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FDIC Enforcement Decisions and Orders |
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A bank director who made preferential loans for the benefit of affiliates and who authorized overdrafts in the checking accounts of those affiliates was assessed a civil money penalty for unsafe and unsound banking practices.
[.1] Civil Money PenaltiesAmount of PenaltyStatutory Standard
[.2] Civil Money PenaltiesAmount of PenaltyStatutory Standard
[.3] Civil Money PenaltiesFactors Determining LiabilityViolation of Lending Limitations
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DECISION
The Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") has reviewed the record and finds that the Administrative Law Judge's ("ALJ's") Recommended Decision (appended hereto) is in all material respects fully supported by the law and the evidence. The ALJ's Recommended Decision and Order is therefore adopted and incorporated herein by reference.
ORDER
After taking into account the appropriateness of the penalty with respect to the financial resources of Respondent * * *, his good faith, the gravity of the violations, the history of previous violations, and such other matters as justice may require, it is:
RECOMMENDED DECISION AND
WILLIAM A. GERSHUNY, Administrative Law Judge: A hearing was held in * * *, on September 17-18, 1986 at the request of Respondent * * *, on Notice of Assessment of Civil Money Penalties issued June 25, 1986, pursuant to Sec. 18(j)(3) of the Federal Deposit Insurance Act. 12 U.S.C. 1828(j)(3). The last post-hearing briefs were received on December 15, 1986.
Findings of Fact and Conclusions of Law
I. Jurisdiction
The Notice alleges, Respondent * * * admits, and I find that both the * * * Bank (hereafter "Bank"), an insured state nonmember bank, and Respondent * * *, then its Chief Executive Officer and Chairman of the Board, are subject to the Federal Deposit Insurance Act, 12 U.S.C. 18111831, and to the jurisdiction of the FDIC.
II. The Alleged Violations
The Notice alleges the following violations:
A. Background.
The Bank was organized in 1977 by community leaders to provide banking services in a riot-torn area of * * * no longer served by any other bank, to rekindle economic activity, and to finance the rehabilitation of existing, deteriorating slum housing.
B. The Loans.
Between 1983 and 1985, thirty-eight (38) loans were made to * * * and the eight limited partnerships in an amount in excess of $3.4 million, and one letter of credit was issued to one of the limited partnerships in the amount of $168,000. These credit extensions are summarized as follows:
In 1984, the Bank renewed a loan to * * * in the amount of $80,000, for the benefit of * * *. The loans were secured by an $80,000 note receivable given to * * * by one of the limited partnerships in lieu of
{{4-1-90 p.A-1071}}payment for construction work. Interest payments were made by * * *.
C. The Overdrafts.
As described more fully in the Notice and as stipulated by the parties, the accounts of * * * and the limited partnerships in 1984-5 were overdrawn on almost 400 days in amounts ranging from $2 to $514,681. Many of the overdrafts were paid with proceeds of loans credited to the accounts as late as seventeen days after the date of the note.
D. Lending Limits.
Section 23A(a)(1) imposes two lending limitation requirements on transactions with affiliates. The first prohibits transactions which when aggregated for any one affiliate exceed ten percent of the bank's capital stock and surplus. The other prohibits transactions which when aggregated for all affiliates exceed twenty percent.
E. Collateral.
Section 23A(c)(1) requires collateral of a market value equal to a minimum percentage of the amount of the loan for all affiliate loans. Where real and personal property is pledged as collateral, its market value must be 130 percent of the loan.
F. Safe and Sound Banking Practices.
Included within the concepts of unsound and unsafe banking practices are the concentrations of credit represented by these loans and overdrafts, the Bank's weak collateral position and its capitalization of interest. The above discussions of these practices will not be repeated here, and I find and conclude that these practices violate Sec. 23A(a)(4), which requires that such transactions "shall be on terms and conditions that are consistent with safe and sound banking practices."
G. Preferential Interest Rates.
Section 215.4(a)(1) of Regulation O, made applicable to insured state nonmember banks by Sec. 337.3 of FDIC Rules and Regulations, provides that loans to insiders and their related interests must be made "on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions by the bank with other persons that are not covered by this Part and who are not employed by the bank." Respondent * * * admits that each of the limited partnerships was a related interest within the meaning of Regulation O.
H. Risk of Repayment.
Section 215.4(a)(2) of the Regulation O requires that insider loans "not involve more than the normal risk of repayment or present other unfavorable features." The Notice alleges violations of this provision in connection with loans to Director * * * and to seven of the limited partnerships.
I. Prior Approval.
More than 25 of the loans to related interests (in excess of $25,000 or 5% of the Bank's capital and unimpaired surplus) had no prior approval of the Board of Directors or were given subsequent approval, in apparent violations of Section 215.4(b) of Regulation O. Respondent * * * testified that a written policy of polling Directors by telephone had been in place since 197980, and that he was informed by the Vice President - Loans that the policy was followed when approval at Directors' meetings was not obtained, that the Directors would be orally apprised of the results of the polling, and that he had no knowledge of whether polling records were kept. Respondent offered no other evidence of the existence or use of such a practice and did not call the officer purportedly in charge of polling. Examiner * * * credibly testified that no one at the bank mentioned such a practice, that he saw no evidence of polling, and that the written loan policy contained no provision for polling.
III. Civil Money Penalty
Section 18(j)(3)(A) of the Federal Deposit Insurance Act authorizes the imposition of a civil penalty of not more than $1,000 per day upon "any officer, director, employee, agent, or other person participating in the conduct of the affairs" of a nonmember insured bank who violates Section 23A or Regulation O. Having found and concluded above that Respondent * * * , while serving as an officer and director of the Bank, engaged in multiple violations of these provisions, I must conclude also that he is liable for a civil penalty.
[.1] In the determination of the amount of the penalty, Section 18(j)(3)(B) sets forth a number of factors to be considered: the appropriateness of the penalty with respect to the financial resources of the person charged, i.e. his ability to pay; his good faith; the gravity of the violations; the history of previous violations; and such other matters as justice may require.
[.2] Turning initially to Respondent * * * ability to pay, the record reflects that he earned a salary of $82,280 from his positions with the Holding Company, the Bank and * * * and had additional earnings of $10-12,000 as a consultant. He is a licensed attorney and realtor, and had a net worth in May, 1985, of $356,000. Although he apparently does not have $10,000 in cash, Respondent * * * has sufficient assets for sale or as security for a loan to satisfy any penalty which might be imposed here. His ability to pay, therefore, is not a negative factor.
[.3] The "good faith" factor must be considered together with the history of previous violations. The record here is replete with prior warnings from the State, the Federal Reserve Board and the FDIC concerning apparent violations of Section 23A and Regulation O, based on the Bank's preferential treatment of the affiliates. Yet Respondent * * * , an attorney, continued on the same course as before as to these affiliate transactions, without consulting experienced bank counsel and without making any effort whatever to perfect the assignment of the HUD housing assistance payments to the Bank. It is difficult, if not impossible, to glean from this record any suggestion of a good faith effort on his part to comply with banking regulations. Respondent * * * admittedly was motivated to provide housing to the commmunity's needy. There is no evidence or suggestion that he derived any personal benefit or gain from the transactions in question. This, of course, is a factor to be considered in determining the amount of the penalty. But, at the same time, it must be said that, in the process of performing that social good, Respondent * * * literally thumbed his nose at bank regulators and sound banking principles, and jeopardized the very existence of the bank which was organized to serve this depressed community.
RECOMMENDED ORDER TO PAY*
After taking into account the appropriateness of the penalty with respect to the financial resources of Respondent * * * , his good faith, the gravity of the violations, the history of previous violations, and such other matters as justice may require, it is |
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Last Updated 6/6/2003 | legal@fdic.gov |