Federal Deposit
Insurance Corporation

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   [¶5162] In the Matter of William Marvin Clark, Sr., Docket No. FDIC-89-199e(1-29-91).

   FDIC rejected ALJ's recommendation and ordered removal of Bank officer on the basis of his practices as chief lending officer at another bank. The FDIC found overwhelming evidence that Respondent made numerous loans without any regard for the borrowers' creditworthiness, resulting in significant losses, and thus demonstrated continuing disregard for the safety and soundness of the Bank. The FDIC also prohibited Respondent from serving as an officer or institution-affiliated party at any insured institution, but because there was no allegation of personal dishonesty, it permitted him and his employer to request a waiver of the removal and prohibition, subject to FDIC conditions.

   [.1] Prohibition, Removal, or Suspension—Hearing—Scope of Proceedings
   The scope of proceedings is not limited to 79 specific loans where the Notice of Intent to Remove alleges financial loss to the bank as a result of "approximately 800 loans" attributable to Respondent in addition to the 79 described in Exhibit A of the Notice.

   [.2] Prohibition, Removal, or Suspension—Liability—Losses to Bank
   Losses to Bank of $148,000 were "substantial" for purposes of this removal action.

   [.3] Prohibition, Removal, or Suspension—Disregard for Safety and Soundness—Imprudent Loans
   A chief lending officer who failed to obtain basic credit, employment, and income information about borrowers could not make informed credit judgments, and therefore acted with continuing disregard for the safety and soundness of the bank in making the loans.

   [.4] Prohibition, Removal, or Suspension—Liability—Conduct at Another Institution
   Evidence of Applicant's unsafe and unsound practices at bank where he was previously employed is an adequate basis for removal from his current position, where the current position provides an opportunity to repeat the unsafe and unsound conduct.

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   [.5] Prohibition, Removal, or Suspension—Waiver
   The Board has flexibility to mitigate the harsh effect of a removal order, and where Respondent is not charged with any personal dishonesty or fraud, he and his employer may be permitted to apply to the FDIC for a waiver (with appropriate conditions and safeguards for the institution and its depositors) of the removal and prohibition order.

In the Matter of
WILLIAM MARVIN CLARK, SR.,
individually and as an
officer, a participant in the
conduct of the affairs, and as an
institution-affiliated party of
FARMERS & MERCHANTS BANK
DUBLIN, GEORGIA
(Insured State Nonmember Bank)
DECISION AND ORDER TO
REMOVE

I. PROCEDURAL BACKGROUND

   A Notice of Intention to Remove From Office and to Prohibit From Further Participation ("Notice") was served by the Federal Deposit Insurance Corporation ("FDIC") on William Marvin Clark, Sr. ("Respondent" or "Respondent Clark"), individually and as an officer, a participant in the conduct of the affairs, and as an institution-affiliated party of Farmers & Merchants Bank, Dublin, Georgia, on November 16, 1989. The Notice was issued pursuant to section 8(e) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1818(e), as amended and supplemented by sections 903 and 904 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), Pub. L. No. 101-73, §§ 903 and 904, 103 Stat. 183, 453–459 (1989), and Part 308 of the FDIC's Rules of Practice and Procedures, 12 C.F.R. Part 308.¹
   The Notice alleges that Respondent Clark engaged in unsafe and unsound banking practices in connection with the lending operations of Bank South-Douglas, Douglas, Georgia ("Bank"), and that respondent breached his fiduciary duty as a director of the Bank as a result of his lending practices. The Notice further alleges that, as a result of the unsafe and unsound practices and breaches of fiduciary duty, the Bank has suffered and will continue to suffer substantial financial losses or other damage, and/or that the interests of the Bank's depositors could be seriously prejudiced by such practices and/ or breaches of fiduciary duty. The Notice also charges that these practices and/or breaches of fiduciary duty demonstrate a willful or continuing disregard for the safety and soundness of the Bank and, as such, evidence the Respondent's unfitness to participate in the affairs of the Bank or to continue as an officer or participant in the conduct of the affairs of the Farmers & Merchants Bank, Dublin, Georgia ("F & M Dublin"), or any other Federally insured depository institution. The Notice seeks Respondent's removal from his current position as an officer of F & M Dublin, based upon his conduct as an officer and director of the Bank, and seeks to bar him from further participation in the affairs of any Federally insured depository institution.
   An evidentiary hearing was held March 12–14, 1990, in Savannah, Georgia, before Administrative Law Judge James L. Rose ("ALJ"). Both parties filed briefs and reply briefs following the hearing. The ALJ filed his Recommended Decision with the Office of the Executive Secretary on September 25, 1990, in which he found that FDIC Enforcement Counsel had proven that Respondent had engaged in "some culpable conduct or practice" which resulted in substantial financial loss or other damage.² Nonetheless, he also found that this "culpable" practice did not evidence Respondent's willful or continuing disregard for the safety and soundness of the Bank and, thus, that the FDIC had not proven Respondent's unfitness to continue as an officer, director or participant in the affairs of F & M Dublin. The ALJ recommended dismissal of the Notice

   Respondent Clark was hired on January 27, 1986, by the Bank's CEO as the Bank's Executive Vice President, and subsequently, on February 12, 1986, was elected to the Bank's board of directors. He functioned as the Bank's chief lending officer and managed the day-to-day operations of the Bank. He was hired with the express instruction to increase both loans and deposits. Shortly after assuming his duties at the Bank, Respondent Clark established a new business relationship for the Bank with * * * Chevrolet, Inc., Douglas, Georgia.
   As a result of this new relationship, the volume of the Bank's consumer lending activity increased dramatically. The Bank engaged in two types of credit transactions with * * *: the purchase of retail installment contracts originated by * * * in connection with the sale of automobiles or other motor vehicles (indirect extensions of credit), and the extension of direct credit to customers purchasing automobiles from * * * (direct extensions of credit). Between January, 1986, and February, 1988, Respondent personally originated or authorized the purchase of approximately 675 direct and indirect extensions of credit to customers of * * *.
   By February, 1988, subordinate Bank employees became concerned about the quality of the Bank's portfolio—particularly the * * * credits—and brought this issue to the attention of the Bank's CEO, * * *. The Bank's board of directors conducted a preliminary audit of Respondent Clark's lending practices. In February, 1988, * * *⁴ withdrew Clark's lending authority and brought in an officer from an affiliated bank to manage the day-to-day operations of the Bank. Tr. I at 30–31, 57–66.
   As a result of the Preliminary findings, a more extensive audit was conducted covering a review and evaluation of 675 extensions of credit attributable to Respondent. On or about September 8, 1988, Respondent Clark resigned his position at the Bank and on September 26, 1988, took a position with F & M Dublin, where he is presently employed as a lending officer.

   The Recommended Decision reaches several conclusions with which we agree, but ultimately recommends that Respondent not be removed. The ALJ found that the Respondent imprudently engaged in the conduct or practice of approving 55 extensions of credit without giving adequate attention to the creditworthiness of the borrowers and that as a result of such conduct and practices the Bank sustained substantial financial loss. He declined to find, however, that the Respondent's conduct and practices demonstrated willful or continuing disregard for the Bank's safety and soundness or that the conduct and practices evidenced his unfitness to participate in the affairs of F & M Dublin. R.D. at 41.
   Although we concur in the first two findings of the ALJ, there are several elements of the ALJ's discussion of these two points with which we disagree. We will discuss briefly the more significant of these "secondary" issues, and then discuss and set forth the basis for the Board's disagreement with the ALJ's ultimate conclusion.

   A. Number of Loans at Issue.

   [.1] The ALJ found that although "there is some dispute as to the number of loans made by the Respondent during his tenure at Bank South, it is undisputed that it was well over 3,000, of which 55 are the basis for this removal action." R.D. at 4. The FDIC

   B. Losses Attributable to Respondent.

   [.2] The ALJ finds that Respondent's conduct resulted in "substantial financial loss." R. D. at 33. In reaching this conclusion the ALJ attributes some $148,609.51 of losses to Respondent's lending practices. FDIC Enforcement Counsel excepts to this finding and urges that the loss attributed to Respondent should total at least $839,358.77 and should include losses incurred after the date of the Notice, but which are a direct result of pre-Notice loans, losses due to lost opportunity, and losses due to collection and disposition expenses. FDIC Except. at 91–97. Because the ALJ has identified evidence to substantiate his finding that Respondent's activities resulted in substantial loss, we concur in the ALJ's finding. As this is an action for removal, rather than for a civil money penalty, the statutory requirement is satisfied, and it is not necessary for the Board to address the issue of further losses.

C. The * * * Loans.

   The ALJ found that FDIC Enforcement Counsel failed to prove that Respondent was responsible for a loan to * * * on September 28, 1987. The FDIC admits that original loan to * * * was approved by the Bank's loan committee. Rather, the FDIC asserts that Clark was responsible for the renewal of a $98,000 credit on that date.⁷ FDIC Ex. No. 23; Tr. II at 162–166. It is clear from FDIC Ex. No. 23 that Respondent did approve the renewal of the * * * loan. Further, because the original loan was in the amount of $98,000 and the renewal was for $98,500, it appears that Respondent also approved a new loan of $500 for Mr. * * *. FDIC witness Charles Myler testified that at the time of the renewal Respondent failed to obtain a complete loan application and failed to conduct a proper background investigation concerning * * *'s financial condition. Tr. II at 164-5. These assertions are unrebutted. While the record concerning this credit is somewhat confusing, that Respondent was responsible for its renewal cannot be questioned.
   The FDIC also excepts to the ALJ's fail-

D. Willful or Continuing Disregard for
the Bank's Safety and Soundness.

   Ultimately, in spite of his findings regarding Respondent's lending practices and the substantial losses attributable to Respondent, the ALJ did not conclude that Respondent's conduct constituted a willful or continuing disregard for the safety and soundness of the Bank and therefore recommended that the FDIC's charges be dismissed. We disagree with the ALJ's conclusion for several reasons.

   [.3] First, the Board believes that the ALJ missed the fundamental point of this case. This case is not about technical failures to document individual loans, or about an officer who, according to the ALJ, "kept sloppy records", although there is certainly enough support in the record to prove a myriad of technical violations. R. D. at 39. Rather, at issue in this case is the conduct of a chief lending officer who exercised no judgment whatsoever in determining whether or not to extend credit. Because Respondent did not follow standard underwriting practices regarding the determination of a borrower's ability to pay based on current economic data, he did not assess whether or not the loan posed a risk to the Bank, and if so, the magnitude of that risk. He did not make, nor could he make on the basis of the information he gathered, a risk assessment with regard to each loan. This failure to make a risk assessment constitutes a clear and unconscionable disregard for the safety and soundness of the Bank.
   Purchasing automobile contracts from dealers can be a safe and profitable method for generating loan volume if the lending institution follows standard credit procedures that include obtaining sufficient information from the applicant to substantiate the likelihood of repayment and requiring adequate collateral protection for each extension of credit, while maintaining an adequate dealer reserve, proportionate to the level of risk for the entire dealer portfolio. The ALJ has taken the insupportable position that having either sufficient applicant information or adequate collateral would protect the Bank against loss. However, a bank that had adequate collateral but that did not require sufficient information from its borrowers could develop a large portfolio of non-performing loans which would result in heavy collection costs and the loss of interest income.⁸ Similarly, even if there were sufficient applicant information but a deficiency in the level of collateral protection, the resulting losses in the loans that defaulted could more than offset the profitable loans.
   A bank engaged in consumer lending must obtain fundamental information on its borrowers to make an informed judgment of credit risk. It must document an applicant's income, expenditures, and credit history. This is generally accomplished by requiring a complete loan application that reports all the applicant's obligations, by verifying reported employment and income, and by obtaining a credit agency report that shows the applicant's performance for other obligations and provides a check on the debt information shown on the application.
   The need for this basis information in order to make an informed credit judgment is obvious. Employment and income verification is necessary because an applicant may misrepresent his or her income to qualify for a loan. Similarly, the borrower may not report debt unless specifically requested to do so in the loan application. The credit agency

   In this category the ALJ places four (4) loans. The Board finds that all four loans fail for lack of each of the critical pieces of information needed to determine adequate capacity to repay a debt. First, the application form itself is fundamentally flawed in that it fails to request the listing of all the obligations of the applicant. While the application had a section on "credit references," none of the borrowers was required to show his or her total liabilities and monthly payments.
   Only one of the four applicants (FDIC Ex. No. 62) reported all the debt shown in the credit agency report. Notably, even this information was ignored by Respondent. The applicant was unemployed and had only social security income of $1,000 per month. He had another car loan which required payment of $167 per month in addition to the $233 per month required by the subject loan. Evidence shows that the borrower's file on a previous loan at the Bank was marked "Be Careful" by another Bank loan officer, and that the borrower had a loan 90 to 120 days past due at the Bank. The loan file shows a NADA retail value of $7,426 and an average loan amount of $5,675 for the car being purchased. Nonetheless, Respondent loaned $7,669. After selling the repossessed automobile, the Bank charged its dealer reserve $1,471, which represents 19% of the original loan.
   Three applicants in this category had credit reports which showed credit histories with loan delinquencies (Loan Nos. 14, 22, and 62), and the fourth loan file did not have a credit agency report (Loan No. 66).
   With respect to Loan No. 14, the Respondent testified that he made the loan because the applicant had prior loans with * * * and the Bank which were paid satisfactorily. Tr. III at 117. He does not rebut the fact that the credit report had two negative indications, or that he failed to obtain debt information, adequate employer information, collateral value, or employment verification.
   The application for Loan No. 22 in the amount of $9,260 contains no collateral valuation, no total debt information, and no employment verification. The credit report shows two delinquencies and a tax judgment. FDIC Ex. No. 22. Respondent testified that the applicant's credit history with other banks enabled him to ignore the $87.00 tax judgment. His testimony is silent, however, with respect to the two other deficiencies, and the absence of collateral valuation, employment, income or debt information. Tr. III at 125. Significant, too, is Respondent's silence with respect to the outstanding loan with a then-current balance of $19,000 indicated on the credit report. Id. When this loan defaulted, after selling the repossessed car, the Bank charged the dealer reserve $1,627, which represents 18% of the original loan.
   One of the best examples of a deficient {{4-30-91 p.A-1615}}application in this entire record is Loan No. 66. The application does not have a stated purpose for the unsecured loan of $4,067 (subsequently, a used car was added as collateral — but no value was provided). There is no listing of a residential address, length of residency or rental or mortgage payment; no address of employer, length of employment, no employment verification. There is no income or debt information of any kind or credit references. The record contains evidence showing that on the same day Loan No. 66 was made, Respondent made another loan to the same borrowers in the amount of $20,771 to buy a 1987 Nissan 300ZX. FDIC Ex. No. 68. That loan file contains no more applicant information than the file for FDIC Ex. No. 66. Respondent's testimony addresses the unfortunate circumstances involving embezzlement of funds by the borrowers' son and the death of one of the borrowers. However, it is again silent regarding the dearth of information upon which this loan was made. In short, FDIC Enforcement Counsel's assertions concerning this loan are unrebutted. Tr. III at 174.
   According to the ALJ, these are the best of the loan files which contain sufficient information to make a credit judgment. Yet, as described above, on the basis of the information in this record, the Board finds that Respondent simply could not make an informed judgment regarding the creditworthiness of these borrowers as required by good lending practice.

   The ALJ concludes that "reliance upon reasonable collateral value or a reserve is another prudent way of protecting a bank from sustaining a loss." R. D. at 37. By this statement it appears that the ALJ misunderstands the purposes of risk assessment and collateral or loss reserves. The protection afforded by collateral or a loss reserve presupposes that the lender has made some assessment of the risk he is taking and, thus, has tailored the collateral or the reserve amount to protect against this risk. This is the crucial element missing in this case. Respondent Clark never made an assessment of whether his borrower was likely to be able to repay the debt. Indeed, in none of the 56 loans reviewed did he have sufficient information with which to make such an assessment. Thus, even if Respondent had known the value of the collateral, he could never really know whether the collateral or dealer reserve would be adequate to protect the Bank from sustaining a loss because he never knew how likely a loss would be. By his finding, it appears that the ALJ would permit a loan officer to abdicate his responsibility to make a credit judgment with respect to each borrower and to substitute that judgment with a "bandaid" in the form of collateral or reserves. The Board cannot concur in this.
   While the Board recognizes that it is standard practice to require security for loans in the form of collateral or reserves, what we criticize here is the failure to determine how much protection is necessary based on an assessment of each borrower's ability to repay his or her loan and the risk of nonpayment. Thus, the fact that Respondent obtained collateral or that some loans were covered by a dealer reserve does not address the question of whether at the time the loans were made Respondent Clark evaluated the risk of each loan and could thus assess whether the collateral or the dealer reserve was, as a whole, sufficient protection.
   Even loans that are sound credit risks when originated go into default because of loss of employment, deterioration in health, divorce and other unforeseen events. Collateral and dealer reserves are intended to minimize losses should such an unanticipated event occur. They are not a substitute for the borrower's capacity to repay the loan.
   In support of his position, the ALJ found it noteworthy that "on 14 of the 55 loans as a result of selling the collateral and/or changing the dealer reserve, the Bank suffered no loss as a result of default." R. D. at 37. That no loss was suffered on these particular loans is immaterial to the question of whether Respondent acted with disregard in assessing the borrowers at the loan's inception. Even if no losses had been sustained, the Board finds evidence to support a finding that Respondent acted with disregard for the safety and soundness of the Bank.⁹
   FDIC examiner Myler testified that almost none of the loan files contained collateral valuation. The ALJ found, however, that "collateral value was generally sup-

   With respect to this, the largest category of loans, the ALJ notes that the FDIC cited missing or insufficient information or anal-

   [.4] As stated by the ALJ, "resolution of this issue is dependent on the resolution of the previous issue." R. D. at 40, citing FDIC Docket No. FDIC-86-56e (1988 PH Enf. Dec. p 5110). "Where a respondent has responsibilities at his current bank which are similar to those performed at his previous bank, the failure to follow safe and sound practices at the former is evidence of an unfitness to participate in the latter's affairs." Id. There is an obvious nexus between the Respondent's position at the Bank and his current position at F & M Dublin. His current position provides the Respondent with the opportunity to repeat the unsafe and unsound conduct in which he engaged at the Bank. Therefore, proof of his unfitness to serve as an officer or director of any Federally insured depository institution has been established by the substantial evidence of Respondent's unsafe and unsound conduct leading to substantial losses and his willful and continuing disregard for the safety and soundness of the Bank.

   Section 8(e)(4) of the FDI Act, 12 U.S.C. § 1818(e)(4) (1989), provides that "[i]f upon the record at the hearing the [FDIC] shall find that any of the grounds specified in the Notice have been established, the [FDIC] may issue such orders of suspension or removal from office, or prohibition from participation in the conduct of the affairs of the depository institution, as it may deem appropriate." Upon a through review of the record in this proceeding, the Board finds that the serious nature of Respondent's unsafe and unsound lending practices merit Respondent's removal from his position as a lending officer at F & M Dublin and prohibition from participating in the conduct of the affairs of that bank or any other Federally insured depository institution or organization listed in section 8(e)(7) of the Act, 12 U.S.C. § 1818(e)(7) (1989).

   [.5] An order of removal is a very severe penalty that is intended not only to punish a person for serious transgressions, but also to protect the insured institution at which he was employed and the banking system as a whole. Section 8(e)(7)(B) of the FDI Act was added by FIRREA and provides the Board with additional flexibility in circumstances it deems appropriate to mitigate the harsh effect of a removal order. This section permits a party to apply for a limited suspension of the effect or an order of removal and prohibition to allow him or her to be employed by an insured institution upon the written consent of the agency that issued the order and the appropriate Federal financial institutions regulatory agency. The agencies can condition suspension upon terms that will protect the employer, the banking industry and the insurance fund.
   Thus, the statute permits the Board the flexibility to impose a remedy tailored to the circumstances of a particular case. This may be such a case since it does not raise issues of personal dishonesty, fraud, or malevolence. The Board concludes that application of section 8(e)(7)(B) may be appropriate with the implementation of adequate safeguards to protect Respondent's current employer. The Board, therefore, will provide the Respondent an opportunity to avail himself of section 8(e)(7)(B) of the FDI Act by executing a formal, tri-partite consent agreement between the Respondent, the appropriate Regional Director, Division of Supervision, and Respondent's employer to provide the necessary safeguards. The consent agreement shall contain such requirements and restrictions as the Regional Director may deem appropriate to prevent a repetition of the conduct at issue in this proceeding, including, among other things, a requirement for proper training for Respondent, adequate supervision of his activities, and the implementation of appropriate lending policies and procedures by F & M Dublin. Accordingly, the Board will remove Respondent and prohibit his further participation in the conduct of the affairs of any Federally insured financial institution. Respondent, his current employer, and any future insured institution employer may, however, seek the consent of the FDIC to waive such removal and prohibition under section 8(e)(7)(B) of the FDI Act, 12 U.S.C. § 1818(e)(7)(B), subject to the requirements as outlined above.

{{5-31-92 p.A-1619}}

   For the reasons set forth in the above Decision, and pursuant to section 8(e) of the FDI Act, as amended by section 903 and 904 of FIRREA, Pub. L. No. 101-73, §§ 903 and 904, 103 Stat. 183, 453, 457 (1989) (codified at 12 U.S.C. § 1818(e)), the Board of Directors of the Federal Deposit Insurance Corporation hereby ORDERS that:
   1. William M. Clark, Sr. is hereby removed as an officer of Farmers & Merchants Bank, Dublin, Georgia.
   2. William M. Clark, Sr. is hereby prohibited from serving or acting as an institution-affiliated party and/or from participating in any manner in the conduct of the affairs of any of the institutions or agencies listed herein, without the prior written consent of the FDIC and of the appropriate Federal financial institutions regulatory agency pursuant to the provisions of section 904(a) of FIRREA, Pub. L. No. 101-73, § 904, 103 Stat. 183, 457 (1989) (codified at 12 U.S.C. § 1818(e)(7)):

   (i) Any insured depository institution;
   (ii) Any institution treated as an insured bank under sections 8(b)(3)-(4) of the FDI Act including: (1) any bank holding company, (2) any foreign bank that maintains a branch or agency in a State, (3) any foreign bank or foreign company controlling a foreign bank that controls a commercial lending company organized under State law, and any company of which any foreign bank or company referred to in (2) of (3), above, is a subsidiary, or as a savings association under section 902(a) of FIRREA, including any savings and loan holding company, any subsidiary of a savings and loan holding company, any service corporation of a savings association, and any subsidiary of any service corporation of a savings association;
   (iii) Any insured credit union under the Federal Credit Union Act;
   (iv) Any institution chartered under the Farm Credit Act of 1971;
   (v) Any appropriate Federal depository institution regulatory agency;
   (vi) The Federal Housing Finance Board and any Federal home loan bank; and
   (vii) The Resolution Trust Corporation.

   (i) upon the written agreement of F & M Bank, Dublin, Georgia, or any successor Federally insured depository institution employer, who shall specifically agree to be made a party to the consent agreement;
   (ii) upon establishment and implementation to the satisfaction of the Regional Director of appropriate safeguards and procedures to ensure that the lending practices which this case addresses are not repeated in the future. Such safeguards and practices shall include, but shall not be limited to, adequate training, close supervision, the implementation of and adherence to ap-

appropriate formal written lending policies and procedures by such insured institution employer, and compliance with documentation, underwriting, and qualification standards and loan policy requirements by Respondent; and
   (iii) upon annual presentation by William M. Clark, Sr. and his employer to the appropriate Regional Director of a written report certifying compliance with these requirements.

In the Matter of
William Marvin Clark, Sr.,
Individually and as an officer,
a participant in the conduct of
the affairs, and as an
institution-affiliated party of
FARMERS AND MERCHANTS
BANK,
DUBLIN, GEORGIA
(Insured State Nonmember Bank)
James L. Rose, Administrative Law
Judge:
   This matter was tried before me at Savannah, Georgia, on March 12, 13, and 14, 1990, upon a Notice of Intention to Remove From Office and to Prohibit from Further Participation (Notice) under 12 U.S.C. § 1818(e)(2).
   Upon the entire record in this matter, including briefs and arguments of counsel, I hereby make the following findings of fact, conclusions of law, and recommended decision:

   From January 27, 1986, to September 8, 1988, William M. Clark, Sr., the Respondent, served as Executive Vice-President of Bank South-Douglas, Douglas, Georgia (Bank South). He also was a director from February 12, 1986 to September 8, 1988. Since September 26, 1988, Clark has been a loan officer at the Farmers & Merchants Bank, Dublin, Georgia (F&M Dublin).
   This action centers on the Respondent's conduct at Bank South of approving, or participation in approving, 55 loans¹ which are now in default. The FDIC alleges that these credits are in default as the direct result of Clark's failure to:

   (a) analyze properly the credit risk (quality) or confirm the accuracy of financial information provided by the borrowers;
   (b) assure that the loans were adequately protected by the current sound worth and paying capacity of the borrowers, adequately collateralized, and adequately supported by the loan documentation;
   (c) assure that approved loans did not involve more than the normal risk of repayment and/or other unfavorable features; and
   (d) follow Bank South's lending policy.

   The Respondent began his career in the financial services industry in 1966 when he was employed by MCC Financial Services. In 1981 he moved to the First Federal Savings & Loan Association in Valdosta, Georgia, where he stayed until being employed by Bank South in January 1986.
   He was hired by Bank South's CEO, * * *, with the express instruction to increase both loans and deposits. His initial function was to supervise the Bank's credit division, however, in the summer of 1986 he was given responsibility for its day-to-day management.
   During Clark's tenure, Bank South experienced significant asset and earnings growth. From 1986 to 1988, assets increased from $33 million to $45 million, and earnings increased from $330,000 to $684,000. Also during his tenure, the Bank saw some improvement in its CAMEL rating. As of March 31, 1986, the Georgia Department of Banking and Finance gave the Bank CAMEL ratings of 2-2-2-2-2/2. As of June 30, 1987, the FDIC assigned CAMEL ratings of 1-1-2-1-2/1. And, as of July 29, 1988, the State's CAMEL ratings were 1-2-2-1-2/2. With respect to the allegations here, only the 1987 examination mentioned loan documentation deficiencies, and that citation does not refer specifically to any of the 55 loans at issue.
   Although there is some dispute as to the number of loans made by the Respondent during his tenure at Bank South, it is undisputed that it was well over 3,000, of which 55 are the basis for this removal action. Included in this 55 are loans of various types, including real estate purchase money loans, construction loans, personal loans, and automobile loans.
   Though having no experience as a banker, Clark had worked twenty years in financial services, particularly in lending, and was brought to the Bank for the purpose of increasing the Bank's lending activity.
   Among other things, he established a lending relationship with the * * * Chevrolet dealership. In one aspect of this, the Bank would purchase installment sales contracts originated by the dealership. To protect the Bank against potential loss, a dealer reserve was established such that the Bank would retain 50 percent of the difference between the interest rate charged by the Bank and that charged by the dealership. The Bank also extended credit directly to several borrowers for the purpose of buying automobiles from the dealership, however, these loans were not covered by the dealer reserve. of the 675 * * * Chevrolet-related loans made by the Bank during the Respondent's tenure, 22 are at issue here.
   Below is a summary of the 55 loans in question, in the order they were presented at the hearing:
   On July 9, 1987, the Respondent approved the purchase of a loan to * * * in the amount of $6,756.42 for the purpose of purchasing a used car. The loan was originated by * * * Chevrolet. The record shows that in determining whether to purchase this credit, the Respondent considered * * *'s good credit history. The credit file contained information on * * *'s employment, salary, and the value of the loan's collateral, but did not contain a document analyzing * * *'s debt-to-income ratio. * * * defaulted in the repayment of the loan but, as of the date of the Notice, the bank had sustained no loss.
   On January 28, 1987, the Respondent approved a loan to * * * and * * * for $30,502,75 for the purpose buying a used car. The records shows that in determining whether to grant this loan, the Respondent considered that the collateral for the loan was a lien on a truck owned by * * * and a first mortgage on * * *'s house. The value of the collateral far exceeded the amount loaned. * * * and * * * defaulted in the repayment of the loan and, following disposition of the collateral, Bank South sustained a loss of $1,088.85.
   On April 13, 1987, the Respondent approved the purchase of a loan to * * * in the amount of $11,184.98. The loan was originated by * * * Chevrolet for a new car. The record shows that in determining whether to purchase this credit, the Respondent considered information available from * * *'s history as a customer of Bank South, as well as * * *'s good credit history. * * * defaulted

   Since the conduct at issue here occurred prior to August 9, 1989, the parties agree that the pre-FIRREA statute controls, though counsel for the FDIC argues that some FIRREA remedy provisions apply. Section 1818(e)(2) provides the basis for removing one from an insured bank for conduct he engaged in at another bank or business. The FDIC must prove that:

   (a) the individual engaged in "conduct or practice" at the other insured bank or business
   (b) which resulted in a substantial loss or other damage; and
   (c) the "conduct or practice" evidenced either personal dishonesty or a willful or continuing disregard for the safety and soundness of the other bank; and
   (d) the "conduct or practice" demonstrates his unfitness to continue as a director or officer of the current bank.

A. "Conduct or Practice"

   At the outset I note that this case does not involve kickbacks (though there was an unproven accusation of this involving the * * * credits), insider dealing, profiteering, conflicts of interest, breach of fiduciary duty or other truly egregious activity. What is alleged is simply that 55 of the more than 3000 loans approved by the Respondent were imprudent and are in default, and that the Bank suffered losses on them. While the Respondent's conduct certainly cannot be condoned, it does not rise to the level to justify the harsh remedy sought by the FDIC.
   Both parties argue that Section 1818(e)(2) requires proof of an unsafe or unsound banking practice in order to establish the "conduct or practice" tier. I disagree. Since Section 1818(e)(1), inter alia, lists "unsafe or unsound practices" as culpable conduct, the absence of this phrase from Section 1818(e)(2) suggests that "conduct or practice" is to be more broadly construed.
   However, since Congress recognized that removal is an extraordinary remedy, certainly not all conduct can be the basis for removal. Under this Section, I conclude that FDIC counsel need not prove unsafe or unsound practices; but the Respondent's conduct or practice must be shown to involve some level of culpability. Thus, that the Respondent approved loans would not be enough to support a removal under Section 1818(e)(2), even if the Bank suffered substantial loss as a result. The FDIC must prove conduct amounting at least to imprudence.
   In sum, to remove one from Bank B for his activity at Bank A (or another business) under Section 1818(e)(2), the FDIC must establish four elements by a preponderance of the credible evidence: (1) some culpable conduct or practice; (2) which has resulted in substantial financial loss or other damage; (3) which evidences a willful or continuing disregard for the safety and soundness of Bank A; and (4) which evidences the individual's unfitness to continue as a director, officer, or to participate in the affairs of Bank B.
   Although the Respondent's conduct with regard to some of the loans was more imprudent than with others, in general the FDIC established that many of the loans here at issue were granted without sufficient information on the borrower's creditworthiness, or in spite of adverse information. Indeed, the * * * line was criticized by the Georgia Department of Banking in its report of examination as of July 29, 1988.
   In addition to the loans in issue, the FDIC offered general comments from Bank employees that other loans approved by the Respondent were imprudently granted. This testimony must be discounted because it is too general, not supported by documentary evidence and is beyond the scope of the Notice.
   Nevertheless, I conclude that the FDIC did establish that the Respondent engaged in the conduct or practice of approving loans without sufficient credit information or in spite of adverse credit information. In concluding that the Respondent engaged in imprudent lending practices I have considered his conduct as well as the testimony of FDIC Examiner Charles Myler, to whom deference is accorded on this issue pursuant to Sunshine State Bank v. FDIC, 783 F.2d 1580 (11th Cir. 1986).

B. "Substantial Loss"

   The FDIC alleges that, at a minimum, losses related to these loans total $174,956.94. This calculation is based on charges by Bank South against its Reserve for Loan Losses, on the allocation of foreclosed real estate to the Other Real Estate Owned account, and on charges to the * * * Chevrolet Dealership Reserve. FDIC counsel further argues that Bank South suffered lost income opportunity in the amount of $30,748.38 because it was forced to seize several non-earning real properties as a result of defaults in three of the 55 loans. In addition, FDIC counsel contends that Bank South has suffered a loss of approximately $70,000 in collection and disposition expenses attributable to loans made by the Respondent. Finally, the FDIC alleges a variety of losses which Bank South suffered which resulted from loans made by the Respondent, but are not among the 55 under consideration here, and prospective losses on loans originated by the Respondent.
{{4-30-91 p.A-1629}}
   The Respondent argues that none of the losses are the result of any unsafe or unsound practice by him. He further argues that some of the loans which he approved were also approved by the loan committee of Bank South's board of directors and, therefore, their losses should not be attributed to his actions.
   To reiterate, it is immaterial under Section 1818(e)(2) whether the Respondent's acts amount to unsafe or unsound practices. That he engaged in the conduct of imprudent loan approval is sufficient to establish the first tier.
   Further, I disagree with the Respondent that Bank South did not suffer substantial losses as a result of his conduct. The bank had to charge off all or a portion of many of the 55 loans under consideration here, and such losses are the direct result of his making the loans. Had he not approved the loans, no loss would have been sustained by the bank.
   I further disagree with the Respondent's contention that approval by the loan committee of certain loans relieves him from liability. He admitted that he approved or participated in the approval of each of these loans. The additional approval of certain loans by his superiors does not negate his conduct.
   Turning to the FDIC's calculations of loss, I argue with only the charges made to the Reserve for Loan Losses (as of the date of service of the Notice) and, to a limited extent, with the lost income opportunity. The charge-offs to the Reserve represent established losses with no likelihood of recovery. Of the 55 loans in questions, 40 such chargeoffs were documented by the FDIC.
   However, included in the FDIC's calculation are charge-offs made as a result of the defaults in the $98,500 loan to * * * made on September 28, 1987. Since the Respondent was not the loan officer on this loan, I conclude the loss was not the result of his "conduct or practice." Therefore, totalling the other 39 charge-offs, I calculate that Bank South suffered losses of $148,609.51.
   The additional losses argued for by the FDIC should not be included because they have not been established on this record. For example, the FDIC Board has considered the inclusion of lost income opportunity incurred by placing non-earning, foreclosed real property into a bank's Other Real Estate Owned account. FDIC Docket Nos. 85-25e, 85-112k, 85-113k (1987 P-H Enf. Dec. ¶5082). There the Board found that the lost opportunity to reinvest funds, which were otherwise invested in a non-earning asset as a result of a foreclosure, should be considered. However, it also recognized the difficulty in quantifying such lost income.
   In this case, the exhibit which the FDIC offered to prove the lost income opportunity calculations has several flaws. First, as the Respondent correctly points out, it was not supported by or explained in the testimony of any witness. Without such explanation, I am unable to determine whether the calculations or its assumptions are reasonable. Second, the calculations include the losses associated with the September 28, 1987, loan to * * *. But this is not a loan which can be attributed to the Respondent. And, finally, the calculations include losses incurred after the date of the Notice. For reasons given below, I conclude that all losses must be calculated as of the date of service of the Notice. In sum, because of the difficulty in quantifying the alleged lost income opportunity and the flaws in the FDIC's supporting exhibit, I conclude that such losses were not established by a preponderance of the credible evidence.
   The remaining items should not be included as losses for a variety of reasons. First, the amounts allocated to Bank South's OREO account as a result of foreclosures: Upon foreclosure of property, a debit is made to OREO in the amount of the lesser of the fair market value of the property or the outstanding loan balance. Any excess of loan balance over the fair market value is chargedoff, i.e., it is considered an unrecoverable loss. That is the only loss the bank has sustained. Any such charge-offs are included in the calculations above. The bank may sustain further losses upon the sale of the property, but, as explained below, we can only consider actual losses incurred as of the date of service of the Notice.
   Next, it is also improper to include charges against the * * * dealer reserve. To include such would ignore the origin and purpose of the reserve. As shown by the testimony of Robert Fender (and as discussed in general by Penny Henderson and Timothy Palmer) the reserve was established with monies otherwise due * * *. The bank did not fund this reserve as it did the Allowance for Loan and {{4-30-91 p.A-1630}}Lease Losses. Further, the purpose of the reserve was to protect the Bank against loss from a covered loan. Although some of the defaulted * * * loans were not covered by this reserve, the ones which were covered do not constitute losses to the bank.
   The exhibit purporting to prove the losses incurred as a result of collection and disposition expense was neither introduced nor explained by testimony. Further, this exhibit and the testimony of * * * regarding collection and disposition expenses were not specific as to which expenses should be attributed to any particular loans among the 55 at issue here. Instead, this evidence relates to the total expenses associated with loans originated by the Respondent. Without reference to a specific loan, I cannot determine that any of the loans at issue were the cause of such expense.
   Finally, with regard to losses associated with loans not at issue here, and to prospective losses, neither due process nor Section 1818(e) permit their inclusion. It is clear that due process prohibits the consideration of issues not alleged in the Notice. The Notice addresses only the 79 loans (now 55). Thus in evidence are three exhibits purporting to show the losses sustained by the Bank for the years 1987, 1988, and 1989 as a result of Clark's lending activity. These exhibits also show losses on loans approved by others and include loans approved by Clark which have not been shown in this case to have been imprudent.
   Since the wording of Section 1818(e)(2) makes a causal connection between "conduct or practice" and "substantial financial loss," losses on loans which have not been shown to have resulted from culpable activity cannot be considered.
   As for prospective losses, I again refer to the language differences between 1818(e)(1) and (e)(2). In Section 1818(e)(1), the losses to be considered include those which the bank "has suffered or will probably suffer ...." However, Section 1818(e)(2) states that the conduct must have "resulted in substantial financial loss...." The absence of prospective loss language in (e)(2) must mean that such is not to be a consideration under this section.
   Though discounting some of the loss allegations, I nevertheless conclude that FDIC proved that Bank South suffered a loss of $148,609.51 as a result of the Respondent's conduct with regard to 38 of the 55 loans. The standards for determining whether this loss is "substantial" are not provided in Section 1818. The term is comparative and fairly subjective. Further, a reasonable argument could be made that the losses should be considered in the context of the asset size of the bank. However, in the legislative history the Senate stated that "substantial" must be determined without consideration to the size of the institutions. S. Rep. No. 323, 95th Cong., 1st Sess. 7 (1977).
   I conclude that the total loss proved by the FDIC from the 38 charge-offs is substantial. Although this amount may not have any real impact on the viability of Bank South, it is a great deal of loss for one person to cause, particularly since it amounts to approximately 20–25% of the Bank's annual earnings.

C. "Willful or Continuing Disregard"⁴
   Counsel for the FDIC correctly points out that this tier provides two alternative standards. Brickner v. FDIC, 747 F.2d 1198 (8th Cir. 1984), where the Court concluded that "continuing disregard" does require some knowledge of wrongdoing, but not the same order of intent as "willful disregard". Though distinct standards, both require proving that the conduct was done with knowledge that the bank's safety and soundness could be harmed.
   For both, the critical word is "disregard." First it must be shown that the conduct or practice demonstrated a disregard for the Bank's safety and soundness. Then it must be shown that the disregard was willful or continuing. Since disregard is not defined in either Section 1818(e) or the legislative history, I conclude it should be given its standard meaning. 3 Sutherland Stat. Const., p. 681. That meaning is "[t]o pay no attention or heed to; to ignore." The American Heritage Dictionary, 2d College Edition (1985). In this case, therefore, the evidence must show that the Respondent ignored safe and sound banking practices by approving the 55 loans at issue.
   While resolution of this requires a review of each loan, the issue is whether in sum the Respondent's conduct demonstrated a disregard for the Bank's safety and soundness.
   And this must be demonstrated clearly and {{4-30-91 p.A-1631}}convincingly, consistent with the Congressional concern that removal is an "extraordinary power" with very serious consequences.
   Examiner Myler testified that none of the loans in issue completely conformed to Bank South's loan policy and all were made without the Respondent first obtaining sufficient information upon which to make an informed judgment about the quality of the loan. On each loan he cites one or more specific loan policy exception, and, for almost every loan, he notes either a deficiency in the information needed by the Respondent to make the loan⁵ or a derogatory credit history. Again deference is given Myler's testimony.
   However, whether particular conduct demonstrates a willful or continuing disregard for the Bank's safety and soundness is not a proper subject for deference. Such is a legal conclusion to be derived from all the facts, including an evaluation of each witness' credibility.
   The Bank's auditor, Penny Henderson, testified on behalf of the FDIC. On direct examination, Ms. Henderson did not specifically address any of the 55 loans at issue. Rather she made general summary comments regarding her February 1988 audit of Bank South loans to customers of car dealers (primarily of * * * Chevrolet). However, she did testify to many of the loans during cross examination.
   Prior to the hearing, Henderson's review of the loans was limited to the February 1988 audit of indirect car loans. Of the 55 loans at issue, only 22 are indirect car loans. And of those 22, on only four did she make comments which support Examiner Myler's statements that the Respondent made the loans without sufficient information upon which to make an informed credit decision. In addition, in addressing FDIC exhibits which she had not previously reviewed, only three of her comments support Examiner Myler's testimony.⁶ Her other comments on specific loans at issue either noted positive aspects of the borrower's credit history (some of which Examiner Myler ignored), indicated that the loan was one upon which reasonable loan officers could disagree was worth making, were otherwise supportive of the Respondent or, did not significantly support the FDIC's argument.
   The Respondent testified that information which Examiner Myler noted as missing from the file was available to him either from other sources at Bank South or during an interview with the borrower. He further testified that the credit history of each borrower contained either positive information or nothing derogatory, that the bank was protected against loss on the particular loan because of the value of the collateral or the existence of a dealer reserve, or that the borrower defaulted for reasons beyond the Respondent's foresight (death, illness, loss of job, or, in one instance, a planned marriage was canceled).
   Though I credit the Respondent, the evidence concerning these loans is generally undisputed. Considering his testimony along with Examiner Myler's, I conclude that each loan falls into one of four categories: (1) loans where the Respondent had sufficient information upon which to make an informed judgment as to the quality of the loan, (2) loans where he had a reasonable basis to anticipate that the bank would unlikely suffer a loss (through disposition of the collateral or a charge to the dealer reserve), (3) loans where the availability of information or a reasonable basis for making the loan is unresolved, and (4) loans where the Respondent did not have sufficient information or other reasonable basis to make the loan.
   Clearly, loans which fall into the first category do not evidence a disregard for Bank South's safety and soundness, even if they result in a loss to the bank. Analysis of a borrower's credit history, his current income and debt, and consideration of collateral or reserves available to support the loan is a basic method of credit analysis. DowJones Irwin's The Loan Officer's Handbook, (W. Korsvik & C. Meiburg, eds., 1986), Chap. 29. Such considerations evidence a regard, not a disregard, for the bank's safety and soundness. The loans which fall

D. "Unfitness to Participate"

   The final element required by Section 1818(e)(2) is whether the Respondent's conduct or practice evidences an unfitness to participate in the affairs of F&M Dublin. In the few published cases involving Section 1818(e)(2) removals, it is apparent that the resolution of this issue is dependent on the resolution of the previous issue. FDIC Docket No. 86-56e (1988 PH Enf. Dec. ¶5110). Where a respondent has responsibilities at his current bank which are similar to those performed at his previous bank, the failure to follow safe and sound practices at the former is evidence of an unfitness to participate in the latter's affairs. The FDIC appears to agree with this conclusion since it argues that the Respondent's unproven "willful or continuing disregard" for Bank South's safety and soundness evidences his unfitness to continue participating in F&M Dublin's affairs.
   At F&M Dublin, the Respondent has similar lending responsibilities (although his management duties are significantly less). The FDIC failed to prove that Clark's conduct and practice at Bank South generally demonstrated a willful or continuing disregard for its safety and soundness. Indeed, on the record as a whole, it appears that the Respondent followed prudent practices and under his stewardship the Bank's assets and earnings significantly increased. Such militates against a conclusion that he is unfit to work at F&M Dublin or any other insured bank. Therefore, I conclude that the FDIC has not proven that the Respondent has evidenced an unfitness to participate in the affairs of F&M Dublin.

   Although meeting its burden of proof on the issue of whether the Respondent engaged in the conduct or practice of approving 55 with imprudent attention to the creditworthiness of the borrowers, which resulted in a substantial loss to Bank South, the FDIC did not prove either that the conduct evidenced his disregard for its safety and soundness or that the conduct evidenced his unfitness to participate in the affairs of F&M Dublin. Therefore, I conclude that no basis for removal of the Respondent exists under Section 1818(e)(2). I recommend that the FDIC Board issue the attached ORDER dismissing this case and adopt the following:

   1. Bank South-Douglas, Douglas, Georgia (herein the Bank South) is a commercial bank existing and doing business under the laws of the State of Georgia with its principal place of business in Douglas, Georgia.
   2. Bank South is an insured State nonmember bank.
   3. Farmers & Merchants Bank, Dublin, Georgia (herein F&M Dublin) is a commercial bank existing and doing business under the laws of the State of Georgia with its principal place of business in Dublin, Georgia.
   4. F&M Dublin is an insured State nonmember bank.
   5. From January 27, 1986, through September 8, 1988, the Respondent served as the executive vice president of Bank South.
   6. From February 12, 1986, through September 8, 1988, the Respondent served as director of Bank South.
   7. Since September 26, 1988, the Respondent has served as loan officer of F&M Dublin.
   8. At all times pertinent to this proceeding, the Respondent served as an officer, director and a participant in the conduct of the affairs of Bank South and F&M Dublin.
   9. During the course of his employment with Bank South, the Respondent approved in excess of 3000 loans, 55 of which the FDIC alleges form the basis for his removal from F&M Dublin.
   10. The 55 loans in issue (set forth above in Section II) were approved by the Respondent without adequate information concerning the borrower's creditworthiness or in spite of derogatory credit information.
   11. As a result of defaults on 39 of these 55 loans, Bank South suffered losses of $148,609.51.
   12. On thirteen of these loans the Respondent had either sufficient credit information or a reasonable basis to conclude that Bank South {{9-30-91 p.A-1634}}was protected from loss, and on default of these credits, there was no loss.
   13. On seven of these loans the Respondent did not have sufficient information to conclude the bank would be protected in the event of default and on default of these credits, Bank South suffered losses in the aggregate amount of $21,063.44.
   14. On the additional 35 loans the record evidence is insufficient to conclude that the Respondent approved them without sufficient information concerning whether Bank South would be protected in the event of default.

   1. Bank South is, and was at all material times, subject to the Federal Deposit Insurance Act, 12 U.S.C. §§ 1811-1833e, the FDIC Rules and Regulations, 12 C.F.R. Chapter III, and the laws of the State of Georgia.
   2. Bank South is an "insured depository institution" within the meaning of 12 U.S.C. § 1813(c)(2).
   3. F&M Dublin is subject to the Federal Deposit Insurance Act, 12 U.S.C. §§ 1811-1833e, the FDIC Rules and Regulations, 12 C.F.R. Chapter III, and the laws of the State of Georgia.
   4. F&M Dublin is an "insured depository institution" within the meaning of 12 U.S.C. § 1813(c)(2).
   5. The FDIC has jurisdiction over the Respondent, Bank South, F&M Dublin, and the subject matter of this proceeding.
   6. Since the conduct of the Respondent set forth in the Notice occurred before August 9, 1989, the provisions of 12 U.S.C. § 1818(e)(2) as it existed prior to that date control this proceeding.
   7. The Respondent engaged in the "conduct or practice" of imprudently approving the loans in issue in this proceeding.
   8. By engaging in the "conduct or practice" described above, the Respondent caused Bank South to suffer the substantial financial losses in the aggregate amount of $148,609.51.
   9. The FDIC did not prove by a preponderance of the credible evidence that the Respondent was responsible for the approval of a loan to * * * on September 28, 1987.
   10. The FDIC did prove by a preponderance of the credible evidence that the Respondent's conduct and practice evidences a "willful or continuing disregard" for the safety and soundness of Bank South.
   11. The FDIC did not prove by a preponderance of the credible evidence that Respondent's conduct or practice evidences his unfitness to participate in the affairs of F&M Dublin.
   12. The FDIC did not prove by a preponderance of the credible evidence that the Respondent should be removed from his position at F&M Dublin for conduct he engaged in while an officer and director of Bank South.
   13. The Notice should be dismissed in its entirety.
   Dated at Washington, D.C. July 25, 1990.
/s/ James L. Rose
Administrative Law Judge