[¶11,719]In the Matter of Advanta Bank Corp., Draper, Utah, Docket No.00-062b (5-31-00)
A cease and desist order was issued, based on findings by the FDIC that it had reason to believe that respondent had engaged in unsafe and unsound practices. (This order was terminated by order of the FDIC dated 4-4-02; see ¶16,309.)
[.1]Interagency Guidance on Subprime LendingCompliance with Policy Required
[.2] , [.3]LoansExtensions of CreditTo Borrowers with Existing Adversely Classified Credits LoansExtensions of CreditTo Borrowers with Existing Adversely Classified Credits
[.21]ShareholdersDisclosure of Cease and Desist Order Required
In the Matter of
ADVANTA BANK CORP.
DRAPER, UTAH (Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
Advanta Bank Corp., Draper, Utah ("Bank"), having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices alleged to have been engaged in by the Bank and of its right to a hearing on the alleged charges under section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b)(1), and having waived those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN
ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated May 31st, 2000, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.
The FDIC considered the matter and determined that it had reason to believe that the Bank had engaged in unsafe or unsound banking practices. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:
ORDER TO CEASE AND DESIST
IT IS HEREBY ORDERED as follows:
[.1] 1. The Bank shall immediately cease: 1) originating any new subprime mortgage loans; and 2) issuing any new credit cards to subprime businesses under the Bank's small business credit card program; until such time as the Bank complies with the Interagency Guidance on Subprime Lending, issued March 1, 1999, and paragraphs 5 and 6 below.
(a) "subprime" lending is lending to borrowers who exhibit characteristics indicating a significantly higher risk of default than traditional bank lending customers; and
(b) "extension of credit" shall be defined as provided in section 215.3 of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. § 215.3 ("Regulation O").
[.3] 3. The Bank shall not extend, directly or indirectly, credit to, or for the benefit of, any borrower who has a loan or other extension of credit with the Bank that has been charged off or classified, in whole or in part, "Loss," "Doubtful," or "Substandard," and is uncollected without prior approval by the Bank's board of directors after the board's affirmative determination, as reflected in the minutes of the meeting, that the extension of credit is in full compliance with the Bank's loan policy, that the extension of credit is necessary to protect the Bank's interest or is adequately secured, that credit analysis has determined the customer to be creditworthy, and that all necessary loan documentation is on file.
[.4] 4. During the life of this ORDER, the Bank shall not, except to the extent that as of the date hereof the Bank has prior contractual obligations as to a previously committed master CD transaction in the approximate amount of $31,000,000 and prior offers outstanding as to retail CDs in the approximate amount of $10,000,000 in the aggregate, increase its total deposits by more than two and one-half (2 1/2) percent during any consecutive three-month period without providing, at least 30 days prior to its implementation, a growth plan to the Regional Director of the FDIC's New York Regional Office ("Regional Director") and the Commissioner of Financial Institutions for the State of Utah ("Commissioner"). Such growth plan shall detail the Bank's funding plans, as well as the anticipated use of the funds. The growth plan shall not be implemented without the prior written consent of the Regional Director and the Commissioner.
[.5] 5. Within 60 days after the effective date of this ORDER, the Bank shall revise, adopt, and implement written lending and collection policies and procedures to provide effective guidance and control over the Bank's lending function, including, but not limited to, the Bank's subprime lending activities. Such policies and their implementation shall be in a form acceptable to the Regional Director and the Commissioner.
[.6] 6. Within 60 days after the effective date of this ORDER, the Bank shall revise, adopt, and implement written policies and procedures to provide effective internal routines and controls over the Bank's overall operations, including, but not limited to, leasing, subprime lending, and mortgage servicing advancing activities. Such policies and their implementation shall be in a form acceptable to the Regional Director and the Commissioner.
[.7] 7. Within 30 days of the effective date of this ORDER, the Bank shall provide to the Regional Director and the Commissioner records or other acceptable documentation relating to the advances by the Bank to fund servicing obligations ("advances") pursuant to the servicing and subservicing agreements dated February 15, 1999 ("Servicing Agreements") between the Bank and Advanta Mortgage Corp. USA ("AMCUSA"). The information contained in such records or documentation shall include:
(a) Identification of the fees and other benefits or remuneration received by the Bank
in exchange for making advances under the Servicing Agreements;
(b) Accounting, funding and reconcilement records of all advances made by the Bank under the Servicing Agreements;
(c) An assessment of the credit quality of the advances by the Bank under the Servicing Agreements, including, but not limited to the value of the collateral securing each such mortgage, the default and foreclosure rate with regard to the mortgages, and the recovery rate of the funds advanced by the Bank for the servicing of the mortgages;
(d) An assessment of the Bank's legal ability to be reimbursed for advances made pursuant to the Servicing Agreements should a mortgage become in default or should AMCUSA declare bankruptcy;
(e) The aggregate amount and composition of covered transactions (as defined in section 23A of the Federal Reserve Act, 12 U.S.C. § 371c) the Bank has with AMCUSA; and
(f) Any other information requested by the Regional Director or Commissioner.
[.8] 8. Within 60 days of the effective date of this ORDER, the Bank shall adopt or revise and implement an adequate plan, acceptable to the Regional Director and Commissioner, to ensure that all advances are made pursuant to an overall business strategy that addresses critical issues including, but not limited to, a risk assessment process that incorporates an assessment of credit, operating and legal risks, and compliance with section 23A of the Federal Reserve Act, 12 U.S.C. §371c.
[.9] 9. Within 60 days the Bank shall adopt or revise and implement adequate systems and procedures to effectively manage the risk to the Bank posed by the making of advances under the Servicing Agreements. Such systems and procedures shall be acceptable to the Regional Director and Commissioner.
[.10] 10. Within 60 days of the effective date of this ORDER, the Bank shall employ management acceptable to the Regional Director and the Commissioner who are knowledgeable in the area of mortgage servicing.
[.11] 11. The Bank shall cease from making advances under the Servicing Agreements after 60 days from the effective date of this ORDER unless the Bank has complied with the requirements of paragraphs 7-10 above.
[.12] 12. (a) Within 60 days from the effective date of this ORDER, the Bank shall have qualified management. Such management shall include an experienced chief executive officer who shall be given stated written authority by the Bank's board of directors. Such written authority shall include the responsibility of implementing and maintaining lending policies and other Bank policies in accordance with sound banking practices.
(b) Present management shall be assessed on its ability to:
(i) Comply with the requirements of this ORDER;
(ii) Improve and thereafter maintain the Bank in a safe and sound condition, including asset quality, capital adequacy, liquidity adequacy, and earnings adequacy; and
(iii) Comply with all applicable State and Federal laws and regulations.
(c) During the life of this ORDER, the Bank shall notify the Regional Director and the Commissioner in writing of any resignations and/or terminations of any members of its board of directors and/or any of its senior executive officer(s).
(d) The Bank shall comply with section 32 of the Act, 12 U.S.C. §1831i.
[.13] 13. (a) Within 30 days from the effective date of this Order, the Bank shall establish and shall thereafter maintain, through charges to current operating income, an adequate valuation reserve for loan and lease losses. In determining the adequacy of the valuation reserve for loan and lease losses, the board of directors of the Bank shall at a minimum consider the following:
(i) Prevailing instructions contained in the Federal Financial Institutions Examination Council booklet entitled "Instructions-Consolidated Reports of Condition and Income";
(ii) The volume and mix of the existing loan portfolio, including the volume and severity of nonperforming loans and adversely classified credits, as well as an analysis of net charge-offs experienced on previously adversely classified loans;
(iii) The extent to which loan renewals and extensions are used to maintain loans on a current basis and the degree of risk associated with such loans;
(iv) The trend in loan growth, including any rapid increase in loan volume within a relatively short time period;
(v) General and local economic conditions affecting the collectibility of the Bank's loans;
(vi) Previous loan loss experience by loan type, including the trend of net charge-offs as a percent of average loans over the past several years;
(vii) Off balance sheet credit risks;
(viii) The overall risk associated with each concentration of credit together with the degree of risk associated with each related individual borrower; and
(ix) Any other factors appropriate in determining future valuation reserves.
(b) Notwithstanding the provisions of Paragraph 13(a) above, the Bank shall achieve, within 30 days of the effective date of this ORDER, an adequate valuation reserve for loan and lease losses, after charge off of loans classified "Loss" as required in Paragraph 14 below, and shall thereafter maintain, through charges to current operating income, an adequate valuation reserve for loan and lease losses.
(c) As of June 30, 2000, and prior to the submission of any Report of Condition or Report of Income thereafter, the board of directors of the Bank shall review the adequacy of the Bank's valuation reserve for loan and lease losses. The minutes of the board meetings at which each review is undertaken shall indicate the results of the review, the amount of any increase to the reserve, and the basis for the amount of the valuation reserve. The criteria for the review shall be as set forth in Paragraph 13(a).
[.14] 14. Within 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets recommended to be classified "Loss" at the current FDIC examination of the Bank that have not been previously collected or charged-off. Reduction of these assets through proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph. Within 10 days from the date of the final FDIC report of Examination of the Bank, the Bank shall eliminate from its books, by charge-off or collection, all assets classified "Loss" and one-half of all assets classified "Doubtful" not previously collected or charged off.
[.15] 15. (a) Within 30 days of the effective date of this ORDER, the Bank's board of directors shall establish an internal loan review and grading system ("System") to periodically review the Bank's loan portfolio and identify and categorize problem credits. The System shall be in a form acceptable to the Regional Director and the Commissioner. At a minimum the System shall provide for:
(i) The identification of the overall quality of the loan portfolio;
(ii) The identification and amount of each delinquent loan;
(iii) An identification or grouping of loans that warrant the special attention of management;
(iv) For each loan identified, a statement of the amount and an indication of the degree of risk that the loan will not be fully repaid according to its terms and the reason(s) why the particular loan merits special attention;
(v) An identification of credit and collateral documentation exceptions;
(vi) The identification and status of each violation of law, rule or regulation;
(vii) An identification of loans not in conformance with the Bank's lending policy, and exceptions to the Bank's lending policy;
(viii) An identification of insider loan transactions; and
(ix) A mechanism for reporting periodically, no less than quarterly, to the board of directors on the status of each loan identified and the action(s) taken by management.
(b) A copy of the reports submitted to the Bank's board of directors, as well as documentation of the action taken by the Bank to collect or strengthen assets identified as problem credits, shall be kept with the minutes of the board of directors.
[.16] 16. Within 60 days from the effective date of this ORDER, the Bank shall develop, adopt, and implement a written policy satisfactory to the Regional Director and the Commissioner, which policy shall govern the relationship between the Bank and its holding company and shall limit the payment of any management, consulting, or other fees or funds of any nature, directly or indirectly, to or for the benefit of the Bank's
holding company to only those fees or funds paid in connection with services performed by the Bank's holding company on behalf of or for the benefit of the Bank.
[.17] 17. Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of laws, rules or regulations identified at the current FDIC examination of the Bank. In addition, the Bank shall henceforth comply with all applicable laws and regulations.
[.18] 18. The Bank shall comply with Appendix A to 12 CFR Part 365-Interagency Guidelines for Real Estate Lending Policies, including but not limited to complying with the following:
(a) Any loan on owner-occupied 1- to 4-family residential property originated, purchased, or otherwise acquired by the Bank, previously or in the future, with a loan-to-value ratio that equals or exceeds 90 percent at origination and that lacks appropriate credit enhancement in the form of either mortgage insurance or readily marketable collateral, whether securitized or not, shall be separately identified in the Bank's records, and their aggregate amount shall be reported at least quarterly to the Bank's board of directors.
(b) In determining the aggregate amount of such loans, the Bank shall: (i) Include all loans secured by the same property if any one of those loans equal or exceed the 90 percent loan-to-value limit; and (ii) include the recourse obligation of any such loan sold with recourse.
(c) The approval of any such loan originated, purchased, or otherwise acquired by the Bank after the date of this order shall be supported by a written justification that clearly sets forth all of the relevant credit factors that support the underwriting decision. The justification and approval documents for such loans shall be maintained as a part of the permanent loan file.
(d) The aggregate amount of all loans that equal or exceed the 90 percent loan-to-value limit, whether securitized or not, shall not exceed 100 percent of the Bank's total capital as defined in Appendix A to 12 CFR Part 325.
[.19] 19. Within 90 days of the effective date of this ORDER, the Bank shall sufficiently reduce or otherwise improve assets subject to Special Mention in the current FDIC examination to warrant removal from the Special Mention category.
[.20] 20. While this ORDER is in effect, the Bank shall not declare or pay ny cash dividends on its capital stock without the prior written approval of the Regional Director and the Commissioner.
21. On the fifteenth day of the second month following the effective date of this ORDER, and on the fifteenth day of every third month thereafter, the Bank shall furnish written progress reports to the Regional Director and the Commissioner detailing the form and manner of any actions taken to secure compliance with this ORDER and the results thereof. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director and the Commissioner have released the Bank in writing from further reports.
[.21] 22. No more than 20 days from the effective date of this ORDER, the Bank shall send to its shareholders a description of this ORDER. The description shall fully describe this ORDER in all material respects. The description and any accompanying communication, statement or notice shall be sent to the FDIC, Registration and Disclosure Section, 550 17th Street, N.W., Washington, D.C., 20429, for review at least 10 days prior to dissemination to shareholders. Any changes requested by the FDIC shall be made prior to dissemination of the description, communication, notice or statement.
This ORDER shall be effective immediately upon service on the Bank.
The provisions of this ORDER shall be binding upon the Bank, its directors, officers, employees, other institution-affiliated parties, successors and assigns.
The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.