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FDIC Enforcement Decisions and Orders |
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Bank ordered to cease and desist from unsafe or unsound banking practices that included the maintaining of inadequate capital and loan-loss reserves. The FDIC also restricted the lending powers of the bank's president and director by withdrawing his power to extend credit to borrowers in excess of a certain amount. (This decision was affirmed by the U.S. Court of Appeals for the Sixth Circuit, 770 F.2d 81 (1985)).
[.1]Unsafe or Unsound Banking PracticeStatutory Standard
[.2]Lending and Collection Policies and ProceduresExcessive Risk of Loss
[.3]FDICRulemaking Authority
[.4]Cease and Desist OrdersAdditional Capital Ordered
[.5]Cease and Desist OrdersDefensesCessations of Violating
[.6]Cease and Desist OrdersWhen Appropriate
[.7]Cease and Desist OrdersLending Authority Restricted
[.8]Cease and Desist OrdersEffective date
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[.10]Cease and Desist OrdersWhen Appropriate
In the matter of: * * * BANK OF * * *
STATEMENT OF THE CASE
On June 8, 1983, the FDIC issued a Notice of Charges and of Hearingagainst the * * * Bank of * * * County, * * * ("the Bank"). The FDIC charged that the Bank had engaged in improper lending and collection practices, and had failed to maintain adequate capital and loan-loss reserves. The FDIC also charged that the Bank had violated state and federal laws limiting aggregate loans1to individuals.
THE ISSUES
Judge Mosser formulated the issues as follows:
THE FACTS
I. Judge Mosser's Findings as Adopted by the Board
Judge Mosser summarized the record in thirty-seven recommended Findings of Fact. Neither the FDIC staff nor the Bank objects to any of Judge Mosser's recommended Findings. The Board adopts all of them but one.
II. The Bank's Exceptions to Judge Mosser's Findings of Fact
The Bank does not formally challenge any of Judge Mosser's findings. But in its Exceptions to Judge Mosser's Recommended Decision, the Bank asserts several facts that do not appear in Judge Mosser's Findings:
CONCLUSIONS OF LAW
I. Unsafe or unsound practices
A. Meaning of the phrase "unsafe or unsound"
[.1] Judge Mosser reviews the meaning of the phrase "unsafe or unsound practice" as used in Section 8(b)(1). Neither side challenges his analysis. The Board adopts Judge Mosser's view that an "unsafe or unsound practice" is one that is contrary to accepted standards of banking operations which might result in abnormal risk or loss to a banking institution or shareholder. See First National Bank of Eden v. Department of the Treasury568 F.2d 610, 611 (8th Cir. 1978); First National Bank of La Marque v. Smith610 F.2d 1258 (5th Cir. 1980); see also Financial Institutions Supervisory and Insurance Act of 1966: Hearings on S. 3158 Before the House Comm. on Banking and Currency, 89th Cong., 2d Sess., 49-50 (1966) (Memorandum of John E. Horne, Chairman of the Federal Home Loan Bank Board).
B. Lending practices
[.2] Judge Mosser concludes that the Bank engaged in the following activities:
C. Classified loans
Judge Mosser asserts, "(T)he Bank obviously has acted in an unsafe and unsound manner with respect to each of the loans that the FDIC adversely classified as of January 31, 1983." The Bank does not except to this assertion.
D. Loan-loss valuation reserves
As of January 31, 1983, the Bank had $4,724,000 in adversely classified loans. By contrast, the Bank's loan-loss reserve was a mere $152,000.
E. Capital adequacy
As of January 31, 1983, the Bank's adversely classified loans represented 158.42 percent of its total equity capital and reserves.
II. Violations of law, rule or regulation
A. Regulation Omaintenance of records
Regulation O of the Board of Governors of the Federal Reserve System provides:
B. Regulation Oinsider loans
Judge Mosser says the Bank violated Regulation O by lending more than $25,000 to interests related to * * * , a director of the Bank, without the prior approval of the Bank's board of directors. See 12 U.S.C. §375(b)(2); 12 C.F.R. §215.4(b). Judge Mosser asserts that the Bank's loan to * * * , dated November 26, 1982, constituted the violation.
* * * law provides that a bank may not make aggregate loans to any person in an amount exceeding 30 percent of the bank's paid-in capital and actual surplus ("30 percent rule"). * * * Rev. Stat. Ann.§287.280(3). Loans made "for the benefit" of a person are included in the total liabilities of that person. * * * Rev. Stat. Ann.§287.280(4).
D.* * * lawloans exceeding 20 percent of capital and surplus
* * * law specifies that a bank may not make aggregate loans to any person in an amount exceeding 20 percent of the bank's paid-in capital and actual surplus unless the loans are secured by assets worth more than the loans ("20 percent rule"). * * * Rev. Stat. Ann.§287.280(1). Loans made "for the benefit" of a person are to be included in the total liabilities of that person. * * * Rev. Stat. Ann.§287.280(4).
E.* * * lawloans exceeding 10 percent of capital
* * * law specifies that a bank may not make aggregate loans to any person in an amount exceeding 10 percent of the bank's paid-in capital and actual surplus unless the excess of the loan over that 10 percent limit is secured by collateral worth at least twice as much as that excess ("10 percent rule"). * * * Rev. Stat. Ann.§287.280(2). Loans made "for the benefit" of a person are to be included in the total liabilities of that person. * * * Rev. Stat. Ann.§287.280(4).
III. Maintenance of a capital ratio of 7.5 percent.
Judge Mosser concludes that, in view of the evidence, the FDIC may issue an order requiring the Bank to maintain a capital
{{4-1-90 p.A-229}}level of 7.5 percent. The Bank does not challenge this conclusion.
[.3.4] Generally speaking, banking agencies have authority to fashion relief in such a form to prevent future abuses. Groos National Bank v. Comptroller of the Currency, 573 F.2d 889 (5th Cir. 1978). If a bank is operating in an unsafe or unsound condition, and the condition is attributable to an inadequate level of capital, the appropriate regulatory agency may require the bank to raise its capital to an acceptable level. 12 U.S.C. §3907; cf. First National Bank of Bellaire v. Comptroller of the Currency, supra(finding that the Comptroller of the Currency had failed to establish a rational connection between the evidence adduced in the hearing and the requirement that a bank maintain a certain level of capital, but not categorically rejecting capital requirements as allowable forms of relief).
IV. Propriety of a cease-and-desist order
Judge Mosser concludes that it is lawful to issue a cease-and-desist order under the circumstances of this case. The Bank contends that no such order should be issued, because the improper practices and violations of law have been discontinued. The Board adopts Judge Mosser's conclusion.
[.5] The FDIC may issue a cease-and-desist order solely on the basis that the Bank has engaged in violations of law, even when the violations have already been corrected, if the purpose of the order is to assure that the violations do not recur. See First National Bank of Bellaire v. Comptroller of the Currency, supra, 681 & 683. That is the purpose of the order in this case.
[.6] In any event, the Bank continues to suffer adverse effects resulting from the unsafe or unsound practices of the paste.g., the continued presence of a number of the adversely classified loans on the Bank's books. The Board concludes that it is lawful to issue a cease-and-desist order as a means of rectifying the conditions currently affecting the Bank. Id.
In the Notice, the FDIC proposed to issue an order that would compel the Bank to "remove all lending authority from its chief executive officer, * * * ." The order would also compel the Bank to "provide and continue to retain management acceptable to the Regional Director and the Commissioner," including "a qualified chief executive officer." The order specified that the chief executive officer would also be responsible for making loans.
[.7] The FDIC staff takes exception to Judge Mosser's conclusion. The FDIC staff contends that the directive to the Bank compelling it to remove Mr. * * * 's lending powers is a corrective measure authorized by Section 8(b)(1). That section enables the FDIC to require a bank to take affirmative action to correct the conditions resulting from violations of law or unsafe or unsound banking practices.
THE ORDER
I. Effective Date of the Order
[.8] Judge Mosser's Recommended Ordersets an effective date of 10 days after service on the Bank. The FDIC's regulations provide, however, that cease-and-desist orders become effective at the expiration of 30 days after service. 12 C.F.R. §308.36(b). Accordingly, the Board's Final Order modifies the Recommended Orderby setting the effective date at 30 days after service.
II. Bank Procedures Required by the Order
The Bank contends that as a practical matter there is no need for at least two of the order's provisions. First, the Bank says that its collection proceduresthat is, its procedures for obtaining the payment of overdue loansare perfectly adequate as they stand. The Bank objects to the provision requiring it to amend its written lending policy, and to provide in the amendment for the "development of effective collection procedures."
III. Bank Capital Required by the Order
Judge Mosser's Recommended Ordercommands the Bank to maintain a capital level of 7.5 percent. The Bank does not challenge this requirement.
[.9] The Bank's net equity capital was negative on January 31, 1983, and still more so on June 30, 1983. The net equity capital was not sufficient to provide an adequate cushion against loan losses not otherwise provided for (e.g., by loan-loss reserves). In Judge Mosser's view, this condition amounted to an unsafe or unsound practice on the part of the Bank. He concludes that an order requiring the Bank to increase its capital is an appropriate remedy under the circumstances of this case. The Board agrees with his evaluation.
IV. Changes in Management Required by the Order
The Board has determined to incorporate an additional set of provisions into the Order, as follows:
By order of the Board of Directors of the FDIC, dated June 18, 1984.
/s/ Hoyle L. Robinson
Date Issued: February 28, 1984 FDIC-83-132b
BEFORE: Donald W. Mosser
Administrative Law Judge
RECOMMENDED DECISION
On June 8, 1983 the Federal Deposit Insurance Corporation (hereinafter FDIC) issued and served upon the respondent, * * * Bank of * * * County (Formerly * * * County Bank of * * * County, * * *) a Notice of Charges and of Hearing pursuant to Section 8(b) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1818(b). The Notice charged that respondent with engaging in unsound and unsafe banking practices. It also alleged violations of law, rule, or regulation, by the respondent in violating Section 22(b)(2) of the Act, Sections 215.4(b) and 215.7 of Regulation O of the Board of Governors of the Federal Reserve System and Section 287.280(1), (2) and (3) of the * * * Revised Statutes. An answer dated August 9, 1983 was filed by the respondent in which each charge was denied and several defenses were asserted.
Issues
The issues to be decided in this case are essentially three:
I find the following facts based upon the entire record including the pleadings, stipulation, evidence and the proposed findings of fact and conclusions submitted by the parties.
* * * and * * * had a combined loan limit of $200,000.00 secured and $300,000.00 unsecured. (Ex. 39).
8. Of the $4,976,000 in loans subject to special mention or substandard classification as of January 31, 1983, $4,449,000 represents credit extended to borrowers outside the Bank's trade area. Most of these loans were made to borrowers in the * * * area or close associates of individuals from that area. Of the total of the Bank's out-of-state loans, 68.68 percent were subject to adverse classification by the FDIC examiner as of January 31, 1983. (Ex. 3-C).
12. Most of the adversely classified credits listed in paragraph 11 above represent participations in loans originating at either * * * Bank of * * * County or * * * Bank of * * * County, both of which are located in * * * . Other of the adversely classified credits represent 100 percent interest, or more specifically, direct loans to borrowers outside the Bank's normal trade area. (Exs. 9-47). The Bank lacked information such as current credit information, appraisals, evidence of title, or evidence of insurance on all of the loans set forth above. (Ex. 3-C; Tr. 190).
29. The Bank made the following allegations in its complaint before the United States District Court, Eastern District of * * * in its cause of action against * * * Bank of * * * County, * * *, et al., Civil Action No. 83-141:
33. As of January 31, 1983, the Bank's capital stock actually paid in and its actual amount of surplus were $200,000 and $800,000, respectively. (Ex. 3-C).
Conclusions of Law
a. Unsafe or unsound banking practices.
It is provided in Section 8(b)(1) of the Federal Deposit Insurance Act (Title 12 U.S.C. §1818(b)(1)), in pertinent part:
As indicated above, an agency may issue and serve upon a bank a notice of charges under Section 8(b)(1) of the Act for violations of a law, rule or regulation. 12 U.S.C. § 1818(b)(1). Moreover, the agency, upon finding such a violation, has the discretion to take relief in such a manner as to prevent further abuses. Groos National Bank v. Comptroller of the Currency, 573 F.2d 889, 897 (5th Cir. 1978). The relief may be in the form of a cease and desist Order. First National Bank of Bellaire v. Comptroller of the Currency, 697 F.2d 674, 680 (5th Cir. 1983).
c. Whether a cease and desist order should be issued.
Since the evidence clearly demonstrates that * * * Bank engaged in unsafe and unsound bank practices and violated numberous laws, rules or regulations, it must next be decided whether the issuance of a cease and desist order is appropriate. Section 8(b)(1) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(b) (1978), provides in pertinent part that a cease and desist order may be issued against any bank:
PROPOSED ORDER
In view of the above findings of fact and conclusions of law, it is proposed that the Federal Deposit Insurance Corporation issue a Cease and Desist Order to the * * * Bank of * * * County (formerly * * * Bank of * * * County, * * *) providing: |
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Last Updated 6/6/2003 | legal@fdic.gov |