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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, including the following: extending credit without establishing and enforcing realistic payment programs; extending credit on inadequate security; extending credit without obtaining current and complete credit information; operating with an excessive level of adversely classified assets; operating without an adequate loan loss reserve; operating with inadequate liquidity; operating without adequate supervision by a board of directors; violating the statutory maximum lending limit; and operating with management whose practices are detrimental to the bank.
[.1] Unsafe or Unsound PracticesStatutory Standard
[.2] Lending and Collection Policy and ProceduresUnsafe or Unsound PracticesLack of Repayment Program
[.3] Lending and Collection Policy and ProceduresUnsafe or Unsound PracticesInadequate Collateral
[.4] Lending and Collection Policy and ProceduresUnsafe and Unsound PracticesLack of Credit Information
[.5] Lending and Collection Policy and ProceduresLoan Loss ReserveUnsafe or Unsound Practices
[.6] LiquidityUnsafe or Unsound Practice
[.7] LoansClassification of AdverseGenerally
[.8] Federal Reserve Act §23ATransactions with AffiliatesTransfer of Assets
[.9] DirectorsDuties and ResponsibilitiesSupervision of Bank's Affairs
[.10] DirectorsDuties and ResponsibilitiesDelegation to Officers
[.11] DirectorsDuties and ResponsibilitiesSupervision of Bank's Affairs
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In the Matter of * * * BANK * * *
STATEMENT OF THE CASE
These proceedings arise under Section 8(b) of the Federal Deposit Insurance Act (the "Act"), 12 U.S.C. §1818(b). On April 18, 1984, the Board of Directors of the Federal Deposit Insurance Corporation (the "Board" and the "FDIC", respectively) issued a written Notice of Charges and of Hearing to * * * Bank, * * * (the "Bank" or "Respondent"), pursuant to Section 8(b) of the Act and Part 308 of the FDIC's Rules and Regulations, 12 C.F.R. Part 308. The Notice of Charges and of Hearing (the "Notice") charged the Bank with having engaged in unsafe or unsound banking practices and a violation of law. The Notice specifically alleged that the Bank engaged in the following unsafe or unsound practices and violation of law: (1) extending credit without establishing and enforcing realistic repayment programs, (2) extending credit on inadequate security, (3) extending credit without obtaining current and complete credit information, (4) operating with an excessive level of adversely classified assets, (5) operating without an adequate loan loss reserve, (6) operating with inadequate liquidity, (7) operating without adequate supervision by its board of directors, (8) violating the statutory maximum lending limit of * * *, and (9) operating with management whose practices and policies are detrimental to the Bank. The Notice sought an ORDER under Section 8(b)(1) of the Act, requiring the Bank to cease and desist from the unsafe or unsound practices and the violation of * * * law, and requiring the Bank to remedy the conditions resulting from these practices and the violation of * * * law.
OPINION
The Board finds the ALJ's recommended Findings of Fact, with one minor exception discussed below, to be supported by substantial evidence in the record. We therefore, adopt and incorporate them herein by reference. The Board also agrees with the analysis of the law set forth in the ALJ's
{{4-1-90 p.A-448}}Recommended Decision. We find that analysis to be supported both by statute and established precedent. Therefore, the Board hereby adopts and incorporates herein by reference the ALJ's Conclusions of Law.
ORDER
Having found and concluded that Respondent has engaged in unsafe and unsound banking practices within the meaning of Section 8(b) of the Federal Deposit Insurance Act, the Board of Directors of the Federal Deposit Insurance Corporation now issues a Cease-and-Desist Order ("Order") to the * * * Bank, * * * providing:
/s/ Hoyle L. Robinson
CERTIFYING AND FILING OF
FDIC-84-71(b)
Pursuant to §308.13 of the FDIC Rules and Regulations, I hereby certify to the Board of Directors for decision the record of the hearing in the captioned proceeding. It contains a recommended decision, findings of fact, conclusions of law, proposed order, the transcript, exhibits, briefs and reply brief of the FDIC.
/s/ WILLIAM A. SHUE
RECOMMENDED DECISION
FDIC-84-71b
Decided: February 1, 1985
Statement of Facts
The * * * Bank is a corporation existing and doing business under the laws of * * * and has its principal place of business at * * *. It is, and has been at all times pertinent to this proceeding, an insured statechartered bank and is not a member of the Federal Reserve System. As such, the Bank is subject to the Federal Deposit Insurance Act, 12 U.S.C. §§1811-1831d, the rules and regulations of the Federal Deposit Insurance Corporation and the laws of the State of * * *. The Federal Deposit Insurance Corporation has jurisdiction over the Bank and the subject matter of this proceeding.
Discussion And Conclusions Of Law
[.1] We shall now turn to the all important question whether the Bank has engaged in unsafe or unsound banking practices within the meaning of section 8(b) of the Federal Deposit Insurance Act. To begin with, whether a particular practice is unsafe or unsound may be established as a matter of fact through the testimony of a bank examiner. First National Bank of Eden v. Department of the Treasury, 568 F.2d 610 (8th Cir. 1978). In that case the court approved the definition of "unsafe or unsound" by the Comptroller of the Currency, stating:
[.2.6] In re First State Bank of Wayne Country, Monticello, Kentucky, FDIC-83-0132b, June 18, 1984, appeal docketed, No. 84-3562 (6th Cir. July 18, 1984) (Appendix attached hereto at 6) held that failing to establish and enforce realistic programs for the repayment of loans, extending credit that is inadequately secured, extending credit without complete and current credit information, failing to make provision for an adequate loan loss reserve, and operating with inadequate liquidity were unsafe or unsound practices.2
As noted above, the legislative history of section 8(b) of the Federal Deposit Insurance Act (12 U.S.C. § 1818(b)) indicates that the "failure to make adequate transfers to reserves for absorbing losses" is an unsafe or unsound practice. Financial Institutions Supervisory and Insurance Act of 1966: Hearings on § 3158 Before the House Comm. on Banking and Currency, 89th Cong., 2d Sess., 49-50 (1966). Although the federal banking agencies normally treat this practice as an unsafe or unsound banking practice rather than a violation of reporting requirements (e.g. section 7(a)(1) of the Federal Deposit Insurance Act (12 U.S.C. § 1817(a)(1)) the considerations are the same as those governing the securities laws:
[.7.8] The classification of loans has been accepted by Congress in imposing restrictions upon self-dealings by bank insiders. For instance, the "more than normal risk of repayment" language of section
[.9] The standard of care for directors of banks was handed down in Briggs v. Spaulding, 141 U.S. 132, 165-66 (1891):
[.11] Finally, the duty of care also includes a duty to investigate where investigation is necessary to protect the interests of shareholders. Depinto v. Provident Security Life Insurance Co., 374 F. 2d 37 (9th Cir.), cert. denied, 389 U.S. 822 (1967). A director is not excused from this duty because he lacks expertise. Cf., Francis v. United Jersey Bank, 392 A. 2d 1233 (N.J. Super. Ct. Law Div 1978), aff'd, 407A. 2d 1253 (N.J. Super. Ct. App. Div. 1979) (holding liable a "simple housewife" who failed to discharge her responsibilities). Cf., F.D.I.D. v. Lesselyoung, 476 F. Supp. 938 (E.D. Wis. 1979), Aff'd sub nom. F.D.I.D. v. Lauterbach, 626 F. 2d 1327 (7th Cir. 1980) (director's duty to investigate precludes their asserting fraud in transactions with their corporations). Cf., Lane v. Chowning, 610 F. 2d 1385, 1389 (8th Cir. 1979) (duty of directors to investigate and remove an officer who receives an illegal fee for processing a loan). Such investigation should have been made into the reasons for the Bank's deviation from normal banking standards.
[.12] The evidence in the case at bar clearly demonstrates that the Bank engaged in unsafe or unsound practices and therefore such an order is an appropriate one to prevent future abuses and to protect its shareholders.
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, * * * providing: |
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Last Updated 6/6/2003 | legal@fdic.gov |