The Curious Case Of Charter Bank

The Curious Case Of Charter Bank

The FDIC’s first lawsuit of 2013 against former officers and directors of a failed FDIC-insured financial institution involved a former thrift that was the subject of a number of blog posts over the past several years, Charter Bank of Santa Fe, New Mexico. In one post, I recounted how I was taken behind the woodshed by OTS personnel and supporters for questioning the severity of that agency’s writedown of the value of collateral securing commercial real estate loans in the bank’s portfolio. Most of the discussions at that time (and since that time) that I have had with folks on all sides of that bank’s failure and subsequent “resolution” have focused on commercial real estate loans, especially acquisition and development loans.

Given that focus, I was surprised to read that the claims against the former board and certain executive officers of Charter involved not commercial real estate loans, but a subprime residential mortgage operation that the bank established in Denver at perhaps, with hindsight, was one of the worst possible times to do so: 2006. It’s been more common during the latest wave of lawsuits that involve a failed community bank that concentrated on commercial real estate lending, for the FDIC’s complaint to allege negligence, gross negligence, and breach of fiduciary duty arising out of excessive growth, concentrated in CRE, funded by “hot money,” without adequate capital in light of the risk, and without proper risk management policies, procedures, and/or practices for that type of lending concentration. Usually, the FDIC selects a portfolio of CRE loans where they think they can prove the allegedly wrongful acts and omissions caused identifiable monetary losses, totals the aggregate amount of losses on those loans, and sues for that amount.

In this case, I guess the FDIC chose what it thought was the “lower hanging fruit”: losses related to the bank’s subprime lending unit. The three-year statute of limitations has expired, and the FDIC’s lawsuit made it under the wire, so unless there was a tolling agreement signed by potential defendants (unlikely), this is likely to be the only claim against the former officers and directors of the bank that the FDIC pursues. I simply find it unusual that, after all the allegations and “controversy” concerning CRE loan losses at that institution, it was subprime lending that caught the FDIC’s eye.

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