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FDIC Enforcement Decisions and Orders |
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Cease and desist order issued to a bank that had committed unsafe or unsound banking practices. The bank's condition had not improved since the bank was examined, but even if the bank's condition had improved, the FDIC could still issue a cease and desist order. (This decision was affirmed by the U.S. Court of Appeals for the Fifth Circuit, 766 F.2d 175 (1985)).
[.1] Unsafe or Unsound Banking PracticeStatutory Standard
[.2] Lending and Collection Policies and PracticesHazardous Lending
[.3] Loan Loss ReserveAdequacy
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[.5] LiquidityUnsafe or Unsound Practices
[.6] DirectorsDuties and ResponsibilitiesStandard of Care
[.7] DirectorsDuties and ResponsibilitiesDelegation to Officers
[.8] DirectorsDuties and ResponsibilitiesGenerally
[.9] Cease and Desist OrdersDefensesCorrection of Violation
[.10] Cease and Desist OrdersWhen Appropriate
[.11] Ex-parte CommunicationDefined
[.12] Practice and ProcedureSubmission of Proposed Oder to ALJ
In the Matter of * * * (INSURED STATE NONMEMBER BANK)
DECISION AND ORDER FDIC-83-172b
I. STATEMENT OF THE CASE
On July 28, 1983, the Federal Deposit Insurance Corporation ("FDIC" or "Proponent") issued a Notice of Charges and of Hearing ("Notice") against Bank of * * * ("Bank" or "Respondent") under Section 8(b)(1) of the Federal Deposit Insurance Act (12 U.S.C. § 1818(b)(1) and Part 308 of the FDIC's Rules of Practice and Procedures (12 C.F.R. Part 308). The Notice charged that the Bank engaged in certain unsafe or unsound practices in conducting the business of the Bank within the meaning of Section 8(b)(1), and called for a hearing to take evidence and determine whether a cease-and-desist order should be issued. The order would require the Bank to terminate such practices and to take affirmative action to correct the conditions resulting from such practices.
II. ALJ's RECOMMENDED DECISION
In the Recommended Decision, the ALJ concludes that FDIC's action against the
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Bank should be dismissed. Consequently, the decision contains no Recommended Cease-and-Desist Order. Also, the ALJ's decision, which summarizes portions of the record for 22 pages but contains only one-and-one-half pages of discussion and conclusions, does not specifically enumerate any findings of fact or conclusions of law. However, several such findings and conclusions are discernible from the decision.
III. DISCUSSIONS OF CHARGES AND PROPOSED FINDINGS OF FACT
1. Allegations of Jurisdiction.
IV. FINDING OF FACT
Based on the record and the analysis of charges discussed previously, the Board adopts the following Findings of Fact:
The following credits involved collateral subject to both prior liens and charge-offs as shown at Ex. 26-Bank:
(g) A result of the Bank's hazardous lending and lax collection practices set forth in paragraphs 3(a)-3(f) is an excessive volume of poor quality assets in relation to total equity capital and reserves and an excessive volume of overdue loans in relation to gross loans. Tr. at 5964, 234, 249, 253254, 387388, 597598 and 775. Ex. 1-FDIC at 4, 8, 29 and 30. Ex. 8-Joint at 2 and 5. Ex. 10-Bank at 1. See also Ex. 14-Bank at 3. Total classified assets as of January 14, 1983 were $9,651,000 including $376,000 classified Loss. Ex. 1-FDIC at 4 and 7. Total classified assets as of January 14, 1983 were equal to 205.6 percent of the Bank's total equity capital and reserves. Ex. 1-FDIC at 4 and 29. Consequently, if half of the classified assets ultimately prove to be losses, the depositors are in peril. Tr. at 62. The Bank's total overdue loans of $4,859,000 as of January 14, 1983 represented 11.7 percent of loans. Ex. 1-FDIC at 5, 7, 8 and 27. When a past due ratio gets much above 5 percent there is some concern generated. Tr. at 263. A high overdue ratio is indicative of poor lending standards or lax collection procedures or both. Tr. at 365366.
V. CONCLUSIONS OF LAW
1. Bank has engaged in unsafe or unsound practices
[.1] Section 8(b) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(b), refers to the term unsafe or unsound banking practices; however, it does not define the phrase or specify what particular acts and conduct constitute such practices. As the FDIC notes in its initial brief, the legislative history of the Financial Institutions Supervisory and Insurance Act of 1966 (which amended Section 8 by adding, among other things, subsection (b)) provides some clarity as to what constitute unsafe or unsound banking practices. The Senate and the House both quoted with approval from a memorandum introduced during committee hearings by then Chairman of the Federal Home Loan Bank Board John E. Horne. 112 Cong. Rec. 24022 (daily ed. Oct. 4, 1966) (House); 112 Cong. Rec. 25416 (daily ed. Oct. 13, 1966) (Senate). The memorandum stated that the term "unsafe or unsound practices" is a generic term, like "negligence" or "probable cause," having a central meaning which must be applied to constantly changing factual circumstances. Further, it notes that an "unsafe or unsound practice" is "any action, or lack of action, which is contrary to generally accepted standards of prudent operation, the possible consequences of which if continued, would be abnormal risk or loss or damage to an institution, its shareholders, or the agencies administering the insurance funds." Financial Institutions Supervisory and Insurance Act of 1966: Hearings on S. 3158 Before the House Comm. on Banking and Currency, 89th Cong., 2d Sess., 4950 (1966).
[.2-.5] The record and Findings of Fact adopted herein support the conclusion that as of January 14, 1983, the Bank's hazardous lending and lax collection practices,
{{4-1-90 p.A-336}}inadequate loan loss reserves, inadequate capital and inadequate liquidity involved abnormal risk of loss or damage to the Bank, its shareholders and depositors, and the FDIC insurance fund and thereby constituted unsafe or unsound banking practices. Accordingly, the Board concludes as a matter of law that the Bank has engaged in unsafe or unsound banking practices.
[.6,.7] Directors of banks are held to a standard of ordinary care and prudence in the administration of bank affairs. Briggs v. Spaulding, 141 U.S. 132, 165-66 (1891). They are entitled to delegate banking business to their duly authorized officers, but may be held liable for negligence if they fail to exercise reasonable supervision over the management. As Finding of Fact 5 demonstrates, the Bank's directors exercised less than ordinary care by permitting loan and liquidity problems to steadily deteriorate after those problems were brought to their attention in the FDIC August 18, 1980 Examination Report.
[.8] The board of directors of a bank has a duty to investigate where necessary to protect shareholders' interests, to supervise the bank's affairs, to have a general knowledge of its business, and to know to whom and upon what security its large lines of credit are given. DePinto v. Provident Security Life Insurance Co., 374 F.2d 37, 46 (9th Cir.), cert. denied, 389 U.S. 822 (1967); Gibbons v. Anderson, 80 F. 345, 349 (C.C. W.D. Mich 1897). As Finding of Fact 5 states, the Bank's board ignored this responsibility despite FDIC warnings and admonitions as early as 1980, The huge loan losses suffered by the Bank indicate that this duty has not been satisfied.
[.9] 3. Cessation of Unsafe or Unsound Practices is not a Defense to a Section 8(b) Action
[.10] The plain language of Section 8(b) indicates that unsafe or unsound practices need not be ongoing at the time a cease-and-desist order is issued. Section 8(b)(1) of the Act provides, in pertinent part, that a cease-and-desist order may be issued against any bank "[i]f upon the record made at any...hearing, the agency shall find that any violation or unsafe or unsound practice specified in the notice of charges has been established...." 12 U.S.C. § 1818(b) (emphasis added). Further, judicial interpretations of the ceaseand-desist powers of the FDIC and other agencies support the view that a cease-and-desist order can be issued for unsafe or unsound practices a bank has committed for corrective purposes and in order to prevent future abuses. See First Nat'l Bank of Bellaire v. Comptroller of the Currency, 697 F.2d 674, 680-81 (5th Cir. 1983); Zale Corp. and Corrigan-Republic, Inc. v. F.T.C., 437 F.2d 1317, 1320 (5th Cir. 1973). Such an approach is, of course, entirely consistent with the remedial and enforcement policies underlying Section 8(b). If cessation of prior unlawful activity were considered a sufficient defense to an action under Sec-
{{4-1-90 p.A-337}}tion 8(b), a bank could engage in unsafe or unsound practices with virtual impunity, knowing that it could bring those practices to a halt when challenged by a bank regulatory agency.
[.11,.12] An "ex parte communication" is defined as an oral or written communication not on the public record with respect to which no reasonable prior notice to all parties is given. 12 C.F.R. § 308.01(f). FDIC's Proposed Order is on the record, and was provided to the Bank prior to the appointment of the ALJ, giving the Bank reasonable advance notice of the document. Section 557(c)(3) of the Administrative Procedure Act (5 U.S.C. § 557(c)(3)) ("APA") provides that the ALJ's recommended decision is a part of the record and shall include a statement of the basis for the decision and the appropriate order or denial thereof. The record is intended to include the FDIC's Proposed Order and the ALJ's disposition with respect to it. The APA contains no restriction as to when a proposed order is to be sent to the ALJ. Certainly, submission of a proposed order is no more influential than transmittal of a notice of charges or proposed findings of fact or conclusions of law. The ALJ must have each of these documents in order to recommend a decision.
VI. EXCEPTIONS
Only the FDIC submitted exceptions to the ALJ's Recommended Decision. The FDIC excepted to the ALJ's failure to review and resolve the issues presented in the Notice of Charges issued on July 28, 1983. The FDIC took exception to the ALJ's purported failure to adopt any findings of fact or conclusions of law, and specifically, FDIC's Proposed Findings of Fact 1 through 3, Additional Proposed Findings of Fact 1 through 8, Proposed Conclusions of Law 1 through 3, and Proposed Order to Cease and Desist. These matters are dealt with throughout the Board's Decision and Order.
VII. ORDER TO CEASE AND DESIST
Both the Bank and the ALJ have taken the position that a cease-and-desist order should not be issued because the unsafe or unsound practices have ceased and the condition of the Bank has improved. Further, the Bank contends that the FDIC's Proposed Cease-and-Desist Order is unduly restrictive in nature and that the issuance of any form of a cease-and-desist order will harm the Bank's reputation.
RECOMMENDED DECISION
No. 83-172b
Issuance of a Cease and Desist Order not supported by the record, Bank improvements since January 14, 1983, have been and are being made. The action in this proceeding ordered dismissed and the proceeding discontinued.
By Earl S. Dowell, Administrative Law Judge:
On July 28, 1983, the Board of Review of the Federal Deposit Insurance Corporation (FDIC) pursuant to authority delegated by the FDIC's Board of Directors and pursuant to section 8(b)(1) of the Federal Deposit Insurance Act [12 U.S.C. 1818(b)(1)], issued a Notice of Charges and of Hearing to Bank of * * *, which charged the bank with having engaged in unsafe or unsound banking practices. The issue is whether the "unsafe and unsound" practices require the issuance of a cease-and-desist order that forbids their continuation and requires affirmative action to remedy any resulting conditions.
FDIC stresses that the bulk of the classified assets is loans and the above summary reflects significant deterioration in the loan portfolio. It admits the local farming economy may have contributed to the increase in problem credits, but loans were made to borrowers in weak financial condition without providing for adequate collateral or collection procedures. A significant portion of the classified loans is based on real estate mortgages in which there are large outstanding prior liens, and the past two calendar years the loan portfolio has resulted in net loan losses totaling $3,162,000.
* * * Great care should be exercised in listing violations. The erroneous designation of conduct as a violation tends to discredit the report of examination and detract from its value as evidence. * * *
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The first two categories equal 75 percent of the total jumbo certificates of deposit as of January 13, 1984. Also it is explained that the public funds deposits which are secured by a pledge of high quality collateral offsets the volatility of this category. |
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Last Updated 6/6/2003 | legal@fdic.gov |