducted at the Bank prior to the issuance of formal charges. As previously noted, I do not find that these agents engaged in "affirmative misconduct" sufficient to impose the doctrine of estoppel but a reading of the record impels the conclusion that their actions or failure to speak out against the condemned practice may well have lulled * * * and other Bank officials into a belief that the practice had the tacit approval of FDIC. This fact weighs heavily against imposing a harsh or severe penalty against * * * , U. S. v. American Greetings Corp., 168 F. Supp. 45 (U.S.D.C., N.D. Ohio, E.D.), aff'd 272 F.2d 945 (6th Cir. 1959).
   Finally, since the January 1981 FDIC examination, * * * has turned over all fees received from brokering loans directly to the Bank and has personally absorbed expenses which would otherwise be borne by the Bank. He has performed extraordinary services for the Bank at a personal loss to himself. While the value of these services is not disclosed in the record, their value, extending in time for over one year, have, in all likelihood, far exceeded any past losses the Bank may have suffered as a result of the unsafe or unsound practice.
   This case is not an appropriate vehicle for the imposition of harsh penalties, or to require the remedy of restitution. I would propose a nominal penalty not to exceed $500 against * * * to guard against future abuses.

   PROPOSED CONCLUSIONS OF LAW

   A. The FDIC has jurisdiction over * * * and the subject matter of this proceeding.
   * * * has violated Regulation O, 12 C.F.R. Part 215 (1980), and section 22(h) of the Federal Reserve Act, 12 U.S.C. § 375b (Supp. IV 1980) made applicable to nonmember banks by section 18(j) of the Federal Deposit Insurance Act, 12 U.S.C. § 1828(j)(Supp. IV 1980).
   * * * engaged in unsafe or unsound banking practices while serving as an officer and director of the Bank and as an employee of * * * and * * *.
   D. An appropriate order should issue requiring * * * to cease and desist from violations of the regulations and acts specifically described in paragraphs B and C above. In addition, an appropriate order should issue requiring * * * to pay a penalty not to exceed $500 to guard against future abuses of the acts and regulations.
   Dated this 15th day of April, 1982.
/s/ EDWIN G. SALYERS
Administrative Law Judge

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