FDIC Brings 2nd Legal Action against Directors & Officers of Failed Bank

- ABA Banking Journal

By Thomas P. Vartanian, Robert H. Ledig, and Lawrence Nesbitt, of the Financial Institutions Practice at Dechert LLP, Washington, D.C . For more information, see the author’s note at the end this article.

Industry observers have been waiting to see when bank failures arising out of the recent financial crisis would produce a wave of FDIC litigation similar to that seen in the early 1990s after the savings and loan crisis. With its second suit in recent months, FDIC has shown that it will aggressively pursue claims against directors and officers in connection with failed depository institutions.

FDIC has significantly increased its legal staff in the last few years and has engaged outside law firms to perform professional liability investigations and to conduct litigation in connection with recently failed institutions.

ARTICLE SHORTENED DUE TO LENGTH….

LINK TO ARTICLE HERE

Banking Humor: Just Poking a Little Fun at Troubled Banks

FDIC Says Failed Spartanburg Bank Attracts Many Bids

- scbiznews.com

Six banks placed bids to buy First National Bank of the South, which federal regulators closed in July, according to records released Monday by the Federal Deposit Insurance Corp.

According to the FDIC, two banks with S.C. headquarters submitted competing bids: First Federal Savings and Loan of Charleston and First Citizens Bank and Trust of Columbia.

Other bidders were Ameris Bank of Moultrie, Ga., Bank of the Ozarks of Little Rock, Ark., and First Community Bank of Bluefield, Va.

North American Financial Holdings of Charlotte submitted the winning bid and acquired the bank in July in a transaction assisted by the FDIC.

ARTICLE SHORTENED DUE TO LENGTH….

LINK TO ARTICLE HERE

Quote of the Day - J. Paul Getty

"If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem." - J. Paul Getty

Is the FDIC Staking Out Its Territory or Extending Its Borders?

- The D & O Diary

With one lone exception, the FDIC has not yet itself pursued litigation against the directors and officers of a failed financial institution. However, the FDIC has already made it clear that it intends to assert its rights under FIRREA as the receiver of failed banks to take control of shareholders’ derivative lawsuits.

More recently, and perhaps more aggressively, the FDIC is now attempting to intervene in two direct shareholder actions where failed institutions’ aggrieved investors are asserting their own claims, rather than derivatively asserting those of the failed institution. These more recent moves may represent efforts not just to assert but to extend the FDIC’s litigation preclusion rights. The FDIC’s actions are interesting in and of themselves, but also for what the FDIC has claimed in asserting its rights.

ARTICLE SHORTENED DUE TO LENGTH….

LINK TO ARTICLE HERE

Beware of the One Man Banks

You have to love these portions of the recent FDIC OIG report on the collapse of Florida Community Bank (page 6).

"At that time, he originated 80 percent to 90 percent of the loans, wrote most of the bank’s policies, conducted a majority of in-house appraisals and outside appraisal reviews, and managed the bank’s daily affairs."

"The CEO was abetted by the Board. The Board did not adequately exert its authority, and Board members did not have sufficient CRE expertise to question the judgment of the CEO. There was no apparent effort to seek new Board members to complement the bank’s geographic expansion into the major metropolitan areas of Southwest Florida, or to change the CRE lending emphasis."

Beware of the one man banks.

LINK TO REPORT HERE

Note the Date on the Cartoon......Pretty Good

A Little Bank Board Humor.....

Need Help With Your Real Estate Appraisal Policy?

I think this blog post on the ABA Banking Journal site is good, and agree that individual bank policies are more important than ever. If we can assist with your real estate appraisal policy, please let me know.

LINK TO BLOG POST

Michael Dodds, MAI, CCIM, MRICS

Here We Go....FDIC Files First D&O Suit of Current Failed Bank Wave

On July 2, 2010, the FDIC filed a lawsuit against former directors and officers of IndyMac's Homebuilder Division. While I have not read the entire document, I did do a search for the word “appraisal.” Excerpts from the document include:

- "negligently approving loans with inadequate appraisals"

- "The function of credit officers was not separate from the function of production groups, and appraisals were not being properly obtained"

- "Causing or allowing a loan to be made, renewed, and/or extended with inadequate or problematic appraisals"

Obviously, IndyMac was not in compliance with Part 323 FDIC Laws and Regulations. If you are a banker, or bank director, that has concerns about Part 323 compliance, e-mail me at mdodds@irr.com. Our appraisal process management division was designed to address appraisal independence issues that lending institutions are experiencing.

Michael B. Dodds, MAI, CCIM, MRICS

COMPLETE DOCUMENT HERE

Appraisal Red Flags For Bank Examiners When Reviewing Appraisals

- No appraisal or property evaluation in file.
- Mortgage broker or borrowers that always use the same appraiser.
- Appraiser bills association for more than one appraisal when there is only one in the file.
- Unusual appraisal fees (high or low).
- No history of property or prior sales records.
- Market data located away from subject property.
Unsupported or unrealistic assumptions relating to capitalization rates, zoning change, utility availability, absorption, or rent level.
- Valued for highest and best use, which is different from current use.
- Appraisal method using retail value of one unit in condo complex multiplied by the number of units equals collateral value.
- Use of superlatives in appraisals.
- Appraisal made for borrower.
- Appraisals performed or dated after loan.
- Close relationship between builder, broker, appraiser, lender and/or borrower.
- Overvalued (inflated) or high property value.

Office of Thrift Supervision May 2010 Examination Handbook 360.1

Hiding Appraisals from Regulators is Not a Good Idea

What was this guy thinking?

A former executive at the failed Bank of Clark County is scheduled to be sentenced today in Tacoma, Wash., for hiding information from Federal Deposit Insurance Corp. examiners.

David S. Kennelly, who was chief credit officer until he was fired in November 2008, pleaded guilty on Feb. 19 to a felony scheme to conceal a material fact. In his guilty plea, he admitted to hiding appraisals on 23 real-estate backed loans that revealed looming problems at the Vancouver-based bank. Federal prosecutors have asked U.S. District Court Judge Robert J. Bryan to sentence Kennelly to six months of incarceration, probation and a $10,000 fine

LINK TO ARTICLE HERE

Disgruntled Shareholder Sues Bank to Gain Access to Records

- The Island Packet

A shareholder who says he is concerned about the direction of CoastalStates Bank is urging fellow investors to "hold management accountable for their actions and ask questions" during an annual meeting Wednesday on Hilton Head Island.

George N. Snelling of Augusta, Ga., placed advertisements in Sunday's Island Packet and Beaufort Gazette. In the ads, he says he is the largest individual shareholder of the Hilton Head-based bank's parent company, CoastalSouth Bancshares, and has sued to gain access to the bank's records.

ARTICLE SHORTENED DUE TO LENGTH….

LINK TO ARTICLE HERE

America's Mortgage Fraud Capital? New York, N.Y.

- housingwatch.com

Start spreading the news: New York City -- home to embattled investment banks and notorious fraudster Bernie Madoff -- has another infamous distinction to add to its list. According to a new report, the metro area is the nation's leader for mortgage fraud in 2009.

As cases of fraud skyrocketed across the country last year, New York City rose to the top, claiming 12 percent of the nearly 70,000 reports of suspicious activity filed nationwide; this according to a report by LexisNexis. Los Angeles came in second with 8 percent and Chicago was third with 5 percent.

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LINK TO ARTICLE HERE

Nonperforming Loan Market Still Not Performing

- GlobeSt.com

Most would-be investors in distressed debt think the market for such debt hasn’t gotten up to speed, with 76% of respondents to an Ernst & Young survey saying the market is “still developing” and another 13% opining that it hasn’t even begun. So it stands to reason that while all respondents to the E&Y survey did due diligence on nonperforming loan portfolios during 2009, fewer than 17.5% actually completed a purchase.

The reason: there wasn’t enough distress to go around, writes E&Y’s Mark Grinis and Christopher Seyfarth in a report released Monday. "Up until now, most, but not all, banks have not been engaged in selling distressed loans," leaving the FDIC to take the lead, according to the report.

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LINK TO ARTICLE HERE:

Beach First Bank Places First in South Carolina Race

Beach First Bank becomes the first South Carolina bank to fail - who will be the second?

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Michael Dodds, MAI, CCIM, MRICS

What Exactly Does 323compliance Do?

Interesting question......

323compliance is basically a divison of Integra Realty Resources - SC that provides appraisal process management, appraisal reviews and assistance with establishing FDIC compliant appraisal procedures. Our services are certainly not right for every bank, but community banks have responded very well to our knowledge of Part 323 of the FDIC Laws and Regulations, otherwise known as Appraisal Independence.

When I first started marketing the Appraisal Process Management (APM) program, I expected to hear mainly from banks that had, as one banker stated, "been smacked around by the FDIC." Surprisingly, one of the first bankers to sign up for our program told me that he "just wanted higher quality appraisals" and that the examiners had never had a problem with their appraisal procedures.

We offer a very flexible service program, from working as a consultant to assemble a strong approved appraiser list, to procuring appraisals on behalf of banks.......or just providing technical appraisal reviews of select commercial appraisals. Please e-mail me at mdodds@irr.com if we can assist.

Michael Dodds, MAI, CCIM, MRICS

FDIC Humor: Do You Speak the FDIC Language?

The banker fell overboard... (humor)

The banker fell overboard from a friend's sailboat.

The friend grabbed a life ring, held it up, not knowing if the banker could swim, and shouted, "Can you float alone?"

"Obviously," the banker replied, "but this is a heck of a time to talk business."

Are Your Approved Appraisers Licensed? Really? Are You Sure?

An unlicensed appraiser was able to submit numerous fraudulent appraisals to a mortgage brokerage company in Pennsylvania, which were then used to secure financial loans. The case has been back in the news as one of his fellow participants pleaded guilty to charges of wire fraud conspiracy and filing false tax returns. John Polosky, a loan officer for First Capital Home Equity, accepted fraudulent appraisals from Kenneth Cowden, an unlicensed appraiser. Cowden had plead guilty in July, 2007, in federal court in Pittsburgh to two counts of failing to file income tax returns.

LINK TO ARTICLE HERE

We constantly monitor the approved appraiser lists of our 323compliance clients to ensure that their approved appraisers are appropriately licensed and maintain errors and omissions insurance. Proper approved appraiser list management is a vendor management responsibility. The FDIC takes that very seriously.........

E-mail me if I can help

Michael Dodds, MAI, CCIM, MRICS

Too Little.....Too Late

Former Bank Vice President Pleads Guilty to Hiding Appraisals in Bank Audit

David S. Kennelly, of Vancouver, Washington, pleaded guilty in U.S. District Court to a Scheme to Conceal Material Facts in connection with an audit of the former Bank of Clark County in 2008. The bank was shut down by the FDIC in January 2009. Under the terms of his plea agreement, KENNELLY is prohibited from working for a financial institution regulated by the FDIC or the Federal Credit Union Act, without written approval of the agency. When sentenced on May 14, 2010, by U.S. District Judge Robert J. Bryan KENNELLY faces up to five years in prison, three years of supervised release, and a $250,000 fine.

During the examination in November 2008, KENNELLY falsely represented that all available appraisals were in the computerized system. Based on the appraisals the examiners were able to review, the bank was instructed to increase its loan loss reserved by more than $3 million. Just prior to the termination of the examination, investigators learned of the hidden appraisals on some 15 different projects. In response, KENNELLY first tried to advance the false claim that the appraisals had been overlooked because of a heavy work load. He unsuccessfully attempted to get a bank employee to promote this story. After the examiners saw the additional appraisals, they determined the bank needed an additional $16.7 million of capital for loan reserves. On January 16, 2009, the Washington State Department of Financial Institutions declared the Bank of Clark County insolvent and appointed the FDIC as Receiver.

Click Here for More Details on the FBI Website

Former Bank CEO's Son Did a Large Portion of Georgian Bank's Appraisals

Should the FDIC sue bank directors and executives if they prove regulators’ assertions of "unsafe and unsound banking practices" and wrongful acts?

Here are some excerpts from an article about the failure of Georgian Bank.

"Sources in the banking industry say the FDIC has sent “demands for civil damages” to directors and officers at some Georgia banks."

"Regulators criticized the bank for allegedly inadequate appraisals used in loan underwriting and for renewing development loans without updated valuations of the collateral."

"Regulators also criticized the bank for the use of Teel Appraisals & Advisory Inc., a company owned by Georgian Bank CEO Gordon Teel's son, which apparently performed a “large portion” of the bank’s appraisals."

"A proxy filed November 22, 2004, with the SEC prior to the company changing from publicly to privately held shows that the firm was paid $324,000 for appraisal services, or about 90 percent of the total paid during the first nine months of that year for appraisals."

Click Here for Details on the Georgian Bank Situation

Obviously, Georgian bank didn't have a proper appraisal process management plan in place. If you feel that your bank could use some help with addressing appraisal independence (compliance with Part 323 of FDIC Laws and Regulations) give me a call. Integra can help.