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FDIC Enforcement Decisions and Orders |
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Banks ordered to cease and desist from practices such as operating with excessive volume of adversely classified assets; engaging in hazardous lending and lax collection practices; operating with inadequate equity capital and allowance for loan and lease losses; engaging in violations of applicable law; operating with deficient or inadequate loan documentation; engaging in practices which produce inadequate operating income and excessive loan losses; and failing to provide adequate supervision and direction over the affairs of the Banks to
{{4-1-90 p.A-1257}}prevent unsafe or unsound practices and violations of law. (Petition seeking attorneys' fees under Equal Access to Justice Act denied, 8-21-89. See [¶5134]. The Order to Cease and Desist in this case was set aside and the matter was remanded by the U.S. Court of Appeals for the Eighth Circuit, 878 F.2d 215 (1989)).
[.1] Cease and Desist OrdersWithdrawal of Answer
[.2] Cease and Desist OrdersFDIC Authority to Issue
[.3] Cease and Desist OrdersAffirmative RemediesFDIC Approval of Management
[.4] DirectorsDuties and ResponsibilitiesSupervision of Bank's Affairs
[.5] Cease and Desist OrdersAffirmative RemediesAdditional Directors Ordered
[.6] FDICSupervisory Functions of
[.7] FDICSupervisory Functions of
[.8] Practice and ProcedureStipulations
[.9] Cease and Desist OrdersFDIC AuthorityFuture Misconduct
[.10] Cease and Desist OrdersFDIC AuthorityOversight of Management
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In the Matters of: * * * BANK * * *; * * * BANK * * *; and * * * BANK
(Consolidated)
I. PROCEDURAL HISTORY
This proceeding is a consolidation of three cease and desist actions brought by the Federal Deposit Insurance Corporation ("FDIC") against the * * * Bank * * *, an insured state nonmember bank, the * * * Bank * * *, an insured state nonmember bank, and the * * * Bank, * * *, an insured state nonmember bank (* * *, * * * and * * * are sometimes referred to collectively as the "Banks" or the "Respondents"), for engaging in unsafe or unsound banking practices and violations of law within the meaning of section 8(b) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1818(b).
II. STATEMENT OF THE CASE
Pursuant to the Stipulations of the parties, which included withdrawal of the Banks' Answers, and by operation of section 308.06(d) of the Rules and Regulations, 12 C.F.R. § 308.06(d), the ALJ found the facts and conclusions in the case to be as alleged in the Notices. The Notices alleged, and the ALJ found and concluded, that each of the Respondent Banks is subject to the jurisdiction of the FDIC and its rules and regulations. (R.D. at 2).3 The Notices alleged, and the ALJ properly found and concluded, that each Respondent engaged in unsafe or unsound banking practices which include: following hazardous lending and lax collection practices; operating with an excessive volume of poor quality loans as a result of such hazardous lending and lax collection practices; operating with an inadequate level of capital protection for the kind and quality of assets held; failing to provide and maintain an adequate allowance for loan and lease losses for the volume, kind, and quality of loans and leases held; and operating in a manner which produces excessive overhead expenses, inadequate operating income or inadequate earnings. (R.D. at 2; Nov. 16 Br. at 15-17; Dec. 3 Br. at 8).
[.1] By withdrawing their Answers to the Notices, Respondents have chosen not to contest the allegations contained in the Notices and those allegations must be found as fact as set forth in the Regulations. Consequently, Respondents presented no evidence to rebut or to mitigate the seriousness of the allegations. Therefore, the Board of Directors ("Board") of the FDIC has no alternative but to accept the serious allegations set forth in the Notices as fact and to incorporate such findings herein by reference.
III. THE RELIEF ISSUES
The parties have left at issue two fundamental aspects of the relief sought by enforcement counsel. The parties have sought to present and to attack, respectively, these remedies as matters of law. The first issue relates to whether the FDIC has the authority under section 8(b) of the FDI Act to take affirmative action as a remedial measure to correct deficiencies in bank management that have led to serious unsafe or unsound banking practices resulting in severe financial problems for the bank. In these proceedings, the form of the FDIC's proposed affirmative remedial action was to require that within 90 days the Banks must have and thereafter retain "management acceptable to the Regional Director...." The provision at issue also required the Banks to have and retain a qualified senior lending officer with written authority from the Banks' boards and also set out four factors that are to be the basis for management's acceptability.
A. The ALJ's Recommended Remedies
In the Recommended Decision, the ALJ found that the Management Acceptable Provisions proposed by enforcement counsel5 should not be included in the Orders, but that the Injunctive Relief Provisions should be included as part of his recommended order. (R.D. at 6).
B. Discussion of the Remedies
[.2] 1. The FDIC's Authority to Fashion
Section 8(b) of the FDI Act, 12 U.S.C. § 1818(b), specifically provides that the Board has the authority to impose affirmative as well as prohibitive relief. In appropriate circumstances, the Board has exercised just this authority and utilized its judgment and expertise to formulate orders that are both remedial in nature and specifically designed to correct the problems of a particular bank. The Board further notes that judicial deference has been afforded to the experience and expertise of federal regulatory agencies in the formulation of remedies necessary to carry out their statutory mission. See, e.g., Groos National Bank v. Comptroller of the Currency, 573 F.2d 889 (5th Cir. 1978). In regulating financial institutions, where it is found that a bank has engaged in unsafe or unsound practices or violations of the law, the courts have held that the appropriate federal regulatory agency has broad discretion under the FDI Act to fashion an appropriate remedy to stop such practices or violations, to correct the effects of such practices or violations, and to prevent future abuses. Brickner v. Federal Deposit Insurance Corp., 747 F. 2d 1198, 1203 (8th Cir. 1984); First National Bank of Bellaire v. Comptroller of the Currency, 697 F.2d 674, 680 (5th Cir. 1983); del Junco v. Conover, 682 F.2d 1338, 1340 (9th Cir. 1982), cert. denied, 459 U.S. 1146 (1983); Scotia v. United States of America, 530 F. Supp. 162, 165 n.1 (citing The First National Bank of Scotia v. United States of America, unpublished opinion No. 80-4256, slip op. at 2 (2d Cir. April 9, 1981)), 166 (D.D.C. 1982); Groos, 573 F.2d at 897.8
[.3] A cease and desist order, such as the one at issue here, is a mechanism by which the FDIC is able to require a bank to take the actions necessary to correct the conditions resulting from violations of law or unsafe or unsound banking practices. A simple prohibitory requirement that a bank halt the unsafe or unsound practices is frequently an insufficient remedy to restore the bank to financial health. For this reason, section 8(b) specifically authorizes affirmative relief to correct the existing problems. Where a bank's management, through its actions, inactions or policies, is a key factor in the creation of the bank's problems, often the most effective (and many times the only) way to restore the bank to financial health is to require it to upgrade the level of ability of its management. The Board has held that, in appropriate circumstances, it has the broad discretion to fashion an appropriate remedy, such as a management acceptable clause, to facilitate correction of the Bank's problems, including management deficiencies, and to bring to an end the unsafe or unsound conditions or practices. Docket No. FDIC 85-42b, Vol II P-H Enf. Dec. ¶5062, 6588 (1986).
2. The Management Acceptable Provisions at Issue
While the Board has rejected the arguments of the Respondents and the ALJ that the FDIC lacks the legal authority to impose affirmative relief dealing with management, this type of relief has been ordered by the Board only in very serious situations. Whether a management acceptable provision of some type is an appropriate remedial measure is dependent upon the specific factual circumstances of a particular proceeding and is a separate factual issue that must be addressed in each matter. In this proceeding, the Board is forced to make such a determination as to the appropriateness of such a management acceptable provision on the basis of a very sparse and conclusory factual record. Even though the record is sparse, it establishes serious deficiencies in lending operations, management and controls, all of which are of great concern to this Board. The lack of a more complete factual record exploring in some detail the relationship between the Banks' unsafe or unsound practices and poor financial condition and the Banks' senior management has increased the difficulty of making a proper analysis and an informed judgment as to the appropriate remedial measures for these particular Banks. Nevertheless, in view of the serious financial problems and urgent need for corrective action by these Banks the Board concludes that any further delay in implementing appropriate corrective action is untenable and has exercised its best judgment on the basis of the facts available and the conclusions that are implicit from those facts.
[.4] As the ALJ recognized, at a minimum it is vital that the Banks each have and retain a qualified senior lending officer with a suitable degree of experience in not only approving future loans, but also in collecting the substantial volumes of adversely classified and delinquent loans already in the Banks. The Board agrees. Further, if a lending officer is to be successful, it is also necessary that his/her responsibilities and authority be set out in writing and that the officer adhere to safe and sound lending practices and policies. However, the existence of a qualified lending officer does not absolve the Banks' boards of directors and other management from their continuing responsibility for overseeing the Banks' future operations and practices, including their lending practices or the correction of the present problems and deficiencies. The Banks' directors must initially select with due care a qualified individual to serve as the senior lending officer and provide that officer with an appropriate level of authority to successfully perform the duties of that position. The directors then must provide adequate oversight over the performance of the senior lending officer to ensure that the requirements of the cease and desist order are met and that the lending operations continue to meet safety and soundness standards.
[.5] Moreover, the record establishes in the present case that the Banks' boards of directors have failed to provide supervision over the active officers to prevent such practices. The oversight and guidance of a board of directors is critical to the effective management and operation of a bank. The Board believes that an independent board of directors is a prerequisite to correct the lack of supervision of the Banks' management. The Respondents have stipulated to a provision in the proposed Orders requiring that the Banks' boards of directors be composed of a majority of independent directors. Based upon the serious financial condition of the Banks and the management deficiencies discussed herein, the Board agrees that the Banks must each have an independent board of directors to provide proper oversight of compliance with the remedial Order and the Banks' return to financial health. However, the stipulated provision leaves indefinite the time for implementation of the requirement for an independent board of directors. The Board finds such ambiguity unacceptable in view of the Banks' serious financial problems and it's managerial weaknesses. Consequently, the Board accelerates the time period for selection of an independent board of directors to require an election within 60 days of the effective date of the Orders and rejects the stipulated provisions.
[.6] In his Recommended Decision, the ALJ noted that it is a "fundamental precept of bank law [that] it is the responsibility of the bank, in the first instance, to determine its own management." (R.D. at 6). While the Board agrees with this statement, it is our view that some oversight by the FDIC over management of the Banks does not conflict with this proposition. The Banks will still select their own lending officer(s) subject only to the requirement that the selected officers have the necessary level of training and experience to correct the
3. Respondents' Objection to the Management Clause
Throughout these proceedings it has been asserted by Respondents both explicitly and implicitly that the provisions which require that management be acceptable to the FDIC are in fact the exercise of removal power under section 8(b), which sidesteps the stringent requirements for removal set forth under section 8(e). 12 U.S.C. ¶1818(e). (Resp. B. at 6-13, 24-25; R.D. at 6). The Board has consistently concluded that the inclusion of a management or lending officer acceptable clause is a proper exercise of FDIC enforcement authority under section 8(b). See, e.g., Docket Nos. FDIC 85-42b, 2 P-H FDIC Enf. Dec. ¶5062 (1986); FDIC 83-132b, 1 P-H FDIC Enf. Dec. ¶5024 (1985), aff'd as to other issues, First State Bank of Wayne County v. FDIC, 770 F.2d 81 (6th Cir. 1985); FDIC 83-172b, 1 P-H FDIC Enf. Dec. ¶5030 (1984), aff'd, Bank of Dixie v. FDIC, 766 F.2d 175 (5th Cir. 1985).
[.7] This Board disagrees with the premise that affirmative remedial provisions, such as management limitations on the authority of specific officers or the requirement of qualified officers acceptable to the FDIC, are tantamount to a section 8(e) removal. The effect of such restrictions is much more limited than that imposed under section 8(e). In a removal under section 8(e), an officer or director is prohibited from participating in any manner in the conduct of the affairs of the bank from which he/she has been removed and from participating in any manner in the conduct of the affairs of any other FDIC insured bank. 12 U.S.C. ¶1818(e)(1), (j)(2). As such, a section 8(e) removal would not only eliminate the current officers' lending authority, but would also remove them from all management responsibilities within the Banks and prevent them from assuming or acting in any management positions in other FDIC insured banks.
B. The Injunctive Relief Provisions
The Banks have not consented to the Injunctive Relief Provisions contained in paragraphs A-I of the * * * Order, paragraphs A-H of the * * * Order and paragraphs A-H of the * * * Order. The injunctive relief provisions order the Banks to cease and desist from specified unsafe and unsound banking practices. These are: operating with an excessive volume of adversely classified loans; engaging in hazardous lending and lax collection practices; operating with inadequate equity capital and loan loss allowances; operating with management whose policies are detrimental to the Banks; operating with deficient or inadequate loan documentation; engaging in practices which produce inadequate income; failing to provide adequate supervision and direction over the Bank; and oper-
{{4-1-90 p.A-1266}}ating with inadequate allowances for loan and lease losses.
[.8] As discussed, the FDIC has broad discretion in formulating remedies under section 8(b). Specifically, section 8(b) provides in pertinent part that "...[t]he agency may issue and serve upon the bank. ...an order to cease and desist from any such violation or [unsafe or unsound] practice. Such order may...require the bank... to cease and desist from the same."
[.9] The type of injunctive provisions at issue in this action are routinely found in FDIC cease and desist orders and have been imposed on literally hundreds of banks which have made no serious complaints about being able to understand and comply with them. That Respondents have created a tempest in a teapot with respect to this issue, seems clear. The ALJ also considered the objections and concluded that the injunctive relief was closely related to the unsafe or unsound practices to which Respondents have in essence admitted. The Board concurs with the analysis by the ALJ in this respect. The Board finds that the proposed injunctive relief provisions clearly fall within the FDIC's broad discretion to fashion appropriate remedies to stop such practices and to prevent future abuses. Moreover, the language of the proposed injunctive relief provisions is not vague or overbroad but fairly tracks the allegations of unsafe or unsound banking practices and violations of law that the Banks chose not to contest. Consequently, the proposed provisions are not only aimed at curbing existing practices as alleged, but also at deterring such future misconduct. As stated by the United States Supreme Court, an agency has the discretion not only to formulate orders to stop existing practices but also to, "effectively close all roads to the prohibited goal, so that its order may not be by-passed with impunity." FTC v. Ruberoid, 343 U.S. at 473.
IV. CONCLUSION
Therefore, for the reasons set forth herein, the Board adopts the ALJ's findings of fact in their entirety and the conclusions of law except those relating to the so-called Management Acceptable Provision and the independent board of directors provision. The Board's analysis, findings and conclusions with regard to those clauses are set forth herein. Consequently, the Board adopts and includes as the appropriate remedy the requirements set forth as paragraphs 1(a) and 1(d) and the injunctive relief provisions of the Orders accompanying this Decision.
Hoyle L. Robinson
In the Matter of * * * BANK
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
Having found that * * * Bank * * * ("Bank"), has engaged in unsafe or unsound banking practices and a violation of law within the meaning of section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. ¶1818(b), and for the reasons set forth in the separate Decision of the Board of Directors of the Federal Deposit Insurance Corporation:
Hoyle L. Robinson
In the Matter of * * * BANK
ORDER TO CEASE AND DESIST
Having found that * * * Bank * * * ("Bank"), has engaged in unsafe or unsound banking practices and a violation of law within the meaning of section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b), and for the reasons set forth in the separate Decision of the Board of Directors of the Federal Deposit Insurance Corporation:
Hoyle L. Robinson
In the Matter of * * * BANK
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
Having found that * * * Bank, * * * ("Bank") has engaged in unsafe or unsound banking practices within the meaning of section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b), and for the reasons set forth in the separate Decision of the Board of Directors of the Federal Deposit Insurance Corporation:
Hoyle L. Robinson
In the Matter of * * * BANK OF * * *
Findings of Fact and Conclusions of Law
I. Jurisdiction
Each notice alleges, and I find and conclude, that the Respondent Bank is subject to the jurisdiction of the FDIC and its rules and regulations.
II. The Violations
Each notice alleges, and I find and conclude, that the Respondent Bank has engaged in unsafe or unsound banking practices. I adopt and incorporate herein by reference as my findings and conclusions all such allegations of the notices.
III. The Recommended Cease-and Desist Orders
Each Respondent has agreed to the entry of all affirmative relief provisions of the cease-and-desist order proposed by the FDIC in each case, except the provisions of Paragraph 1(a) and the first nine words of Paragraph 1(b). Accordingly, I adopt and incorporate herein as my recommended orders all such agreed-upon provisions.
[.10] Second, the management-acceptable provision conflicts with a fundamental precept of bank lawit is the responsibility of the bank, in the first instance, to determine its own management. The FDIC has the authority to reject an application for merger or acquisition or deposit insurance, because Congress specifically gave that authority. It may remove existing directors and officers under Sec. 8(e), because Congress specifically gave it that authority also. And it may impose penalties, or seek cease-and-desist orders, or terminate insurance because of faulty management, because Congress also gave it that authority. But as the FDIC acknowledged at the hearing, in all other contexts, it is left for the Bank to decide who its directors and officers shall be. The supervisory and enforcement responsibilities of the FDIC empower it to assess management, not appoint it, or remove it, or approve it, or limit its areas of responsibilities.
[.11] I now turn to the second issue, the appropriateness of the injunctive provisions proposed by the FDIC. The Banks in these cases are charged in the Notices with having engaged in a number of unsafe or unsound banking practices. The allegationsand my findings and conclusions drawn from those allegationsare broad. Thus, for example, in the case of the * * * Bank * * *, the Notice alleges "hazardous lending and lax collection practices" and goes on to describe, in equally general terms, six such practices. The injunctive language of the three proposed orders fairly tracks these broad allegations, and are essential not only to curb existing practices, but to serve as a deterrent against future unsafe or unsound banking practices of a like kind. FTC v. Ruberoid Co., 343 U.S. 470, 473 (1952). Accordingly, I adopt and incorporate herein by reference as my recommended orders all injunctive provisions of the three FDIC-proposed orders.
William A. Gershuny |
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Last Updated 6/6/2003 | legal@fdic.gov |