Unsafe and unsound banking practices Part 2: Recent enforcement actions

Last week, I wrote a post about how bank regulators determine when a banking practice is “unsafe and unsound.” As I explained, the regulators exercise broad discretion in defining unsafe and unsound banking practices, sometimes without any prior guidance. To get a better understanding of how the regulators define unsafe and unsound practices, this post highlights some of the enforcement actions the OCC, FDIC, and Federal Reserve Board have pursued over the last year and a half.

In the Matter of Dan J. Fehrenbach, Bank of Indiana, N.A. (AA-EC-15-97): The OCC entered a consent order for a civil money penalty, finding that a former bank officer engaged in unsafe and unsound practices by extending credit in contravention of bank policy. Specifically, the Comptroller found that the bank officer failed to follow the loan approval process, provide accurate information to the loan committee, adequately monitor loans, ensure independent inspections on construction loans, ensure compliance with loan covenants, and obtain accurate collateral valuations. The bank officer also ignored instructions from his board in negotiating and executing the release of a guaranty on a loan in foreclosure.

In the Matter of Dewayne Shannon Maddox, Superior Bank (AA-EC-16-05): The OCC entered a consent order of prohibition against a former bank officer for engaging in unsafe and unsound practices in connection with non-performing loans. The Comptroller found that the bank officer facilitated the extension or acquisition of multiple non-performing loans totaling over $9 million, some financed at 100% with no borrower equity. In some cases, the bank officer also failed to obtain an appraisal or a personal guaranty, allowed the borrower to make interest-only payments, and knew that a borrower had previously defaulted and had no ability to repay the loan.

In the Matter of James Barnes, Ozark Heritage Bank, N.A. (OCC-AA-EC-14-97): The OCC entered a consent order for a civil money penalty against a former bank director for unsafe and unsound practices in connection with personal loans the director obtained from the bank. The Comptroller found that the director had misrepresented his assets and liabilities in obtaining and extending loans from the bank and ultimately failed to repay the loans, resulting in a loss to the bank.

In the Matter of Robert Michael Brewer, Bank of Mingo (FDIC-15-0284e): The FDIC filed a notice of charges against a bank officer for engaging in unsafe and unsound practices by failing to comply with Bank Secrecy Act requirements, including the filing of currency transaction reports (CTRs) and suspicious activity reports (SARs). The FDIC accused the bank officer of enabling the criminal conduct of customers by failing to file SARs and CTRs where customers were clearly structuring cash transactions to stay just under the $10,000 reporting requirement or making multiple cash transactions aggregating more than $10,000.

In the Matter of Thomas A. Neely, Jr., Regions Bank (FRB-14-020-I): The FRB entered a consent order for a civil money penalty, finding that a former bank officer engaged in unsafe and unsound practices by reporting non-accrual loans as accruing. The FRB also found that the bank officer provided false information to bank examiners during a prior exam.

These are just a few examples of the types of conduct that may trigger an enforcement action for unsafe and unsound banking practices. The common theme in many enforcement actions is a failure to follow bank policy or to engage in proper due diligence in connection with lending activities. Instituting and closely following a comprehensive diligence policy goes a long way in helping banks and their officers and directors avoid unsafe and unsound banking practices.

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