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FDIC Enforcement Decisions and Orders |
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FDIC rejected ALJ's recommendation and ordered removal of Bank officer on the basis of his practices as chief lending officer at another bank. The FDIC found overwhelming evidence that Respondent made numerous loans without any regard for the borrowers' creditworthiness, resulting in significant losses, and thus demonstrated continuing disregard for the safety and soundness of the Bank. The FDIC also prohibited Respondent from serving as an officer or institution-affiliated party at any insured institution, but because there was no allegation of personal dishonesty, it permitted him and his employer to request a waiver of the removal and prohibition, subject to FDIC conditions.
[.1] Prohibition, Removal, or SuspensionHearingScope of Proceedings
[.2] Prohibition, Removal, or SuspensionLiabilityLosses to Bank
[.3] Prohibition, Removal, or SuspensionDisregard for Safety and SoundnessImprudent Loans
[.4] Prohibition, Removal, or SuspensionLiabilityConduct at Another Institution
{{4-30-91 p.A-1610}}
In the Matter of
I. PROCEDURAL BACKGROUND
A Notice of Intention to Remove From Office and to Prohibit From Further Participation ("Notice") was served by the Federal Deposit Insurance Corporation ("FDIC") on William Marvin Clark, Sr. ("Respondent" or "Respondent Clark"), individually and as an officer, a participant in the conduct of the affairs, and as an institution-affiliated party of Farmers & Merchants Bank, Dublin, Georgia, on November 16, 1989. The Notice was issued pursuant to section 8(e) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1818(e), as amended and supplemented by sections 903 and 904 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), Pub. L. No. 101-73, §§ 903 and 904, 103 Stat. 183, 453459 (1989), and Part 308 of the FDIC's Rules of Practice and Procedures, 12 C.F.R. Part 308.1
Respondent Clark was hired on January 27, 1986, by the Bank's CEO as the Bank's Executive Vice President, and subsequently, on February 12, 1986, was elected to the Bank's board of directors. He functioned as the Bank's chief lending officer and managed the day-to-day operations of the Bank. He was hired with the express instruction to increase both loans and deposits. Shortly after assuming his duties at the Bank, Respondent Clark established a new business relationship for the Bank with * * * Chevrolet, Inc., Douglas, Georgia.
The Recommended Decision reaches several conclusions with which we agree, but ultimately recommends that Respondent not be removed. The ALJ found that the Respondent imprudently engaged in the conduct or practice of approving 55 extensions of credit without giving adequate attention to the creditworthiness of the borrowers and that as a result of such conduct and practices the Bank sustained substantial financial loss. He declined to find, however, that the Respondent's conduct and practices demonstrated willful or continuing disregard for the Bank's safety and soundness or that the conduct and practices evidenced his unfitness to participate in the affairs of F & M Dublin. R.D. at 41.
A. Number of Loans at Issue.
[.1] The ALJ found that although "there is some dispute as to the number of loans made by the Respondent during his tenure at Bank South, it is undisputed that it was well over 3,000, of which 55 are the basis for this removal action." R.D. at 4. The FDIC
B. Losses Attributable to Respondent.
[.2] The ALJ finds that Respondent's conduct resulted in "substantial financial loss." R. D. at 33. In reaching this conclusion the ALJ attributes some $148,609.51 of losses to Respondent's lending practices. FDIC Enforcement Counsel excepts to this finding and urges that the loss attributed to Respondent should total at least $839,358.77 and should include losses incurred after the date of the Notice, but which are a direct result of pre-Notice loans, losses due to lost opportunity, and losses due to collection and disposition expenses. FDIC Except. at 9197. Because the ALJ has identified evidence to substantiate his finding that Respondent's activities resulted in substantial loss, we concur in the ALJ's finding. As this is an action for removal, rather than for a civil money penalty, the statutory requirement is satisfied, and it is not necessary for the Board to address the issue of further losses.
C. The * * * Loans.
The ALJ found that FDIC Enforcement Counsel failed to prove that Respondent was responsible for a loan to * * * on September 28, 1987. The FDIC admits that original loan to * * * was approved by the Bank's loan committee. Rather, the FDIC asserts that Clark was responsible for the renewal of a $98,000 credit on that date.7 FDIC Ex. No. 23; Tr. II at 162166. It is clear from FDIC Ex. No. 23 that Respondent did approve the renewal of the * * * loan. Further, because the original loan was in the amount of $98,000 and the renewal was for $98,500, it appears that Respondent also approved a new loan of $500 for Mr. * * *. FDIC witness Charles Myler testified that at the time of the renewal Respondent failed to obtain a complete loan application and failed to conduct a proper background investigation concerning * * *'s financial condition. Tr. II at 164-5. These assertions are unrebutted. While the record concerning this credit is somewhat confusing, that Respondent was responsible for its renewal cannot be questioned.
D. Willful or Continuing Disregard for
Ultimately, in spite of his findings regarding Respondent's lending practices and the substantial losses attributable to Respondent, the ALJ did not conclude that Respondent's conduct constituted a willful or continuing disregard for the safety and soundness of the Bank and therefore recommended that the FDIC's charges be dismissed. We disagree with the ALJ's conclusion for several reasons.
[.3] First, the Board believes that the ALJ missed the fundamental point of this case. This case is not about technical failures to document individual loans, or about an officer who, according to the ALJ, "kept sloppy records", although there is certainly enough support in the record to prove a myriad of technical violations. R. D. at 39. Rather, at issue in this case is the conduct of a chief lending officer who exercised no judgment whatsoever in determining whether or not to extend credit. Because Respondent did not follow standard underwriting practices regarding the determination of a borrower's ability to pay based on current economic data, he did not assess whether or not the loan posed a risk to the Bank, and if so, the magnitude of that risk. He did not make, nor could he make on the basis of the information he gathered, a risk assessment with regard to each loan. This failure to make a risk assessment constitutes a clear and unconscionable disregard for the safety and soundness of the Bank.
In this category the ALJ places four (4) loans. The Board finds that all four loans fail for lack of each of the critical pieces of information needed to determine adequate capacity to repay a debt. First, the application form itself is fundamentally flawed in that it fails to request the listing of all the obligations of the applicant. While the application had a section on "credit references," none of the borrowers was required to show his or her total liabilities and monthly payments.
The ALJ concludes that "reliance upon reasonable collateral value or a reserve is another prudent way of protecting a bank from sustaining a loss." R. D. at 37. By this statement it appears that the ALJ misunderstands the purposes of risk assessment and collateral or loss reserves. The protection afforded by collateral or a loss reserve presupposes that the lender has made some assessment of the risk he is taking and, thus, has tailored the collateral or the reserve amount to protect against this risk. This is the crucial element missing in this case. Respondent Clark never made an assessment of whether his borrower was likely to be able to repay the debt. Indeed, in none of the 56 loans reviewed did he have sufficient information with which to make such an assessment. Thus, even if Respondent had known the value of the collateral, he could never really know whether the collateral or dealer reserve would be adequate to protect the Bank from sustaining a loss because he never knew how likely a loss would be. By his finding, it appears that the ALJ would permit a loan officer to abdicate his responsibility to make a credit judgment with respect to each borrower and to substitute that judgment with a "bandaid" in the form of collateral or reserves. The Board cannot concur in this.
With respect to this, the largest category of loans, the ALJ notes that the FDIC cited missing or insufficient information or anal-
[.4] As stated by the ALJ, "resolution of this issue is dependent on the resolution of the previous issue." R. D. at 40, citing FDIC Docket No. FDIC-86-56e (1988 PH Enf. Dec. p 5110). "Where a respondent has responsibilities at his current bank which are similar to those performed at his previous bank, the failure to follow safe and sound practices at the former is evidence of an unfitness to participate in the latter's affairs." Id. There is an obvious nexus between the Respondent's position at the Bank and his current position at F & M Dublin. His current position provides the Respondent with the opportunity to repeat the unsafe and unsound conduct in which he engaged at the Bank. Therefore, proof of his unfitness to serve as an officer or director of any Federally insured depository institution has been established by the substantial evidence of Respondent's unsafe and unsound conduct leading to substantial losses and his willful and continuing disregard for the safety and soundness of the Bank.
Section 8(e)(4) of the FDI Act, 12 U.S.C. § 1818(e)(4) (1989), provides that "[i]f upon the record at the hearing the [FDIC] shall find that any of the grounds specified in the Notice have been established, the [FDIC] may issue such orders of suspension or removal from office, or prohibition from participation in the conduct of the affairs of the depository institution, as it may deem appropriate." Upon a through review of the record in this proceeding, the Board finds that the serious nature of Respondent's unsafe and unsound lending practices merit Respondent's removal from his position as a lending officer at F & M Dublin and prohibition from participating in the conduct of the affairs of that bank or any other Federally insured depository institution or organization listed in section 8(e)(7) of the Act, 12 U.S.C. § 1818(e)(7) (1989).
[.5] An order of removal is a very severe penalty that is intended not only to punish a person for serious transgressions, but also to protect the insured institution at which he was employed and the banking system as a whole. Section 8(e)(7)(B) of the FDI Act was added by FIRREA and provides the Board with additional flexibility in circumstances it deems appropriate to mitigate the harsh effect of a removal order. This section permits a party to apply for a limited suspension of the effect or an order of removal and prohibition to allow him or her to be employed by an insured institution upon the written consent of the agency that issued the order and the appropriate Federal financial institutions regulatory agency. The agencies can condition suspension upon terms that will protect the employer, the banking industry and the insurance fund.
For the reasons set forth in the above Decision, and pursuant to section 8(e) of the FDI Act, as amended by section 903 and 904 of FIRREA, Pub. L. No. 101-73, §§ 903 and 904, 103 Stat. 183, 453, 457 (1989) (codified at 12 U.S.C. § 1818(e)), the Board of Directors of the Federal Deposit Insurance Corporation hereby ORDERS that:
In the Matter of
From January 27, 1986, to September 8, 1988, William M. Clark, Sr., the Respondent, served as Executive Vice-President of Bank South-Douglas, Douglas, Georgia (Bank South). He also was a director from February 12, 1986 to September 8, 1988. Since September 26, 1988, Clark has been a loan officer at the Farmers & Merchants Bank, Dublin, Georgia (F&M Dublin).
The Respondent began his career in the financial services industry in 1966 when he was employed by MCC Financial Services. In 1981 he moved to the First Federal Savings & Loan Association in Valdosta, Georgia, where he stayed until being employed by Bank South in January 1986.
Since the conduct at issue here occurred prior to August 9, 1989, the parties agree that the pre-FIRREA statute controls, though counsel for the FDIC argues that some FIRREA remedy provisions apply. Section 1818(e)(2) provides the basis for removing one from an insured bank for conduct he engaged in at another bank or business. The FDIC must prove that:
A. "Conduct or Practice"
At the outset I note that this case does not involve kickbacks (though there was an unproven accusation of this involving the * * * credits), insider dealing, profiteering, conflicts of interest, breach of fiduciary duty or other truly egregious activity. What is alleged is simply that 55 of the more than 3000 loans approved by the Respondent were imprudent and are in default, and that the Bank suffered losses on them. While the Respondent's conduct certainly cannot be condoned, it does not rise to the level to justify the harsh remedy sought by the FDIC.
B. "Substantial Loss"
The FDIC alleges that, at a minimum, losses related to these loans total $174,956.94. This calculation is based on charges by Bank South against its Reserve for Loan Losses, on the allocation of foreclosed real estate to the Other Real Estate Owned account, and on charges to the * * * Chevrolet Dealership Reserve. FDIC counsel further argues that Bank South suffered lost income opportunity in the amount of $30,748.38 because it was forced to seize several non-earning real properties as a result of defaults in three of the 55 loans. In addition, FDIC counsel contends that Bank South has suffered a loss of approximately $70,000 in collection and disposition expenses attributable to loans made by the Respondent. Finally, the FDIC alleges a variety of losses which Bank South suffered which resulted from loans made by the Respondent, but are not among the 55 under consideration here, and prospective losses on loans originated by the Respondent.
C. "Willful or Continuing Disregard"4
D. "Unfitness to Participate"
The final element required by Section 1818(e)(2) is whether the Respondent's conduct or practice evidences an unfitness to participate in the affairs of F&M Dublin. In the few published cases involving Section 1818(e)(2) removals, it is apparent that the resolution of this issue is dependent on the resolution of the previous issue. FDIC Docket No. 86-56e (1988 PH Enf. Dec. ¶5110). Where a respondent has responsibilities at his current bank which are similar to those performed at his previous bank, the failure to follow safe and sound practices at the former is evidence of an unfitness to participate in the latter's affairs. The FDIC appears to agree with this conclusion since it argues that the Respondent's unproven "willful or continuing disregard" for Bank South's safety and soundness evidences his unfitness to continue participating in F&M Dublin's affairs.
Although meeting its burden of proof on the issue of whether the Respondent engaged in the conduct or practice of approving 55 with imprudent attention to the creditworthiness of the borrowers, which resulted in a substantial loss to Bank South, the FDIC did not prove either that the conduct evidenced his disregard for its safety and soundness or that the conduct evidenced his unfitness to participate in the affairs of F&M Dublin. Therefore, I conclude that no basis for removal of the Respondent exists under Section 1818(e)(2). I recommend that the FDIC Board issue the attached ORDER dismissing this case and adopt the following:
1. Bank South-Douglas, Douglas, Georgia (herein the Bank South) is a commercial bank existing and doing business under the laws of the State of Georgia with its principal place of business in Douglas, Georgia.
1. Bank South is, and was at all material times, subject to the Federal Deposit Insurance Act, 12 U.S.C. §§ 1811-1833e, the FDIC Rules and Regulations, 12 C.F.R. Chapter III, and the laws of the State of Georgia. |
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Last Updated 6/6/2003 | legal@fdic.gov |
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