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FDIC Enforcement Decisions and Orders |
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Civil money penalties assessed against bank directors in connection with the bank's extensions of credit to the directors and their related interests at preferential interest rates and involving more than the normal risk of repayment.
[.1] Practice and ProcedureExceptions to Recommended DecisionTime for Filing
[.2] Regulation OCivil Money Penalties Assessed for Violation
[.3] Civil Money PenaltiesAmount of PenaltyStatutory Standard
[.4] Regulation OLoans to InsidersPreferential Terms
[.5] Regulation OLoans To InsidersDegree of Risk
[.6] DefinitionsSubstandard Loan
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[.8] Civil Money PenaltiesAmount of PenaltyStatutory Standard
In the Matter of * * * and * * *
This proceeding seeks a civil money penalty in the amount of $2,500 against * * * and a civil money penalty in the amount of $5,300 against * * * ("Respondents"),1 individually and as directors of the Bank of * * *, * * * ("Bank"), for violations of section 22(h) of the Federal Reserve Act (12 U.S.C. § 375b) and Regulation O of the Board of Governors of the Federal Reserve System ("Reg. O") (12 C.F.R. Part 215), promulgated thereunder.2 These violations occurred in connection with the Bank's extensions of credit to directors and their related interests at preferential interest rates and involving more than normal risk of repayment. Respondent * * * or his related interests received seven totaling $77,600. Respondent * * * received no loans, but as a member of the board of directors of the Bank approved the preferential loans to Respondent * * * and other directors.
[.1] This matter was referred to Administrative Law Judge William A. Gershuny ("ALJ") and a formal hearing was held on September 11-12, 1986. The parties filed proposed findings of fact, proposed conclusions of law and briefs. FDIC enforcement counsel filed a reply brief. The ALJ issued his Recommended Decision3 on December 5, 1986, recommending entry of an order assessing civil money penalties against the Respondents in the amounts set forth in the Notice. No party filed exceptions to the Recommended Decision within twenty days after service and thus, pursuant to section 308.14 of the FDIC Rules, each party has waived the right to object to the Recommended Decision.
[.2] The ALJ found that 1) during the relevant period loans were made to directors and their related interests at prime plus 1 percent, regardless of the credit quality of a particular loan; 2) prime plus 1 percent was not extended to any other borrower; and 3) extensions of credit to all other borrowers were at rates 1 to 4.5 percentage points higher than prime plus 1 percent. The record indicated three loans were made by the Bank to comparable borrowers. Each of these was made at considerably higher, negotiated interest rates and was secured by stock. The rate of interest on loans to Respondent * * * was uniform and not negotiated and the loans were unsecured. (R.D. at 3). Accordingly, the ALJ concluded that the director and related interest loans at issue were made on preferential terms in violation of section 215.4(a)(1) of Reg. O.
[.3] Finally, the ALJ concluded that in light of all the circumstances the penalties assessed were appropriate. In reaching this conclusion the ALJ specifically considered and balanced various factors including 1) the admission of ability to pay; 2) the modest amount of these penalties where the maximum penalty could have been well in excess of $150,000; 3) the number, repetition and serious nature of the violations in spite of the evidence of numerous warnings by the Commissioner of Banks and Trust Companies and the FDIC; and 4) the "good faith" of the directors exhibited by their payment to the Bank of the difference in interest between the preferential rates and the rates paid by other comparable borrowers.
Order to Pay Civil Money Penalties
On the basis of the record in this proceeding, including the ALJ's Recommended Decision dated December 5, 1986, and after taking into consideration the appropriateness of the penalties with respect to the financial resources and good faith of Respondents * * * and * * *, the gravity of the violations, the history of previous violations, and such other matters as justice may require, the Board adopts the Recommended Decision, incorporates it herein by reference and finds that * * * and * * *, individually and as directors of the Bank have violated section 22(h) of the Federal Reserve Act (12 U.S.C. § 375b) and section 215.4(a)(1) and (2) of Reg. O (12 C.F.R. § 215.4(a)(1) and (2)).
FDIC-86-92k
RECOMMENDED DECISION AND
WILLIAM A. GERSHUNY, Administrative Law Judge: A hearing was conducted in * * * on September 11-12, 1986, at the request of Respondents * * * and * * *, on Notice of Assessment of Civil Money Penalties issued on April 30, 1986, pursuant to Section 18(j)(3) of the Federal Deposit Insurance Act. 12 U.S.C. 1828(j)(3). Penalties of $2,500 and $5,300 respectively were imposed in the Notice. The last posthearing briefs were filed on December 4, 1986.
Findings of Fact and Conclusions of Law
I. Jurisdiction
The Notice alleges, Respondents * * * and * * * admit, and I find that both the
II. The Alleged Violations
The Notice alleges a number of violations of Regulation O, based on loans to directors and their related interests, granted at preferential interest rates and involving more than the normal risk of repayment. Respondents here admit all factual allegations concerning the loans, including the allegations of "related interest" and their direct participation in these transactions as directors of the Bank.
A. The Loans.
Between 1981 and 1985, the Bank extended or renewed credit to Directors and their related interests at a rate of prime plus 1 percent. These transactions are summarized as follows:
B. Preferential Interest Rates.
[.4] Section 215.4(a)(1) of Regulation O, made applicable to insured state nonmember banks by Sec. 337.3 of FDIC Rules and Regulations, provides that loans to directors and related interests must be made "on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions by the bank with other persons that are not covered by this Part and who are not employed by the bank." In assessing comparability, a number of factors generally are considered: the time of the loan; the net worth of the borrower; the collateral pledged; the liquidity of the collateral; and the overall credit quality of the loan.
C. Risk of Repayment
[.5] Section 215.4(a)(2) of Regulation O requires that insider loans "not involve more than the normal risk of repayment or present other unfavorable features." The Notice alleges violations of this provision in connection with the loans to Respondent * * * and his related interest.
[.6] Each of the loans was classified by the FDIC as substandard, i.e. involving more than a normal degree of risk, with the possibility that a loss may occur in the future. The classification was made by Examiner * * * on the basis of state financial statements which showed a decreasing net worth and an annual income for * * * of $40,000, the absence of security, and no principal reductions. Similarly, with respect to * * * related interest, there was only stale financial data which reflected net annual losses and assets which barely exceeded liabilities. Moreover, the loans to the related interest were unsecured and were personally guaranteed by * * * himself.
[.7] Both * * * and Examiner * * * opined that a classification of substandard was proper. In the absence of a showing by Respondents that their opinion was based on erroneous perception of the facts, their opinion is entitled to great deference by an administrative law judge. Sunshine State Bank, supra.
III. Civil Money Penalty
Section 18(j)(3)(A) of the Federal Deposit Insurance Act authorizes the imposition of a civil money penalty of not more than $1,000 per day upon "any officer, director, employee, agent, or other person participating in the conduct of the affairs..." of a nonmember insured bank who violates Regulation O. Having found and concluded above that Respondents * * * and * * *, while serving as directors of the Bank, engaged and participated in multiple violations of Regulation O, I must conclude that they are liable for a civil penalty.
[.8] In the determination of the amount of the penalty, Section 18(j)(3)(B) sets forth a number of factors to be considered: the appropriateness of the penalty with respect to the financial resources of the person charged, i.e. his ability to pay; his good faith; the gravity of the violations; the history of previous violations; and such other matters as justice may require. Here, it should be noted that both Respondents have admitted an ability to pay. Accordingly, there is no need to discuss this factor in determining the amount of the penalty.
RECOMMENDED ORDER TO PAY*
After taking into account the appropriateness of the penalty with respect to the financial resources of Respondents * * * and * * *, their good faith, the gravity of the violations, the history of previous violations, and such other matters as justice may require, it is |
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Last Updated 6/6/2003 | legal@fdic.gov |