Federal Deposit
Insurance Corporation

{{4-1-90 p.A-1187}}
   [¶5110] FDIC Docket No. FDIC 86-56e (1-19-88)

   Bank president was not removed despite findings of previous poor lending practices as branch manager of another bank. A number of mitigating factors led the FDIC board away from removal.

   [.1] Prohibition, Removal, or Suspension—FDIC Authority
   The sanction of removal is within the discretion of the FDIC.

   [.2] Prohibition, Removal, or Suspension—Defenses—Lack of Knowledge
   These factors made removal too harsh a remedy: respondent was young and inexperienced when the poor lending practices occurred; he didn't know of or participate in the fraud underlying the loans; he didn't personally benefit from the fraud or the loans he made; he was at a relatively low level in the bank's managerial hierarchy; and he has been bank president for three years without a recurrence of the problems or other managerial deficiencies.

In the Matter of
***, Individually, and as president and a
participant in the conduct of the affairs of
*** BANK
(Insured State Nonmember Bank)


DECISION AND ORDER
FDIC 86-56e

   This is a removal proceeding under section 8(e)(2) of the Federal Deposit Insurance Act (the "Act"), 12 U.S.C. §1818(e)(2), against *** ("Respondent"). The Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Intention to Remove From Office and/or To Prohibit From Further Participation (the "Notice") on March 7, 1986. Under section 8(e)(2) of the Act the FDIC is empowered to remove an officer from an insured bank for his action at another insured bank. Mr. *** is currently the president of the *** Bank, *** ("***").
   The FDIC alleged that the Respondent, while branch manager at the *** Bank, N.A., *** ("***"), demonstrated his willful and continuing disregard for the safety and soundness of *** in the making of a number of mortgage loans and, as a result of his action, *** suffered substantial financial loss. The FDIC further alleged that the actions of the Respondent at *** evidence his unfitness to continue as the president and to participate in the conduct of the affairs of ***.
   A six-day formal administrative hearing was conducted by Kenneth E. Stewart, Chief Administrative Law Judge, Social Security Administration ("ALJ"), in ***. Briefs and reply briefs were filed by both parties. On September 21, 1987, the ALJ issued his Recommended Decision, Findings of Fact, Conclusions of Law ("Recommended Decision") which recommended removal of the Respondent from his position as president of the *** Bank, *** and issuance of an order prohibiting his further participation in the affairs of *** or any other bank insured by the FDIC. Respondent filed extensive exceptions to the Recommended Decision; the FDIC filed limited exceptions to the ALJ's Findings of Fact.

Factual Summary

   During the period between January, 1983 and October, 1984 in which *** was branch manager of the ***, he was responsible for making or approving approximately 225 mortgage loans to customers of ***. Of those loans, 120 loans were foreclosed by ***, which resulted in a loss of approximately $3.8 million dollars.¹
   The Board of Directors ("Board") has thoroughly reviewed the record in this case including the transcript of the hearing, the submissions of the parties, the Recommended Decision, and the exceptions. The Board finds that Respondent engaged in multiple poor lending practices and made mortgage loans to *** customers despite numerous "red-flags" or signals of weakness which would have induced a prudent lending officer to make further inquiry or to refuse to make the loan at all. The

   [.1,.2] However, section 8(e) of the Act vests the Board with discretion regarding the imposition of the sanction of removal. 18 U.S.C. §1818(e)(2) and (5). Based upon its careful review of the entirety of the circumstances surrounding this proceeding, this Board has determined, in its discretion, not to order removal of Mr. ***. This conclusion is in no way intended to condone or excuse Respondent ***' prior conduct and actions. In addition, nothing in this Decision should be interpreted as an indication that the FDIC will tolerate poor lending practices which threaten the soundness of financial institutions and, thus, the soundness of the insurance fund. It merely recognizes that the equities of this case make removal too harsh a remedy. Among others, the Board considered the following factors. Respondent was a young, somewhat inexperienced manager. There is no evidence in the record to indicate that Respondent had knowledge of or participated in the fraud scheme which surrounded these mortgage loans. There is also no evidence that Respondent personally benefited in any way from the fraud or from the loans he made. Respondent was at a relatively low level in the managerial hierarchy of ***. His lending activity was at least tacitly approved by a supervisor to whom Respondent raised those few concerns which had been expressed to him by subordinates. In addition, because there is no evidence of either personal dishonesty or personal gain by Respondent, the Board, in its discretion, has noted that Respondent has spent almost three (3) years as president of *** without repetition of the kinds of problems experienced at *** or other managerial deficiencies.
   While no one of the factors involved here would be individually the basis to overrule the recommendation of the ALJ, the confluence of all the factors present in this case has led to the Board's determination that removal of Respondent does not further the Board's fulfillment of the purposes of section 8(e) or any other statutory and regulatory obligation. Therefore, this proceeding against Respondent is dismissed.

ORDER

   For the reasons set forth in the Decision, the Board hereby ORDERS that this proceeding be dismissed.
   Dated at Washington, D.C., this 19th day of January, 1988.

/s/ Hoyle L. Robinson
Executive Secretary

Recommended Decision
Findings of Fact,
Conclusions of Law
FDIC 86-56e

   I. SUMMARY OF PROCEEDINGS

   The Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Intention to Remove From Office and/or To Prohibit From Further Participation ("Notice of Intention") against the Respondent *** ("Respondent") on March 7, 1986. The Notice was issued under authority of 12 U.S.C. Section 1818(e)(2) which empowers the FDIC to remove an officer from an insured bank for his actions at another insured bank. The FDIC alleges that the Respondent, while branch manager at the *** Bank, *** demonstrated his willful and continuing disregard for the safety and soundness of *** in the making of a number of mortgage loans and as a result of his action, *** suffered substantial financial loss. The FDIC further alleges that the actions of the Respondent at *** evidence his unfitness to continue as the president and to participate in the conduct of the affairs of the *** Bank.
   A six-day formal administrative hearing was conducted by the undersigned Administrative Law Judge ("ALJ"). The hearing commenced on January 20, 1987, in ***, and was concluded on January 27, 1987. During the course of the hearing, sworn testimony was received from twelve witnesses, seven of whom testified on behalf of the FDIC and five on behalf of the Respondent. The hearing record consists of the following: a transcript consisting of 6 volumes [Volume 1 will correspond with testimony given on January 20; Volume 2 with January 21; Volume 3 with January 22; Volume 4 with January 25; Volume 5 with January 26 and Volume 6 with January 27] and exhibits, 1 through 143 offered by the {{4-1-90 p.A-1189}}FDIC and 200 through 367 (excluding number 350) offered by the Respondent.

   II. FINDINGS OF FACT

   1. *** (Respondent) was the branch manager of the *** Bank, N.A., *** from January 1, 1983 through October 26, 1984, (Stipulated Fact 1).
   2. *** was, at all times pertinent to these proceedings, a national bank, the deposits of which were insured by the FDIC (Stipulated Fact 2).
   3. The Respondent is currently the president of the *** Bank, ***, a state non-member bank with its deposits insured by the FDIC (Stipulated Facts 3 and 4.)
   4. From January 1973 until September 1982, the Respondent had been employed by *** in such capacities as collection manager in the installment loan department, assistant lending officer, assistant manager of the installment loan program, junior commercial lending officer, and branch manager at the *** branch of ***. His duties included handling small floor plan lines of credit, making customer loans, and familiarizing himself with various aspects of commercial lending (Tr. Vol. 5, pages 9–12 and 20).
   5. While the Respondent was branch manager of the *** branch, 11 real estate loans were originated at the branch. This was the extent of his real estate mortgage loan experience before his transfer to the *** branch (Tr. Vol. 1, page 100; Vol. 5, page 23).
   6. *** was the president of *** when *** became manager of the *** branch and held such position until September 19, 1983, at which time *** succeeded him. Mr. *** held that position at the time of the hearing (FDIC Ex. 139).
   7. While *** was the manager of the *** branch, ***, ***'s manager of retail banking, was his immediate supervisor (FDIC Ex. 139).
   8. When *** transferred downtown shortly after *** Bank became a branch, Respondent and *** were left to handle all real estate loans (Tr.. Vol.. 5, page 28).
   9. *** trained *** by answering his questions and telling him to work with Mr. ***'s old files to learn real estate loan procedures (Tr. Vol. 5, pages 28 and 40).
   10. In 1983 and 1984 ***, a principal in *** and a co-owner of *** and ***, brought bogus borrowers to *** and assisted them in falsifying applications to obtain loans for the ostensible purpose of purchasing properties from ***. In many cases Mr. *** paid the individuals to play the role of a borrower (Tr. Vol. 2, pages 6–7 and Stipulated Fact 6).
   11. Between January 1983 and October 14, 1985, approximately 225 mortgage loans were made to purchasers of *** properties at *** (Tr. Vol. 1, page 27).
   12. In March 1985, *** initiated approximately 120 foreclosure actions against properties involving *** mortgage loans. Additionally, another six to eight foreclosures were initiated at a later date (Tr. Vol. 1, page 28).
   13. FDIC Exhibits 1 through 113 are true and accurate copies of *** records for 113 mortgage loans to *** customers made at *** between September 1983 and September 1984. These mortgage loans were foreclosed on by *** (Stipulated Fact 12; Tr. Vol. 1, page 28; and FDIC Exhibit 119).
   14. On 83 of the loans made to customers of *** which were foreclosed by *** either one or both of the borrowers worked for ***, ***, or *** (Stipulated Fact 5).
   15. In 1983, Respondent announced to the employees of *** that the branch would be making quite of [a] number of mortgage loans to applicants who were buying property built by Mr. *** (Tr. Vol. 3, page 5).
   16. ***, assistant manager of the *** branch of ***, observed Mr. *** come in with the applicants and sit with them while the Respondent took their applications (Tr. Vol. 3, page 8).
   17. In mid 1983 ***, at ***' request, started to become involved in taking applications from *** customers. Mr. *** was present when Ms. *** took the applications (Tr. Vol. 3, page 10).
   18. The customers provided information as to name, address, and employment. On more than one occasion Mr. *** assisted the applicants in providing information about salary and income (Tr. Vol. 3, page 11).
   19. After the application was completed, the bank would obtain a credit bureau report through an in-house machine which was connected to a local credit bureau (Tr. Vol. 3, page 12).
{{4-1-90 p.A-1190}}
   20. All *** related loans were processed in the same manner. *** participated in about one-half of the *** related mortgage loans (Tr. Vol. 3, pages 14 and 15).
   21. All concerns about applicants' debt-to-income ratios and problem credit reports were referred to *** (Tr. Vol. 3, pages 12 and 23).
   22. The Respondent corrected problems involving credit reports or debt-to-income ratios after conferring with Mr. *** (Tr. Vol. 3, page 17).
   23. *** does not recall any instance where a loan was denied because of information on a credit report (Tr. Vol. 3, page 19).
   24. Appraisals of *** related property were ordered by Mr. ***'s office (Tr. Vol. 3, page 19).
   25. Although various employees assisted in processing mortgage loans to *** customers, all questions or concerns regarding these applications were directed to Mr. *** (Tr. Vol. 3, page 24).
   26. *** does not believe that any independent verification was made of information on an application or the source of the down payment (Tr. Vol. 3, page 28).
   27. At closings *** related borrowers were always accompanied by a representative from Mr. ***'s office (Tr. Vol. 3, page 27).
   28. In situations involving repeat *** borrowers, a new application was not taken. Instead, the bank transferred information from the first application to another application, which was signed by the borrower at the closing of the second loan (Tr. Vol. 3, page 30).
   29. In accordance with instructions from ***, coupon books for the *** mortgage loans were sent to Mr. ***'s office (Tr. Vol. 3, page 35).
   30. During Mr. ***' absence from the bank during the latter part of 1983, *** worked more closely with ***. However, she communicated with Mr. *** about the *** related loans (Tr. Vol. 3, pages 36 and 55).
   31. *** informed Respondent about several concerns, including the concentration of *** related borrowers, the fact that young people had large downpayments, and the fact that some borrowers were coming in for another mortgage soon after closing on their first piece of property (Tr. Vol. 3, pages 37 and 38).
   32. ***, former personal banker at ***, prepared loan analysis sheets for mortgage loan applications in 1983 and 1984. At the instruction of ***, he contacted *** for verification of a potential borrower's income (Tr. Vol. 3, page 105, 106).
   33. *** expressed his concerns about the number of young borrowers with high incomes and the number of *** related borrowers with *** and *** (Tr. Vol. 3, page 110).
   34. The Respondent told *** and *** that he had discussed their concerns with Mr. *** (Tr. Vol. 3, pages 95 and 128).
   35. Only one inspection of property related to an *** loan was made (Tr. Vol. 5, page 42).
   36. Mr. *** believed *** had inspected some of the *** properties. He never instructed him against inspecting these properties (Tr. Vol. 6, page 137).
   37. The Respondent noted ambiguities in the appraisals. The cover letter would list an amount as of a certain date, while the body of the appraisal indicated the property was incomplete (Tr. Vol. 5, page 95).
   38. The Respondent did not discuss these ambiguities with the appraiser (Tr. Vol. 5, page 95).
   39. The Respondent was aware some of the properties were closing prior to their completion. He did not do any inspections to make sure that they were completed at a later date (Tr. Vol. 5, page 96).
   40. In 1983, the Respondent knew of situations in which the first property owned by a borrower had not sold by the closing date of the mortgage on the second property (Tr. Vol. 5, page 98).
   41. In cases of rollover loan transactions, Mr. *** assumed that the first loan would be closed within days of the second one (Tr. Vol. 6, pages 125 and 126).
   42. Shortly before October 15, 1984, *** informed Mr. *** that some of the loans in rollover transactions were not paying out as they should have (Tr. Vol. 6 pages 123 and 124).
   43. Until October 15, 1984, Mr. *** was not aware that houses were incomplete when the *** related mortgage loans were made (Tr. Vol. 6, page 127).
   44. In the spring or summer of 1984, Mr. *** asked *** whether he was making sure the homes on which he was making loans were completed. He replied that he had {{4-1-90 p.A-1191}}checked out the situation (Tr. Vol. 6, pages 136 and 137).
   45. In March or April 1984, Mr. *** noted an increase in the number of mortgage loans outstanding at *** (Tr. Vol. 2, pages 24–25).
   46. Sometime around May 1984, Mr. *** met with the Respondent and Mr. *** and instructed them to limit the mortgage portfolio to about $500,000 per month (Tr. Vol. 1, page 158).
   47. Because the outstanding mortgage loan figures continued to increase, Mr. *** met with the Respondent and Mr. *** again in late August 1984 and told them to stop all mortgage lending (Tr. Vol. 1, page 160).
   48. In October 1984, Mr. ***, his partner ***, and their attorney advised *** of their fraudulent scheme (Tr. Vol. 1, page 165).
   49. A team of people, including people from Audit Loan Review, reviewed mortgage loan files. Mr. *** informed Mr. *** that over 80 percent of the borrowers were Mr. ***'s employees. They were generally very young, had limited educations, and had very nominal net worths (Tr. Vol. 1, pages 165, 166, and 168).
   50. An October 26, 1984, *** fired the Respondent based on an assessment that he had exercised extremely poor judgement (Tr. Vol. 1, page 173).
   51. In 112 or 113 of the ***-related loans the applicants' incomes were not verified in writing (Tr. Vol. 3, page 141 and Vol. 5, page 46).
   52. In none of the *** mortgage loans was the source of the down payment verified (Stipulated Fact 8).
   53. Employment of *** borrowers was not verified in writing (Tr. Vol. 3, page 146).
   54. In 52 of the *** mortgage loans identified in Exhibits 1 through 113, the loan was extended to the applicant before a previous loan was paid (Tr. Vol. 3, pages 147 and 148).
   55. In 22 of these loans, the financial statement of the borrower was incomplete (Tr. Vol. 3, pages 149 and 150).
   56. In 5 instances the financial statement of the borrower was altered (Tr. Vol. 3, pages 150 and 152).
   57. In 100 instances the monthly expense portion of the application was not completed (Tr. Vol. 3, pages 152 and 153).
   58. In 100 instances the portions of the applications relating to details of purchase were not completed (Tr. Vol. 3, pages 152 and 153).
   59. In 61 of the *** mortgage loans identified in Exhibits 1 through 113, the consumer banking committee minutes do not indicate rollover of first property of outstanding debt (Tr. Vol. 3, page 156).
   60. In 70 instances the consumer banking minutes do not indicate that the property had not been completed (Tr. Vol. 3, page 157).
   61. In 19 instances the financial statements did not indicate that either cash or real estate equity was sufficient to account for the amount of the down payment (Tr. Vol. 3, pages 157 and 158).
   62. In 38 of the *** mortgage loans identified in Exhibits 1 through 113, the property showed a purchase price which was substantially less than the appraised value (Tr. Vol. 3, pages 161 and 162).
   63. A review of the mortgage loan applications completed by *** related borrowers demonstrates several examples of questionable creditworthiness. For example, *** and *** obtained a mortgage loan for property located at ***. They were both 22 years old. His employer was ***. *** stated that he had been employed for three years as a carpenter and had a gross monthly income of [$]42,389.00. The amount of the down payment was listed as $10,000.00 cash. The appraisal value was $59,000.00. The purchase price was $47,000.00. *** was listed as the loan officer. The application was completed on March 7, 1984. The closing date was March 29, 1984 (FDIC Ex. 5)
   64. The *** obtained a second mortgage loan for property located at ***, 6-53. The closing date was July 5, 1984. A mortgage loan to *** in the amount of $37,000.00 was to be paid off. Again, *** is listed as the loan officer (FDIC Ex. 6).
   65. ***, age 25, obtained a mortgage loan of $57,000.00 for property located at ***. Her employer was the ***. The amount of the down payment was listed as $11,500.00, the source for which was cash. The closing date was August 5, 1984. An appraisal report indicates that the property was under {{4-1-90 p.A-1192}}construction. The loan officer was listed as *** (FDIC Ex. 7).
   66. *** and *** obtained a mortgage loan for property located at ***. Their ages were 19 and 24, respectively. Mr. ***, age 19, had been employed for seven months and listed a monthly income of $1,837.00. The amount of the down payment was $24,000.00. The source was cash and the sale of real estate. *** was listed as the loan officer. The closing date was April 19, 1984 (FDIC Ex. 9).
   67. In another instance *** obtained a mortgage loan for property located at ***. Their ages were 22 and 23, respectively. His employer was *** and hers was the ***. The amount and source of the down payment were listed as $10,500.00 from the sale of real estate. The loan officer was listed as ***. The subject property was under construction (FDIC Ex. 11).
   68. The *** obtained a second mortgage for property located at ***. The closing date was August 17, 1984. The down payment was $20,000.00, the source for which was listed as cash from the sale of real estate. *** was listed as the loan officer (FDIC Ex. 12).
   69. *** obtained a mortgage loan for property located at ***. Her age was 21 and she had been employed as a secretary for 2 ½ years. Her monthly income was listed as $2,100.00. The amount and source of the down payment was listed at $11,000.00 from the sale of real estate. The closing date was August 31, 1984. *** was listed as the loan officer. The property was under construction according to an appraisal report (FDIC Ex. 14).
   70. *** obtained a mortgage loan for property located at ***. Their ages were 24 and 21, respectively. *** was employed as a carpenter by ***. His annual salary was listed as $27,600.00. The source of the $14,400.00 down payment was listed as cash. The closing date was April 26, 1984. *** was listed as the loan officer. The subject property was under construction (FDIC Ex. 22).
   71. ***, age 22, obtained a mortgage loan for property located at ***. His employer was ***. The amount of the down payment was listed as $8,000.00 cash. The loan officer was *** and the loan was approved by *** according to minutes of the consumer banking committee. The closing date was November 19, 1983 (FDIC Ex. 30).
   73. ***, age 61, obtained mortgage loans for three parcels of ***-related property during the period of April to September 1984. Down payments ranged from $12,500.00 to $17,000.00 and were allegedly derived from cash or the sale of real estate. *** was the loan officer in two instances and the third time approved a loan made by *** (FDIC Exs. 39–41).
   74. *** obtained three mortgage loans. The closing dates were August 10, 1984 and September 10, 1984. His age was 33 and his employer was the ***. The officer for the first loan was ***; the loan was approved by Mr. ***. He was the loan officer for the second and third transactions (FDIC Exs. 53–55).
   75. ***, age 19, an *** employee, obtained mortgage loans on two occasions for ***-related property. The closing dates were July 12, 1984 and July 30, 1984, respectively. The respective down payments were $9,500.00 and $12,000.00; the listed source each time was the sale of real estate. Mr. *** was the loan officer for both transactions (FDIC Exs. 74–75).
   76. ***, ages 26 and 19, respectively, obtained mortgage loans for ***-related property three times between March 1984 through September 1984. Her employer was ***. Down payments were $9,000.00; $12,000.00; and $17,000.00, respectively. Listed source for these down payments were cash or the sale of real estate. *** was the loan officer for these mortgage loans (FDIC Ex., 86–88).
   77. *** obtained three mortgage loans for *** related property. His employer was *** and ***. Their respective ages were 29 and 30. The closing dates were March 27, 1984; June 22, 1984; and September 12, 1984. *** was the loan officer for these three transactions (FDIC Exs. 101–103).
   78. *** and ***, both age 21, obtained mortgage loans for property located at *** and ***. The respective closing dates were August 9, 1984 and September 5, 1984. His employer was ***. Down payments of $28,000.00 and $20,000.00, respectively, were listed as being from cash or the sale of real estate. Both times the loan officer was ***, and *** approved the loans (FDIC Ex. 111–112).
   79. Respondent's lending procedures were not criticized by FDIC. Moreover, the Office of the Comptroller of the Currency {{4-1-90 p.A-1193}}did not criticize the loans to ***-related borrowers (Tr. Vol. 2, pages 16 and 223).
   80. The FDIC has no regulations, policy statements or written procedures which required that written verification of employment, indebtedness, income, down payment, or creditworthiness be obtained in connection with a first mortgage real estate loan prior to October 26, 1984 (Stipulated Fact 17).
   81. Prior to October 26, 1984, the FDIC did not have any published standards for general distribution to loan officers which attempted to define "safe and sound banking practices" as that term is used in 12 U.S.C. 1818(e)(2) (Stipulated Fact 20; Resp. Ex. 260–261).
   82. Prior to October 26, 1984, ***'s written policy pertaining to residential real estate loans stated that the principal emphasis was on the individual's or individuals' ability to repay the loan. The requirements were a favorable credit record, a job with stability or good prospects, sufficient income and other indebtedness being in line with income. There is no mention of written verification of employment, income, or the source of a down payment (FDIC Ex. 114).
   83. *** did not have a written procedure or policy requiring that properties be inspected before loans were closed (Tr. Vol. 1, page 114 and FDIC Ex. 114).
   84. Although Respondent's lending practices did not violate any bank or FDIC regulations or procedures, his actions or inactions were contrary to standards of prudent bank operation.
   85. The Respondent ignored red flags which would have brought the creditworthiness of the *** mortgage customers into question. These red flags include the following: the fact that 20% was put down by all borrowers; the number of young borrowers with short work histories; the concentration of loans; to Mr. ***'s employees; the volume of loans; and the number of borrowers having not enough or just enough money for the down payment.
   86. The numerous rollover cases were also evidence of Respondent's disregard for situations in which he should have questioned the borrowers' creditworthiness. In many rollover situations, the source of the down payment was identified as the sale of real estate, but the purchase offer stated that Mr. *** already was in possession of the down payment before the real estate had been sold. Moreover, Respondent failed to inquire why first loans were not being paid off as intended and did not make any efforts to ensure that the first loan was paid out before the closing of the second.
   87. Another example of Respondent's disregard for prudent lending practices was the fact that he contacted Mr. *** or one of his associates, not the borrowers, when he was informed of a problem with a credit report.
   88. The Respondent's failure to inspect properties for completion was another factor in the magnitude of the loss *** sustained on the *** mortgage loans.
   89. In 14 of the *** mortgage loans the commitment for title insurance indicated that the purchaser was to receive the deed from ***. However, the title insurance commitment also showed that the current mortgage was owned by a person other than *** and that person had a mortgage from *** (FDIC Exs. 123–136). There is no indication that Mr. *** questioned this discrepancy.
   90. The procedures utilized by the Respondent and those who worked under his direction did not require a thorough analysis of creditworthiness.
   91. Respondent voluntarily and repeatedly disregarded prudent banking practices. He failed to inquire about circumstances which raised serious questions about the applicants' creditworthiness.
   92. Despite being warned that he was violating his lending authority and that the practice of making loans was improper, Respondent extended additional credit to borrowers who had two or more loans outstanding with ***.
   93. The evidence of record establishes an ongoing pattern of poor lending practices and red flags which the Respondent should have, but failed to, detect.

III. CONCLUSIONS OF LAW

   1. The Respondent is an officer of *** within the meaning of 12 U.S.C. Section 1818(e)(2).
   2. The FDIC has jurisdiction over the Respondent, ***, and the subject matter of these proceedings.
{{4-1-90 p.A-1194}}
   3. The FDIC has authority under 12 U.S.C. Section 1818(e)(2) to issue an order prohibiting the Respondent from participating in the conduct of the affairs of *** or any other bank insured by the FDIC.
   4. A preponderance of the evidence establishes that Respondent's conduct at *** resulted in substantial financial loss, demonstrated a willful and continuing disregard for the safety and soundness of ***, and evidenced his unfitness to continue as an officer at the *** Bank ***.

DISCUSSION

   A. Burden of Proof in These Proceedings.
   To remove an officer or director under 12 U.S.C. Section 1818(e)(2), the FDIC must prove all the elements delineated in the statute. The FDIC asserts that its burden of proof is met by satisfying a "preponderance of the evidence" test. Respondent counters that the standard of proof requires "clear and convincing evidence."
   The Federal Deposit Insurance Act does not set forth the standard of proof to be applied in administrative proceedings under the Act. Section 8(h)(1)(A) of the Act does provide that all hearings shall be conducted in accordance with the Administrative Procedures Act (APA). In Steadman v. SEC, 450 U.S. 9 (1981), the United States Supreme Court held that if a statute is silent about the burden of proof to be applied in an administrative proceeding, then the provisions of Section 7(c) of the APA apply; these provisions provide for a standard of proof by a preponderance of the evidence.
   The undersigned finds the Steadman decision to be controlling in this matter and rules that the standard of proof in these proceedings requires a showing by a preponderance of the evidence.
   B. The Weight To Be Given The Opinions of Bank Examiner ***.
   The FDIC has submitted a proposed conclusion of law to the effect that Review Examiner *** is a highly qualified expert witness whose judgments are entitled to considerable deference within the meaning of Sunshine State Bank v. Federal Deposit Insurance Corporation, 783 F. 2d 1580 (11th Cir. 1986). Respondent argues that the reliance on Sunshine constitutes a gross misstatement of the law. The undersigned finds the Respondent's position very persuasive.
Sunshine involved a case in which examiners spent over 3,000 hours in conducting a detailed bank analysis. However, in the instant case, Mr. *** examined portions of files. He conceded at the hearing that he made several assumptions and that some of his conclusions would have been different had he seen other data.
   Even under Sunshine a tribunal may scrutinize an examiner's "discretionary decisions requiring the exercise of informed judgment." Id. at 1583.
   The Administrative Law Judge agrees with Respondent's conclusion that Mr. *** is an ordinary expert witness. It is for the trier to exercise independent judgment and decide what, if any, weight is to be given to the testimony. Therefore, the undersigned must reject the FDIC's proposed conclusion of law concerning the treatment of Mr. ***' testimony.
   C. The Legal Standard of "Willful or Continuing Disregard."
   Under 12 U.S.C. Section 1818(e)(2) an officer or director of a bank may be removed if his conduct with respect to another insured institution resulted in substantial financial loss or other damage, reflected either his personal dishonesty or a willful or continuing disregard for its safety and soundness, and evidenced his unfitness to continue as a director or officer. Counsel for Respondent and the FDIC have submitted arguments about the statutory interpretation of the phrase "willful or continuing disregard." These arguments warrant special consideration.
   The FDIC argues that "willful" is defined as "voluntary, purposeful, deliberate, and intentional." It is not necessary for the Respondent to have known or desired that *** would suffer a loss as the result of his actions. It must only be shown that the Respondent acted with the intent to disregard ***'s safety and soundness.
   On the other hand Respondent cites the case of United States v. Tucker, 686 F. 2d 230, 232 (5th Cir.), cert. denied, 459 U.S. 1071 (1982), for the proposition that a director acts willfully when he commits a voluntary, intentional violation of a known legal duty. Absent a violation of bank procedures or policies, contravention of instructions from superiors, or written or published FDIC procedures, policies or regulations, there is no basis for finding that {{4-1-90 p.A-1195}}Respondent acted in willful disregard for ***'s safety and soundness.
   The undersigned notes that Tucker also states: "To act willfully is to act voluntarily, purposefully, deliberately and intentionally, as distinguished from accidentally, inadvertently or negligently. A taxpayer's good or evil motive is not relevant in determining whether his act was willful." Thus, the inquiry is not whether Respondent meant to harm the bank's fiscal soundness. On the other hand a certain state of mind is required to establish willfulness. There must be some design, purpose, or deliberateness about one's actions. The undersigned concludes that in order for the Respondent to have acted willfully, it must be shown that he intentionally or by design committed acts which constituted a disregard for ***'s safety and soundness.
   To require intent by Respondent to harm the bank would fly in the face of common sense and would render "willful disregard" under Section 1818(e)(2) an unnecessary duplication of "personal dishonesty." Such intent would never be present unless the officer sought personal gain at the bank's expense. In this type of situation, the "personal dishonesty" element of Section 1818(e)(2) would be satisfied and "willful disregard" would not have to be shown. It seems clear that "willful disregard," as opposed to "personal dishonesty," applies to situations in which an officer intentionally engaged in dangerous or speculative conduct at least hoping he could improve the bank's position.
   Respondent argues that "willful disregard" requires knowledge of the facts and knowledge that those facts are a violation of the law. This is the basis for Respondent's position that there must be a violation of the express terms of a statute, regulation or specific warning or instruction from the controlling agency. A violation of general language such as "safety and soundness" is not, according to Respondent, sufficient for a willful, i.e., knowing violation of Section 1818(e)(2).
   This interpretation is overly restrictive and gives the prohibition of the statute no effect at all absent some supplemental prohibition. No matter how flagrantly speculative and dangerous an act might be, there could be no finding of "willful disregard" for the bank's safety and soundness unless that specific act were prohibited by the express terms of a statute, regulation, instruction or warning.
   Since it would be impossible to anticipate and codify every unsafe and unsound practice, it is necessary to use a general prohibition. Respondent, as a bank officer, is held to know that unsafe and unsound practices are violations of the express terms of Section 1818(e)(2). And this is a violation of a "known legal duty" under the interpretation advanced by Respondent.
   Obviously, proof of knowledge that any particular practice was unsafe or unsound would be easier given some express prohibition of that specific practice. However, there is no basis for suggesting that the undersigned cannot find knowledge that a practice was unsafe or unsound based on other types of evidence, such as the position and experience of the officer and the extent to which the practice varied from generally accepted standards of prudent operation.
   The FDIC and Respondent agree that "continuing disregard" is the functional equivalent of recklessness. The FDIC's position is that a series of failures to act with the prudence and knowledge that a reasonable officer would have constitutes continuing disregard or recklessness. Respondent on the other hand rejects the FDIC's objective standard and emphasizes that "reckless" conduct involves knowing that one has done an act of unreasonable character in disregard of a known risk.
   The undersigned agrees that reckless conduct requires some type of knowledge or known conduct on Respondent's part. However, the knowledge requirement is satisfied by knowledge that one has acted unreasonably in disregard of a known or obvious risk. Otherwise, an officer with a fiduciary duty to a bank could assert ignorance of safe and prudent lending practices to avoid his responsibility to a banking institution. The undersigned accepts the FDIC's objective standard because it is consistent with the intent of Congress to permit agencies to move against individuals whose actions threaten an institution's soundness.
   Both parties have discussed legislative history in attempting to interpret "continuing disregard." Both seem to agree that "continuing disregard" was included in the statute as an alternate to the "willful disregard" standard in order to reach situations {{4-1-90 p.A-1196}}in which the individual engaging in unsafe or unsound practices had a lesser degree of knowledge or intent which did not amount to willful disregard. However, Respondent concluded that, because Congress rejected gross negligence as an element of 1818(e)(2), knowledge or scienter amounting to more than mere negligence, or even gross negligence, is required for a showing of "continuing disregard." What is required, Respondent argues, is a degree of awareness on the part of the actor closer to the awareness required to show willful disregard than to the more objective awareness required to show gross negligence. The undersigned is not persuaded that the legislative history requires, or even leads to, such a conclusion.
   Gross negligence was rejected for Section 1818(e)(2) for many reasons, not the least of which were the lack of any uniform judicial interpretation of gross negligence and the fears of the banking industry that this standard would allow removal for a single negligent act.
   Considering these reasons for rejecting gross negligence, the mere fact of this rejection does not carry Respondent's argument for requiring a higher degree of scienter. Moreover, no portion of the legislative history, of which the undersigned has been made aware, even hints that "continuing disregard" was intended or understood to require a higher degree of scienter than gross negligence.
   Since Respondent's scienter argument flows almost entirely from the rejection by Congress of a gross negligence standard, the undersigned must reject the argument and instead adopt the objective standard akin to "reckless conduct in disregard of a known or obvious risk" advanced by the FDIC.
   It should be noted that Respondent's attempt to find or define a degree of awareness closer to willful disregard than gross negligence does appear to the undersigned to have been successful, even in theory. The distinctions drawn have been so thin that, as a practical matter, no real difference would exist between the scienter required for "willful disregard" and that required for "continuing disregard." This would make the second standard redundant, except for the need to repeat or continue the conduct. Such an interpretation is unacceptable.
   D. The Respondent Acted in Willful and Continuing Disregard for ***'s Safety and Soundness.
   The undersigned has carefully considered Respondent's arguments on the issue of willful and continuing disregard. The essence of Respondent's case is that *** believed he was acting in the best interests of ***. He did everything out in the open, asked questions, and followed directions from his superiors. Counsel argues that Respondent had no knowledge that he was committing unsafe and unsound banking practices. Nobody trained him or objected to his lending practices. He was not made aware that he had exercised poor judgment and, at times a lack of common sense.
   Although counsel has raised some interesting points, the undersigned must conclude that *** acted in willful and continuing disregard for ***'s safety and soundness. An agency needs the power to remove an individual who acts in a manner which threatens the soundness of a banking institution. The undersigned finds that *** acts and omissions certainly pose a serious threat to safe and sound banking.
   The totality of the evidence establishes that the Respondent acted with disregard for ***'s fiscal solvency. Although he asserts a good faith argument, he purposefully entered into a course of action which led to a large volume of mortgage loans being granted under highly questionable circumstances.
   As a loan officer with several years experience, he knew or should have known that the emphasis in approving mortgage loan applications is on a borrower's ability to repay. In concentrating on increasing ***'s mortgage portfolio, Respondent needlessly and repeatedly took actions which disregarded the applicant's creditworthiness.
   *** approved or was otherwise involved with most of the *** loans in question. He never questioned the fact that many of the borrowers were young (in at least one instance, 19 years old) and had brief employment histories. It is highly unlikely that so many young borrowers would have enough money for the down payments. A review of the mortgage applications set forth in FDIC Exhibits 1–113 reveal several instances where the applicants' loan lists of assets did not reveal sufficient funds for down payments and closing costs. There is no indica- {{4-1-90 p.A-1197}}tion that *** adequately questioned incomplete financial statements or the details of the borrowers' purchasing abilities. Although *** had no written procedures for verifying income or the source of a down payment, Mr. *** should have requested more information. It was reckless for him to process such a high volume of applications from employees of one company without taking such common sense precautions as conducting written verifications.
   Other examples of very poor lending practices or red flags which Respondent disregarded are his contacting the builder rather than the loan applicant about credit problems. He also should have questioned the fact that mortgage coupon books were sent to ***'s office rather than the borrowers' homes. It is very surprising that no *** related borrower was denied a mortgage loan. This demonstrates that Respondent was rubber stamping applications without regard to the creditworthiness of the applicants.
   An extremely dangerous situation which Respondent permitted was extension of mortgage credit to borrowers who had outstanding first mortgage indebtedness. *** became aware of situations in which a first mortgage loan was not paid off at the closing of a second loan. Nevertheless he continued to permit second loans to close without assuring that the first loan had been paid. The danger to *** is that a borrower would be unable to make payment on more than one loan at a time. Respondent's assertion that he was not aware of the rollover loan problem does not explain his additional extension of credit to borrowers after Mr. *** had told him that he had exceeded his limit, and it was improper for him to extend multiple loans to borrowers.
   The undersigned also notes that the *** properties closed very quickly and in large volumes. Findings of Fact 63–78 note instances where borrowers went through three closings in a six-month period (see Exs. 39–41, 86–88, and 101–103). Mr. *** acted recklessly when he failed to inquire about the unusual nature of these closings. Finally, Respondent had information from appraisals which indicated these properties were unfinished, yet he made only one inspection for completion. Considering the magnitude of the building project, Respondent should have ascertained when construction would be completed. The failure to realize that these properties were not completed, along with the other factors cited above, enabled Mr. *** to perpetrate his scheme.
   It must be emphasized that Respondent is not, as was suggested in Respondent's brief, being held responsible for failing to detect the fraud scheme. Instead, Respondent is being held responsible only for his own conduct, for his own poor lending practices in making a large number of obviously dangerous loans.
   The undersigned is of the opinion that Respondent breached his fiduciary duties to ***. He had enough banking and lending experience to be able to recognize the multitude of unusual circumstances surrounding the *** loans. The fact that others were making these loans or not criticizing Respondent's conduct does not excuse his egregious acts and omissions. Regardless of his "good faith," *** continuously engaged in poor lending practices and ignored warning signs. Consequently, the Administrative Law Judge must conclude that the Respondent acted in willful and continuing disregard for ***'s safety and soundness.
   E. Unfitness to continue as a Director or Officer.
   As noted above, 12 U.S.C. Section 1818(e)(2) provides for removal of an Officer or Director of an insured bank whenever that Officer or Director:

. . .by conduct or practice with respect to another insured bank. . .which has resulted in substantial financial loss or other damage has evidenced either his personal dishonesty or a willful or continuing disregard for its safety and soundness, and, in addition, has evidenced his unfitness to continue as a Director or Officer. . .[emphasis added]

this does not mean that the agency must necessarily await the occurrence of misconduct at a particular bank before it may bar an individual from that bank. Some kinds of conduct (e.g., that involving personal dishonesty) are of such nature that a finding might possibly be made that the individual cannot serve in banks generally in a capacity which would permit a repetition of the alleged conduct thereby establishing the requisite relationship between the alleged misconduct and the individual's fitness to continue or be in office anywhere.

we reject petitioners' contention that the language in this phrase is "too vague to allow its application" absent some clarification by the FDIC. Although the language is somewhat imprecise, it conveys a "sufficiently definite warning as to the proscribed conduct when measured by common understanding or practice. Horn v. Burns & Roe, 536 F.2d 251, 254 (8th Cir. 1976).

   V. ORDER

   Based on the foregoing Findings of Fact and Conclusion of Law and taking into consideration all of the evidence presented at the hearing, the undersigned recommends that an order should be issued removing Respondent *** from his position as president of the *** Bank *** and to prohibit his further participation in the affairs of the bank or any other bank insured by the FDIC.

Kenneth E. Stewart
Administrative Law Judge

Date: Sept. 21, 1987

   This shall certify that I have this day served copies of the attached Recommended Decision dated Sept. 21, 1987 by mailing copies thereof, and depositing same in the U.S. mail at ***, with proper postage prepaid, to the following.
{{6-30-92 p.A-1202}}
***
Regional Attorney
F.D.I.C.
***
Board of Directors
*** Bank
***
Senior Attorney
Federal Deposit Insurance Corporation
550 Seventeenth St., N.W.
Washington, D.C. 20429
***
Chief Administrative Law Judge
***
_________________
Attorney Advisor