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FDIC Enforcement Decisions and Orders |
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Bank directors assessed civil money penalties for violating a cease and desist order by failing to implement a policy to prevent unauthorized extensions of credit in the form of overdrafts to several directors.
[.1] DirectorsDuties and ResponsibilitiesSupervision
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[.3] Regulation OLending LimitationsOverdrafts
[.4] Regulation OOverdraftsInadvertent
[.5] Regulation OOverdraftsInadvertent
[.6] Regulation OOverdraftsInadvertent
[.7] Regulation OExtension of CreditOverdrafts
[.8] DirectorsDuties and ResponsibilitiesCorrection of Known Problems
[.9] Civil Money PenaltiesAmountStatutory Standard
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FINDINGS OF FACT AND
[.1] The Board of Directors, having considered the entire record and applicable law, agrees with the findings and conclusions of the Administrative Law Judge.* The Board of Directors also agrees with the proposed order of the Administrative Law Judge to the extent that it: (1) imposes a penalty of $4,500 upon the individual members of the Bank's board of directors for violations of Regulation O; (2) imposes a $5,000 penalty upon * * *; and (3) imposes a $2,000 penalty upon * * *. The Board, however, rejects the Administrative Law Judge's recommendation that the $7,000 fine originally imposed upon the members of the board of directors for violations of the FDIC Order be eliminated. The record amply indicates that the board members violated the FDIC Order by not implementing an effective policy to prevent unauthorized extensions of credit. Each member of the board was responsible to make certain that such a policy was formulated and implemented. Basic principles of banking law dictate that board members of banking institutions play an active role in the activities of their institution and that passivity on their part will not excuse individual liability. In this light, the elimination of the $7,000 penalty is not warranted. It is reasonable, however, that, in consideration of the mitigating factors noted by the Administrative Law Judge, the fine be reduced. As a result, the Board of Directors has determined that a fine of $900 against the members of the Bank's board of directors for violation of the FDIC Cease and Desist Order of December 16, 1977 is appropriate.
FINAL ORDER TO PAY
ORDERED, a penalty of $4,500 is hereby assessed against the members of the Bank's
/s/ Hoyle L. Robinson
RECOMMENDED DECISION
No. 80-35K
Decided: December 9 1980
Bank's payment of overdrafts of two officers and one director found to be contrary to 12 C.F.R. 215.4(d). Payment of overdrafts of another director found to be contrary to 12 C.F.R. 215.4(d) and not an advance against accrued salary as defined in 12 C.F.R. 215.3(b)(1). Bank's extension of credit to a customer found to be contrary to the terms of the Cease and Desist Order of December 16, 1977. Civil Penalties sought to be applied by FDIC found not justified. Reasonable civil penalties imposed and order to be paid.
By Richard A. White, Administrative Law Judge:
The Federal Deposit Insurance Corporation, sometimes referred to as FDIC, the Corporation or proponent, alleges by "Notice of Assessment of Civil Penalty" dated May 19, 1980, that (1) * * * hereinafter referred to as Bank paid checks during designated periods drawn by * * * on two accounts, by * * * on two accounts, by * * * on one account, and by * * * on one account which caused the accounts to be overdrawn in violation of Section 22(h) of the Federal Reserve Act (12 U.S.C. § 375b) and Regulation O (12 C.F.R. Part 215) and that because of the foregoing infractions the Bank's Board of Directors * * * and * * * were assessed and ordered to pay a civil penalty of $24,000; and (2) the Bank extended credit including credit in the form of overdrafts to * * * and his related business interests which exceeded guidelines required to be observed by a December 16, 1977 Order of the FDIC, the Bank's own statement of lending policies, certain State and Federal banking officials, and designated * * * Statutes; and that * * *, president and chairman of the Board of Directors and * * * vice president, approved payment of one or more of the checks drawn on three accounts of * * * or his related business interests which caused these accounts to be overdrawn, and that by reason of the foregoing violations the Bank's Board of Directors were assessed and ordered to pay a civil penalty of $7,000, * * * a penalty of $5,000, and * * *, a penalty of $5,000.
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But again there is no basis for concluding that the action is against the Board as a group. By naming each of the directors it is apparent that they are each put on notice that the proceeding is against them in their capacities as directors.
[.2] It is true that the "Order to Pay" penalties are directed to the "board of directors of the Bank" and that the members are not identified, but naming the members individually is unnecessary. As stated above the persons charged are identified in the opening paragraph of the "Notice" and it is these persons either individually or in their collective capacity as the Board of directors who are penalized.
[.3] Consideration will first be given whether payment of overdrafts was contrary to the Statute and governing regulations. Section 22(h)(4) of the Federal Reserve Act (12 U.S.C. § 357b(4)) provides in effect that a bank may not pay an overdraft of an executive officer or director. The prohibition is implemented by section 215.4(d) of Regulation O (12 C.F.R. § 215.4(d)) which states:
[.4] It is a well known rule of construction that an exception to a general all encompassing proscription is to be construed in a way that does not defeat the general thrust of the provision's dominant theme. It seems clear that the dominant theme of
{{4-1-90 p.A-47}}section 215.4(d) is that bank's may not pay overdrafts of officers or directors. To come within the so called "inadvertent" exception, payment of the overdraft must meet four tests, to wit, it must be inadvertent, the overdraft may not exceed $1,000, the account may not be overdrawn more than five business days, and the overdrawer must be charged the same fee as any other customer of the bank in similar circumstances. For the exception to be invoked all four tests must be satisfied.
[.5] Section 215.4(d) does not define the meaning of this term so it must be accorded its ordinary meaning as used in the language. According to Webster's New Collegiate Dictionary (1956) inadvertent is "heedless, inattentive, unintentional, or not turning the mind to a matter." Inadvertent carries the connotation of something being done (or not done) through oversight rather than done designedly, or in another sense something performed occasionally rather than something done on continuing basis or even frequently. This construction will be observed in treatment of the issues raised in this proceeding.
[.6] Vice president * * * account 23-069-3, after taking into account that a deposit was actually received and encoded by the Bank, though not posted, on February 26 and thus forestalling an overdraw that day, was overdrawn on February 28 and 29 and again on March 31. The overdrafts were all less than $1,000 and none persisted for more than 2 business days. However because there were overdraws on February 28 and 29 and again on March 31, they cannot be considered as inadvertent, but rather appear to be the result of a fairly consistent pattern which tended to ignore the balance level in the account.
[.7] Section 215.3 goes into considerable detail defining what is and is not an extension of credit within the purview of the Federal Reserve Act. Section 215.3(a)(2) provides that an advance by means of an overdraft is an extension of credit. Section 215.4 is headed "General Prohibitions," and subparagraphs (a), (b), and (c) relate the conditions and limits which are to guide the bank in extending credit to insiders. Subparagraph (d) involves overdrafts and provides that the Bank may not pay an overdraft except under designated conditions.
[.8] It is probably true that the individual members of the Board except of course those whose accounts were actually overdrawn were not aware of the overdrafts which are the subject of this proceeding. But by reason of the FDIC letter of July 11 and discussions at Board meetings with president * * * and consultant * * * they were aware of a general problem. Yet despite these warnings neither the Board as a collective body nor the individual members opted or proposed that the Bank adopt a policy that overdrafts not be paid unless the account holder had an extension of credit or a transfer of funds arrangement to cover the overdrafts. Thus it appears that despite warnings that all was not right, the Board chose to continue doing nothing. Thus neither the Board's passivity nor its lack of knowledge concerning particular overdrafts will excuse it from the reach of section 1828(J)(3)(A). Clearly by doing nothing the Board as a group and the individual members allowed a climate to exist which countenanced the violations and in this sense the directors all participated.
[.9] Section 1828(J)(3)(B) relating to Regulation O violations and section 1818(J)(2)(ii) concerning violations of orders both require that in determining the amount of the penalty the FDIC shall take into account the appropriateness of the sanction with respect to the size of financial resources and good faith of the bank or person, the gravity of the violation, the history of previous violations, and such other matters as justice may require.
HOYLE L. ROBINSON |
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Last Updated 6/6/2003 | legal@fdic.gov |