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FDIC Enforcement Decisions and Orders

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   [5097] FDIC Docket No. FDIC-85-176k (12-8-87)

   A civil money penalty of $35,000 was assessed against a bank director for extending credit to bank insiders and their related interests in excess of the legal lending limit and involving more than the normal risk of repayment. The $35,000 penalty was found not excessive since the director had a net worth of $1,359,200.

   [.1] Practice and Procedure—Evidence—Expert Opinion
   The conclusions and opinions of bank examiners in bank regulatory matters are entitled to be considered as the opinions and conclusions of expert witnesses.

   [.2] Regulation O—Loans to Insiders—Approval of Board of Directors Required
   Loans or extensions of credit to executive officers, directors, principal shareholders, and their related interests are prohibited if the loan or extension of credit to that person and all related interests of that person exceeds in the aggregate an amount determined by the appropriate federal banking agency unless such loan or extension of credit is approved in advance by a majority of the entire board of directors.

   [.3] Regulation O—Loans to Insiders—Lending Limit
   The aggregate lending limit is 15% of the bank's unimpaired capital and unimpaired surplus for unsecured loans plus an additional 10% for loans secured by readily marketable collateral with reliable and continuously available price quotations.

   [.4] Civil Money Penalties—Amount—Statutory Standard
   In determining the amount of a civil money penalty, the FDIC must take into account the appropriateness of the penalty with respect to the financial resources and good faith of the member bank or the person charged, the gravity of the violation, the history of previous violations, and other matters as justice may require.

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In the Matter of * * * individually and as
a director of * * * Bank (INSURED
STATE NONMEMBER BANK)


DECISION AND ORDER

FDIC-85-176k

DECISION

   The Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") has reviewed the record and finds that the Administrative Law Judge's ("ALJ's") Recommended Decision and Order to Pay a Civil Money Penalty ("Recommended Decision") (appended hereto) is in all material respects fully supported by the law and the evidence. The ALJ's Recommended Decision is therefore adopted and incorporated herein by reference.
   The Board adopts the following ORDER as an appropriate penalty against Respondent * * * , individually and as a director of the * * * Bank, * * * , for violations of Section 22(h) of the Federal Reserve Act, 12 U.S.C. §§ 375, Regulation O, 12 C.F.R. Part 215, and Section 337.3(a) of the FDIC's Rules and Regulations, 12 C.F.R. § 337.3(a). The ORDER requires * * * to pay a penalty of $35,000 within twenty (20) days from the date of service of this Decision and Order.

ORDER

   For the reasons set forth in the above Decision,
   It is ORDERED, that by reason of the transactions and violations of law and regulation evidenced by the record in this case, a civil money penalty in the amount of $35,000 be, and the same hereby is, assessed against Respondent * * * pursuant to Section 18(j)(3) of the Federal Deposit Insurance Act; and
   It is further ORDERED, that the penalty shall be payable by Respondent * * *, twenty (20) days from the date of service of this Decision and Order.
   Dated at Washington, D.C., this 8th day of December, 1987.

/s/ Hoyle L. Robinson
Executive Secretary

FDIC-85-176k

ALLYN A. BROOKS
Administrative Law Judge
RECOMMENDED DECISION AND
ORDER TO PAY A CIVIL MONEY
PENALTY

I. SUMMARY OF THE PROCEEDINGS

   On June 12, 1985, the Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Assessment of Civil Money Penalties, Findings of Fact and Conclusions of Law, and Order to Pay against various executive officers and/or directors of the * * * Bank, * * * ("Bank"). The FDIC alleged that the Bank extended to Bank insiders * * * ("Respondent * * *") and * * * , and their related interests, credit which involved more than the normal risk of repayment and presented other unfavorable features, in violation of Section 215.2(k) of Regulation O of the Board of Governors of the Federal Reserve Board ("Regulation O") (12 C.F.R. Section 215.2(k)). In addition, the FDIC alleged that the Bank extended credit to * * * , a related interest of * * * , and to * * *, for the benefit of Respondent * * * , without receiving the prior approval of a majority of the Bank's board of directors as required by Section 215.4(b) of Regulation O (12 C.F.R. Section 215.4(b)). It was further alleged that the Bank extended credit to * * * Farms, a related interest of * * * , and * * * , in an amount which exceeded the Bank's aggregate lending limit imposed by Section 215.4(c) of Regulation O (12 C.F.R. Section 215.4(c)).
   As a result of the violations, the FDIC assessed a civil money penalty of $35,000.00 against Respondent * * *. All other respondents in this matter have withdrawn their requests for a hearing.
   On October 15, 1986, the FDIC filed a motion requesting that the case-in-chief against * * * be presented by affidavit and by previously submitted exhibits. In the thirteenth pre-hearing order dated October 16, 1986, the Administrative Law Judge gave Respondent * * * until October 30, 1986 to file an objection to the motion. Respondent * * * filed no objection, affidavits or exhibit, and made no request for cross-examination of the FDIC's affiants. In the fourteenth pre-hearing order dated January 8, 1987, the FDIC motion of October 15, 1987 was granted by the Administrative Law Judge.
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   The record consists of the following:
   The affidavit of * * * ("* * * p. ____"; the affidavit of * * * ("* * * p. ____"; and 28 exhibits offered by the FDIC. ("Ex. ____".

II. BACKGROUND

   The preceding section provides a skeletal summary of the proceedings. It is now necessary to expand that summary so that the course of events leading to this recommended decision without an oral hearing can be adequately understood.
   This proceeding began with nine respondents. Initially the hearing requests for eight of the respondents were filed by a single attorney, Mr. * * *. For other attorneys later became involved in the case representing various respondents. Mr. * * * continued to represent only respondent * * * throughout the entire proceeding.
   The first prehearing order provided notice of an initial prehearing conference and was issued on February 5, 1986. The last papers filed in the case were submitted by the FDIC on January 30, 1987. During this period of time, approximately forty filings were made by the parties and sixteen orders were issued by the undersigned covering such matters as scheduling of two prehearing conferences and the hearing, prehearing discovery motions regarding interrogatories, depositions and motions to produce documents, motions to default various respondents, and the withdrawal of hearing requests by various respondents. Throughout this avalanche of paperwork, Respondent * * * was served with every motion and order at each and every stop by the other parties and by the Administrative Law Judge. However, Respondent * * * elected not to participate in any meaningful manner, and so stated in correspondence.
   The initial order and notice of prehearing conference was issued by the undersigned on February 5, 1986. This order called for parties to submit their answers, statements of facts, lists of proposed witnesses and exhibits and request for discovery by February 21, 1986. Objections and responses to the February 21 papers were due February 28, 1986.
   On February 19, 1986, a second prehearing order was issued extending the filing due dates of the first prehearing order; the initial filing date was changed to February 28, 1986 and the date for responsive filings was changed to March 7, 1986.
   On February 20, 1986, the FDIC filed a motion for default against Respondent * * * and five others for failure to file an answer to the notice of assessment of civil money penalties as required by FDIC rules and regulations. On February 24, 1986, the FDIC filed an amended motion for default noting that Respondent * * * and one other respondent had failed to respond in any way to the first prehearing order.
   The third prehearing order was issued by the undersigned on March 11, 1986. This order stated that attorney * * * had not yet responded in any fashion to the earlier orders and was technically in default. This order also sought clarification from attorney * * * as to which respondent he was representing.
   On March 13, 1986, the FDIC filed a second amended motion for default against Respondent * * * and three other respondents. The FDIC stated that these respondents had failed to respond in any manner to the orders of the Administrative Law Judge.
   On March 31, 1986, attorney * * * filed a statement that Respondent * * * "has indicated to me that he prefers not to actively oppose the matter". Attorney * * * further stated that it was his understanding that the other respondents for whom he had filed hearing requests had now retained other counsel.
   On April 2, 1986, the first prehearing conference was held in * * * , * * *. Attorney * * * did not attend and Respondent * * * was not present or represented.
   On April 14, 1986, the fifth prehearing order was issued by the undersigned reflecting the orders entered at the prehearing conference. All filings required by the first prehearing order were now to be due on April 28, 1986. Respondent * * * and three others were to be found in default if their answers were not filed within ten days of the date of the fifth prehearing order.
   On May 10, 1986, the sixth prehearing order was issued by the undersigned stating that Respondent * * * and one other respondent had not yet filed answers and that an order of default would be entered against these respondents on May 16, 1986.
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   On May 14, 1986, attorney * * * , on behalf of Respondent * * * , filed an objection to the order of default proposed by the FDIC and requested that entry of such order be denied. No reason for this objection was given by Mr. * * *.
   On May 16, 1986, the undersigned entered the order of default against Respondent * * * and one other respondent for their failure to file answers despite repeated opportunities to do so. The seventh prehearing order was issued by the undersigned on June 13, 1986 denying motions to vacate the order of default against Respondent * * * and one other respondent.
   On July 23, 1986, the eighth prehearing order was issued by the undersigned. This order noted that the previous order of default was not sufficient under FDIC procedural rules and would have to be reissued as a recommended decision in order to comply with FDIC rules and regulations. Prior to issuing such a recommended decision of default, the undersigned, in an attempt to allow respondents every fair opportunity to avoid default, allowed an additional ten days from the date of the order to file answers.
   On July 29, 1986, the other respondent besides * * * who had not yet filed an answer did so. Respondent * * * , on July 29, 1986, filed a "Response to Motion for Default" requesting that default be denied and stating that the assessment was excessive. No explanation for this position was given. On August 1, 1986, Respondent * * * filed an answer and requested that the assessment be stricken and a hearing held.
   On August 21, 1986, the ninth prehearing order was issued by the undersigned establishing dates for the second prehearing conference and the hearing. In this order, the undersigned noted that Respondent * * * had not yet submitted the filings required under the first prehearing order dated February 5, 1986. Therefore, it was ordered that Respondent * * * would not be permitted to offer any exhibits or testimony at the hearing over the objection of any respondent or the FDIC and would not be permitted to cross-examine any witness beyond the scope of the direct examination and cross-examination made by any other party.
   On October 14, 1986, the FDIC filed a motion for a continuance of the hearing which had been scheduled for October 21, 1986. At the time of this motion, four of the nine original respondents had already withdrawn their requests for hearing. The FDIC represented in its motion that four of the five other respondents had indicated to the FDIC that they planned to withdraw their requests for hearing within a week, which action would leave Respondent * * * as the sole respondent. The FDIC further represented that counsel for Respondent * * * had refused to state whether or not he would appear to defend his client and that it would be a poor allocation of government resources to require the FDIC, it witnesses, and the Administrative Law Judge to appear in * * * to conduct a hearing at which neither Respondent * * * nor his counsel were likely to appear. Therefore, the FDIC requested that it be permitted to present its case-in-chief by affidavit reserving to Respondent * * * the opportunity to request or waive cross-examination of the FDIC witnesses.
   On October 16, 1986, the thirteenth prehearing order was issued by the undersigned allowing Respondent * * * until October 30, 1986 to file his response to the FDIC motion of October 14, 1986. If Respondent * * * did not object to the FDIC motion or his objections were not sustained, the FDIC was to file its affidavits in support of its case-in-chief by November 7, 1986. Respondent * * * was then allowed until November 21, 1986 to file his request for cross-examination.
   Respondent * * * filed no objection to the FDIC motion to present its case-in-chief by affidavit and, in fact, filed no response at all to the thirteenth prehearing order. On November 7, 1986, the FDIC filed and served its affidavits in support of its case-in-chief.
   On January 8, 1987, the undersigned issued the Fourteenth Prehearing Order. Since Respondent * * * had filed no objections to the FDIC motion of October 14, 1986 and had filed no request for cross-examination, the FDIC motion was granted and the documents already submitted were accepted as the FDIC case-in-chief. It was further ordered that no additional evidence would be admitted from any party and that both Respondent * * * and the FDIC were to submit proposed findings of fact, conclusions of law and a proposed order by January 30, 1987. Responses to the opposing party's proposed findings of fact, conclu- {{4-1-90 p.A-1169}}sions of law and order were to be filed not later than February 13, 1987.
   On January 30, 1987, FDIC filed its proposed findings of fact, conclusions of law and a proposed order. Respondent * * * submitted no response of any type to the Fourteenth Prehearing Order or to the January 30, 1987 filing of the FDIC.
   In summary, the participation of attorney * * * and Respondent * * * in this proceeding is as follows: The filing of a request for hearing; a statement that Mr. * * * prefers not to actively oppose the matter; an objection to an order of default proposed by the FDIC with no reason given; a request that default be denied based on a bare statement that the assessment was excessive; and a one page answer containing an admission of jurisdictional facts with a general denial of all substantive allegations in the Notice of Assessment of Civil Money Penalties, but with no reasons stated in support of the denial. At no time has Respondent * * * responded to or indicated any serious intention to respond to the case presented by the FDIC. Since Respondent * * * did not object to the FDIC motion to present its case-in-chief by affidavit, did not request cross-examination of the FDIC witnesses, and had already been prohibited from presenting his own witnesses and exhibits because of his failure to file lists of proposed witnesses and exhibits, and having waited a reasonable period for any possible late-filed response, the undersigned is persuaded that proceeding to a recommended decision without a hearing has not compromised any rights of the respondent.

III. FINDINGS OF FACT AND
CONCLUSIONS OF LAW

FINDINGS OF FACT

   1. At all times pertinent to this proceeding, the Bank was a corporation existing and doing business under the laws of the State of * * * , having its principal place of business in * * *. (Admitted in Answer)
   2. The Bank was, at all times pertinent to this proceeding, an insured state nonmember bank subject to the Federal Deposit Insurance Act ("Act") (12 U.S.C. 1811-1831d), the Rules and Regulations of the FDIC (12 C.F.R. Chapter III), and the laws of the State of * * *. (Admitted in Answer)
   3. * * * was, at all times pertinent to this proceeding, an "executive officer" of the Bank as that term is defined in Section 215.2(d) of Regulation O (12 C.F.R. Section 215.2(d)). (Admitted in Answer)
   4. Respondent * * * was, at all times pertinent to this proceeding, a "director" of the Bank as that term is defined in Section 215.2(c) of Regulation O (12 C.F.R. Section 215.2(c)). (Admitted in Answer)

CONCLUSION OF LAW:

   A. The FDIC has jurisdiction over the Bank, each Respondent and the subject matter of this proceeding.

FINDINGS OF FACT:

   5. Field Office Supervisor * * * is a highly trained commissioned bank examiner with approximately 20 years experience in the analysis of the financial condition of banks, including compliance with applicable laws and regulations. (Trost pp.1–2)
   6. * * * conducted examinations of the Bank as examiner-in-charge, as of May 9, 1981 and August 8, 1984. (Exh. 1 and 2)
   7. Deputy Regional Director * * * is a highly trained commissioned bank examiner with approximately 25 years experience in bank supervisory matters, including the review of reports of examination from the * * * Field Office of the FDIC and of civil money penalty actions initiated by the FDIC. (* * * pp.1–2)

CONCLUSION OF LAW:

   [.1]B. The conclusions and opinions of * * * and * * * in bank regulatory matters are entitled to be considered as the opinions and conclusions of expert witnesses. (See also, Sunshine State Bank v. Federal Deposit Insurance Corporation. 783 F. 2d 1580 (11th Cir. 1986)

FINDINGS OF FACT:

   8. * * * was a corporation in which Respondent * * * had a one-third interest. (* * * p.7)
   9. Respondent * * * was one of two incorporators of * * * , was a signator on the * * * account at the Bank, and did not deny to the FDIC his interest in * * * at a board of director's meeting of the Bank. (* * * p.7, Exs. 19 & 20)

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CONCLUSIONS OF LAW:

   C. * * * was a "related interest" of Respondent * * * as that term is defined in Section 215.2(k) of Regulation O (12 C.F.R. Section 215.2(k)).

FINDINGS OF FACT:

   10. The Bank extended credit to * * * on June 19, 1984 in the amount of $136,257.51. (Ex. 18)
   11. The extension of credit to * * * was approved by the Bank's board of directors on July 2, 1984, and Respondent * * * was present at the board meeting. (* * * p.8, Ex. 15 p.4)
   12. The extension of credit to * * * was unsecured and for the purpose of engaging in a farm operation located in * * *. No financial information for the company was available in the Bank's file, and the loan had previously been classified Substandard by the FDIC at a May 9, 1981 examination. The Bank had included accrued interest in the amount of the renewal of the extension of credit. In addition, there was no formal repayment plan for the indebtedness and bank officers were unaware of any source and manner of repayment. (* * * p.8, Ex 1 p.9, Ex. 2 p.25)
   13. The condition and features of the * * * loan existed as of the date of its approval by the Bank's board of directors on July 2, 1984. (* * * p.8)
   14. Extensions of credit classified "Substandard" or "Doubtful" exhibit more than the normal risk or repayment. (* * * pp.3–4; See also instructions on Ex. 2 p.2)
   15. As of August 8, 1984, the extension of credit to * * * was classified Doubtful by the FDIC. (Ex. 2 p.25)

CONCLUSION OF LAW:

   D. The extension of credit to * * * involved more than the normal risk of repayment and presented other unfavorable features, in violation of Section 215.4(a) of Regulation O (12 C.F.R. Section 215.4(a)).

FINDING OF FACT:

   16. As of August 8, 1984, twenty-five (25) percent of the shares of stock outstanding in * * * were owned by the Bank vice-president, * * *. (* * * p.4, Exs. 9 and 10)

CONCLUSION OF LAW:

   E. * * * was a "related interest" of * * * as that term is defined in Sections 215.2(k) and 215.2(b)(1)(i) of Regulation O (12 C.F.R. Section 215.2(i) and 215.2(b)(1)(i)).

FINDINGS OF FACT:

   17. The Bank extended credit to * * * on the following dates in the corresponding amounts:

February 3, 1984 $20,000
February 10, 1984 $40,000
March 2, 1984 $30,000
March 31, 1984 $10,000
July 19, 1984 $10,000
July 28, 1984 $25,000
_______
TOTAL $135,000

(Exs. 3–8)
   18. The total of $135,000.00 in loans to * * * was classified Substandard by the FDIC as of August 8, 1984. (Ex. 2 p.27)
   19. For all loans made by the Bank to * * * on or after February 10, 1984, ($115,000) the credit was unsecured, the financial statement of the company showed an unfavorable ratio of total liabilities to net worth, and excessive credit was extended in view of the new and undercapitalized nature of the business. (Ex. 2 p.27)
   20. Except for the loan to * * * on February 3, 1984, excessive risk of loss was evident on all other loans to that company as of the date they were made. (* * * p.5)

CONCLUSION OF LAW:

   F. The extensions of credit to * * * on February 10, 1984, March 2, 1984, March 31, 1984, July 19, 1984 and July 28, 1984 involved more than the normal risk of repayment and presented other unfavorable features and were in violation of Section 215.4(a) of Regulation O (12 C.F.R. Section 215.4(a)).

FINDING OF FACT:

   21. * * * Farms is a designation of the farm business of * * * and is a sole proprietorship. (* * * p.5)

CONCLUSION OF LAW:

   G. * * * Farms is a "related interest" of * * * as that term is defined in Section 215.2(k) and 215.2(b)(1)(i) of Regulation O (12 C.F.R. Sections 215.2(k) and 215.2(b)(1)(i)).

FINDINGS OF FACT:

   22. The Bank extended credit to * * * Farms on the following dates in the corresponding amounts:

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January 3, 1984 $35,000
January 21, 1984 $90,000
February 8, 1984 $10,000
June 15, 1984 $5,000
_______
TOTAL $140,000

(Exs. 11–14)
   23. From January 3, 1984 through August 8, 1984, the Bank's aggregate lending limit, as defined in Section 215.4(c) of Regulation O (12 C.F.R. Section 215.4(c)), never exceeded $185,000. (Ex. 17, * * * pp. 5–7, Ex. 2 p.13)
   24. The aggregate of extensions of credit to * * * and * * * Farms on February 10, 1984 equaled $195,000. (Ex. 17, * * * pp. 5–7)
   25. The aggregate of extensions of credit to * * * and * * * Farms outstanding on March 2, 1984 equaled $225,000. (Ex. 17)
   26. The aggregate extensions of credit to * * * and * * * Farms outstanding on March 31, 1984 equaled $235,000. (Ex. 17)
   27. The aggregate extensions of credit to * * * and * * * Farms outstanding on June 15, 1984 equaled $240,000. (Ex. 17)
   28. The aggregate extensions of credit to * * * and * * * Farms outstanding on July 19, 1984 equaled $250,000. (Ex. 17)
   29. The aggregate extensions of credit to * * * and * * * Farms outstanding on July 28, 1984 equaled $275,000. (Ex. 17)

CONCLUSION OF LAW:

   H. Bank extensions of credit to * * * or * * * Farms on February 10, 1984, March 2, 1984, March 31, 1984, June 15, 1984, July 19, 1984 and July 28, 1984, as indicated in Proposed Findings of Fact 23 through 28, exceeded the Bank's aggregate lending limit and, therefore, were made in violation of Section 215.4(c) of Regulation O (12 C.F.R. Section 215.4(c)).

FINDINGS OF FACT:

   30. Between March 2, 1984 and August 8, 1984, five percent of the Bank's capital and unimpaired surplus never exceeded $62,200. (Ex. 17, * * * pp.5–7)
   31. On March 2, 1984, the aggregate extensions of credit outstanding to * * * equaled $90,000. (Ex. 17)
   32. On March 31, 1984, the aggregate extensions of credit outstanding to * * * equaled $100,000. (Ex. 17)
   33. On July 19, 1984, the aggregate extensions of credit outstanding to * * * equaled $110,000. (Ex. 17)
   34. On July 28, 1984, the aggregate extensions of credit outstanding to * * * equaled $135,000. (Ex. 17)
   35. None of the loans to * * * received the prior approval of the board of directors of the Bank. (* * * p.6–7), Exs. 11–15, 17)

CONCLUSIONS OF LAW

   I. Bank extensions of credit to * * * on March 2, 1984, March 31, 1984, July 19, 1984 and July 28, 1984, as indicated in Proposed Findings of Fact number 30 through 33, were made in violation of Section 215.4(b) of Regulation O (12 C.F.R. Section 215.4(b)).

FINDINGS OF FACT:

   36. On January 3, 1984, the Bank extended credit in the amount of $34,000 to * * * , wife of * * *. (* * * p.9, Ex. 22)
   37. As of January 3, 1984, five percent of the bank's capital and unimpaired surplus did not exceed $62,206. (* * * p.9)
   38. The Bank extended credit directly to * * * on October 1, 1983 in the amount of $59,000, on January 3, 1984 in the amount of $34,404.10 and on January 3, 1984 in the amount of $20,000, for a total outstanding indebtedness on January 3, 1984 of $110,004.10. (Exs. 24–26)
   39. The proceeds of the extension of credit to * * * (together with other funds of * * *) were paid by the Bank on behalf of * * * to * * * Bank, * * *, and * * * Bank, * * * on January 3, 1984 in the amounts of $16,635.61 and $51,368.49. (Ex. 23, * * * p.9))
   40. The extension of credit to * * * received the approval of the Bank's loan committee after it was granted, on January 4, 1984. (Ex. 16, * * * p.9)
   41. The extension of credit to * * * did not receive the prior approval of the Bank's board of directors. (* * * p.9)

CONCLUSIONS OF LAW:

   J. The Bank extension of credit to * * * was made indirectly for the benefit of * * * and, consequently, was considered made to him within the meaning of Section 215.3(f) of Regulation O (12 C.F.R. Section 215.3(f)).
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   K. The Bank extension of credit to * * * for the benefit of * * * was made in violation of Section 215.4(b) of Regulation O (12 C.F.R. Section 215.3(f)).

FINDINGS OF FACT:

   42. Respondent * * * was president and chairman of the board at the * * * Bank * * * at the time the actions identified in the Notice of Assessment took place. (* * * p.2 Ex. 1 p.34)
   43. Respondent * * * is an attorney. (Ex. 2 p.59)
   44. The loans to * * * and * * * were self-serving in nature and were made for the benefit of Respondent * * *. (* * * p.2)
   45. An extension of credit to * * * had previously been adversely classified by the FDIC as of May 9, 1981. (* * * p.2, Ex. 1 p.9)
   46. As of May 9, 1981, the Bank was cited by the FDIC for violations of Regulations O, including transactions involving * * *. (Ex. 1 p.6)
   47. Member of a Bank's board of directors are furnished copies of FDIC examination reports. (* * * p.8)
   48. Extension of credit to * * * and * * * have, or will result, in a loss to the Bank. (* * * p.10)
   49. The extension of credit to * * * and the use of the proceeds by Respondent * * * demonstrates an effort by Respondent * * * to use subterfuge to obtain funds. (* * * p.3, * * * p.10)
   50. As of August 8, 1984, Bank, the net worth of Respondent * * * was indicated as $1,359,200. (* * * p.10 Ex. 2 pp.36 and 59)
   51. Respondent * * * , as a member of the Bank's board of directors, did not follow normal and prudent practices in supervising the affairs of the Bank. (* * * pp.10–11)
   52. Respondent * * * participated in the approval of the loans to * * *. (* * * p.3)

CONCLUSION OF LAW:

   L. The assessment of a civil money penalty against Respondent * * * in the amount of $35,000 is appropriate in consideration of the statutory factors required to be considered by Section 18(j)(3)(B) of the Act (12 U.S.C. Section 1828(j)(3)(B)).

IV. DISCUSSION

   A. Statutory Background

   [.2]The Financial Institutions Regulatory and Interest Rate Control Act of 1978 ("FIRIRCA") (Pub. L. No. 95–630, 92 Stat. 3641) was enacted into law on November 10, 1978 and became effective on March 10, 1979. Section 104 of Title I of FIRIRCA imposes a statutory prohibition against loans or extensions of credit to executive officers, directors, principal shareholders, and their related interests, where the loan or extension of credit to that person and all related interests of that person, exceed in the aggregate an amount determined by the appropriate federal banking agency (that is, the higher of $25,000 or 5 percent of the Bank's capital and unimpaired surplus up to a maximum of $500,000),1 unless such loan or extension of credit is approved in advance by a majority of the entire board of directors.
   That prohibition is contained in Section 22(h)(2) of the Federal Reserve Act (12 U.S.C. Section 375b(2)) which provides that:

       (2) No member bank shall make any loan or extension of credit in any manner to any of its executive officers of directors, or to any person who directly or indirectly or acting through or in concert with one or more persons owns, controls, or has the power to vote more than 10 per centum of any class of voting securities of such member bank, or to any company controlled by such an executive officer, director or person, or to any political or campaign committee the funds or services of which will benefit such executive, director, or person or which is controlled by such executive officer, director or person, where the amount of such loan or extension of credit, when aggregated with the amount of all other loans or extensions of credit the outstanding by such bank to such executive

    1 FIRIRCA had established this amount as $25,000 (92 Stat. 3641, 3644 (1978)). Section 422 of the Garn-St. Germain Depository Institutions Act of 1982 substituted for this $25,000 amount an amount to be determined by regulation by the appropriate federal banking agency. On September 20, 1983, the Board of Governors of the Federal Reserve System adopted an amendment to Regulation O establishing this amount as the higher of $25,000 or 5 percent of the Bank's capital and unimpaired surplus, but in no event greater than $500,000. See 48 Fed. Reg. 804 (1983) (codified at 12 C.F.R. Section 215.4(b)). On September 21, 1983, the FDIC adopted the same limit for nonmember insured banks and national banks. 48 Fed. Reg. 42,970 (1983) (Codified at 12 C.F.R. Section 337.3(b)).
    {{4-1-90 p.A-1173}}officer, director, or person and to all companies controlled by such executive officer, director, or person and to all political or campaign committees the funds or services of which will benefit such executive officer, director, or person or which are controlled by such executive officer, director, or person, would exceed an amount prescribed in a regulation of the appropriate Federal banking agency, unless such loan, line of credit, or extension of credit is approved in advance by a majority of the entire board of directors with the interested party abstaining from participating directly or indirectly in the voting.
   The statutory prohibition provided in Section 22(h) of the Federal Reserve Act (12 U.S.C. Section 375b) was made applicable to insured banks which are not members of the Federal Reserve System by Section 108 of Title I of FIRIRCA, which amended Section 18(j) of the Federal Deposit Insurance Act (12 U.S.C. Section 1828(j)). As amended, Section 18(j)(2) provides in relevant part:
       The provisions of Section 22(h) of the Federal Reserve Act, as amended . . . shall be applicable to every nonmember insured bank in the same manner and to the same extent as if such nonmember insured bank were a State member bank.
   Section 22(h)(7) of the Federal Reserve Act (12 U.S.C. Section 375(7)) authorizes the Board of Governors of the Federal Reserve System to adopt regulations that implement the prohibition contained in Section 22(h), and provides in part as follows:
       The Board of Governors of the Federal Reserve System may prescribe such rules and regulations, including definitions of terms, as it deems necessary to effectuate the purposes and to prevent evasions of this subsection.
   Pursuant to the foregoing statutory authority (as well as the authority in other sections of the Federal Reserve Act), the Board of Governors of the Federal Reserve System, effective March 10, 1979, adopted Regulation O, in implementation of the statutory prohibition against the extension of credit to executive officers, directors, principal shareholders, or their related interests by member and nonmember banks, contained in Section 22(h)(4) of the Federal Reserved Act (12 U.S.C. Section 375b(4)).
   The prohibition against extensions of credit that exceed in the aggregate an amount determined by the appropriate federal agency, without prior board of directors' approval, is contained in Section 22(h)(2) of the Federal Reserve Act (12 U.S.C. 375b(2)) and is implemented by Section 215.4(b) of Regulation O (12 C.F.R. Section 215.4(b)). That section of the regulation (as amended) is as follows:
       1. No member bank may extend credit . . . to any of its executive officers, directors, or principal shareholders or to any related interest of that person in an amount that, when aggregated with the amount of all other extensions of credit to that person and to all related interests of that person, exceeds the higher of $25,000 or 5 percent of the member bank's capital and unimpaired surplus, unless: (i) The extension of credit has been approved in advance by a majority of the entire board of directors of that bank, and (ii) the interested party has abstained from participating directly or indirectly in the voting. In no event may a member bank extend credit to any one of its executive officers, directors, or principal shareholders, or to any related interest of that person, in an amount that, when aggregated with all other extensions of credit to that person, and all related interests of that person, exceeds $500,000, except by complying with the requirements of this paragraph.
   Pursuant to its authority to adopt rules and regulations (12 U.S.C. Section 1819), the Board of Directors of the FDIC adopted Section 337.3(a) of the FDIC Rules and Regulations which applied Regulation O to state nonmember banks effective October 22, 1982. For purposes of Section 215.4(b), Section 337.3(b) of the FDIC Rules and Regulations requires advance approval by a majority of the bank's entire board of directors for the extensions of credit to a bank's executive officers, directors, principal shareholders, and their related interests when the same lending limit as in Section 215.4(b) is exceeded.
   Section 22(h)(1) of the Federal Reserve Act prohibits extending credit to a bank insider or that person's related interests when the aggregate of the extensions of credit would exceed the limits on a loan to a single borrower established by Section 5200 {{4-1-90 p.A-1174}}of the Revised Statutes. Section 215.4(c) of Regulation O provides:
       No member bank may extend credit to any of its executive officers or principal shareholders or to any related interest of that person in an amount that, when aggregated with the amount of all other extensions of credit by the member bank to that person and all related interests of that person, exceeds the lending limit of the member bank specified in Section 215.2(f) above.

   [.3]Section 215.2(f) of Regulation O defines the aggregate lending limit as 15 percent of the Bank's unimpaired capital and unimpaired surplus for unsecured loans plus an additional 10 percent for loans secured by readily marketable collateral with reliable and continuously available price quotations.
   To combat the practice of granting loans to bank insiders or preferential terms, Section 22(h)(3) provides:
       No member bank shall make any loan or extension of credit in any manner to any of its executive officers or directors, or to any person who directly or acting through or in concert with one or more persons, owns, controls, or has the power to vote more than 10 percentum of any class of voting securities of such member bank, or to any company controlled by such executive officer, director, or person,. . . unless such loan or extension of credit is made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of payment or present other unfavorable features.
   Section 215.4(a) of Regulation O implements this prohibition essentially using the statutory language.
   B. The Civil Money Penalty Assessed Is Appropriate In Consideration Of The Required Statutory Factors.

   [.4] When the FDIC makes the determination that it is appropriate to assess a civil money penalty, the agency is required to consider certain statutory factors set forth in Section 18(j)(3)(B) and the ACT (12 U.S.C. 1828(j)(3)(B)). That section provides:

       In determining the amount of the penalty the Corporation shall take into account the appropriateness of the penalty with respect to the size of financial resources and good faith of the member bank or the person charged, the gravity of the violation, the history of previous violations, and such other matters as justice may require.
   The information regarding the financial resources of Respondent * * * available in the record is the statement by * * * that the net worth of Respondent * * * was indicated to be $1,359,200. This statement is based upon the loan and credit files of Respondent * * * maintained by the Bank. (* * * p.10, Ex. 2 pp. 36 & 59). It should be noted that the information regarding the financial resources of Respondent * * * was derived from data he supplied to the Bank related to the loans. Based upon this uncontroverted evidence, a civil money penalty of $35,000 would be appropriate when considered in light of the financial resources of the Respondent.
   Moreover, in considering the net worth and financial resources of respondent, the undersigned finds the amount of the penalty to be extremely fair. The penalty amounts to only 2.6 percent of respondents' $1,359,200 net worth. However, I consider this penalty as marginally adequate to serve notice upon respondent of the importance of complying with the requirements of the Act and regulations in order to prevent further violations.
   When considering the good faith of the Respondent, a picture emerges of an individual acting to circumvent bank regulations, and in particular, Regulation O. Regarding the extensions of credit to * * * Farms and * * * , which exceeded the Bank's aggregate lending limit, Respondent * * * was a director who participated in the approval of all of those loans. (* * * p.5, Ex. 15) Six of the ten loans were made in violation of Section 215.4(c) of Regulation O. There is no evidence that Respondent * * * made any attempt to prevent the bank from extending credit in violation of the lending limit, even though as an experienced banker and lawyer he would be expected to know the limits imposed by Regulation O.
   It has also been demonstrated that five of the six loans made to * * * were made at a time when the aggregated extensions of credit to that entity exceeded 5 percent of the Bank's capital and unimpaired surplus and did not receive the prior approval of {{4-1-90 p.A-1175}}the Bank's board of directors as required by Section 215.4(b) of Regulation O. (* * * pp.6–7, Ex. 17) Once again it appears that Respondent * * * participated in the approval of all of the loans. (Ex. 15) He has never claimed that he was laboring under a misapprehension of the law or of the facts of the situation. Rather, it has been demonstrated that the Respondent participated in the supervision of the Bank's affairs, which were conducted in an imprudent manner. (* * * p.10)
   The loan to * * * was made at the same time as a loan to Respondent * * * , and the proceeds of both loans were deposited in the same accounts in Respondent's name. Under these circumstances, and in the absence of evidence of any personal use of the proceeds by * * * , the undersigned concludes that the proceeds of both loans were used solely for the benefit of Respondent * * *. This demonstrates an attempt by Respondent * * * to evade banking regulations through subterfuge. Already having excessive credit at the Bank, Respondent * * * utilized the creditworthiness of his wife to funnel more funds to his benefit. No argument of good faith can therefore be made on behalf of Respondent * * *.
   Finally, Respondent * * * participated in the extension of credit to his related interest, * * *, at a time when he knew, or reasonably should have known, that the credit displayed more than the normal risk of repayment and other unfavorable features. (* * * p.8) Respondent * * * has not presented any evidence disputing the classification given by the examiner, nor has he argued that he was laboring under a misapprehension as to the credit quality of the loan. Because the loan had been previously classified in the 1981 report of examination, Respondent * * * had been placed on notice that the credit should have been carefully scrutinized.
   The undersigned is persuaded that these violations are serious and not inadvertent or ambiguous, based in part upon the deception used by Respondent * * * in obtaining the extensions of credit, and also because of the large number of violations. In addition, the receiver for the now defunct bank has been forced to initiate legal actions to collect on loans to * * * and * * * or has been forced to write off some of those loans as loss. (* * * p.10) Obviously, whenever a bank suffers an economic loss as a result of the violations of Regulation O, the severity of the violations is increased.
   Respondent * * * had considerable experience, not only as a director of the * * * Bank, * * * , but also as the president of the * * * Bank, * * * and as its chairman of the board (* * * p.2). Because of this, he should be held to a higher standard of knowledge regarding the requirements of Regulations O and the analysis of the credit-worthiness of the Bank's customers. (* * * p.3) Consequently, in view of Respondent * * *' lack of good faith in the violations, his financial resources, and the seriousness of the violations in which he participated and, in some instances gained, an assessment of a civil money penalty in the amount of $35,000 is appropriate.

V. ORDER TO PAY

   After taking into account the appropriateness of the penalty with respect to the financial resources and good faith of * * *, the gravity of the violations, the history of previous violations, and such other matters as justice may require, it is:
   ORDERED, that by reason of the transactions and violations of law and regulation evidenced in the record of this action, a civil money penalty in the amount of $35,000 be, and is, assessed against * * * pursuant to Section 18(j)(3) of the Act (12 U.S.C. Section 1828(j)(3)).
   FURTHER ORDERED, that this Order shall be effective upon service on * * * and that the penalty ordered shall be payable after 20 days from the date of such service.
   By Direction of the Board of Directors.
   Dated at Washington, D.C. this ____day of ____, 1987.

Hoyle L. Robinson
Executive Secretary
/s/ Allyn A. Brooks
Administrative Law Judge

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