Mortgage Daily Logo

FDIC IG Analyzes Bank’s Failure

Mortgage News

A government report on the failure of a New York bank found that the founder, who was also chairman and chief executive officer, had too little oversight. The bank’s demise was largely the result of a departure from its original business plan.

In July of last year, New York’s Banking Department closed USA Bank.

The collapse of the $193 million institution was originally expected to cost the Federal Deposit Insurance Corp. $62 million — though losses now exceed $65 million. Construction and land development loans accounted for a hefty $57.5 million of its assets.

The FDIC’s Office of Inspector General decided to conduct an in-depth review of the Port Chester, N.Y.-based bank’s failure because it had “determined that there were unusual circumstances pertaining to the bank’s activities as a de novo institution and the actions of a dominant official, and that an in-depth review of the loss was warranted as authorized by the Financial Reform Act.”

When USA Bank was established in December 2005, its business plan was to make residential and multifamily mortgages. But the original plans were thrown out the window once the bank opened for business, and it relied on more costly brokered deposits for its funding and moved into risky acquisition, development, and construction financing on luxury properties through the formation of subsidiary mortgage unit USA MBA Inc.

All of this was done “without providing the required regulatory notice and obtaining approval for significant changes in its operations,” according to the report.

“According to the FDIC, USA Bank failed due to inadequate oversight and failings on the part of the board of directors and management and problems attributable to concentrations in acquisition, development, and construction and CRE lending,” the inspector general said. “Poor credit administration practices and weak real estate market conditions also contributed to the bank’s failure. Additionally, the bank experienced significant losses in its 1-4 family mortgage portfolio, including home-equity loans.”

The report indicated that weak governance enabled the CEO to focus too much on commercial real estate loans and speculative construction loans. The deviation from the original business plan almost immediately caused the bank to exhaust a “significant amount of capital” in the first year of business.

The original business plan called for 44 percent of the bank’s portfolio to be residential. But by the end of 2006, just 34 percent was residential, while 52 percent was in development loans and 22 percent was CRE loans. The concentration deteriorated in 2007.

The inspector general noted that all of the $33 million in adversely classified loans as of March 2009 were originated by the bank’s CEO.

The bank’s former chairman and CEO was Fred DeCaro Jr., according to research by MortgageDaily.com.

Losses at the bank each year between 2006 and 2010 ranged from $2.7 million to $13.4 million.

“The bank’s reported net losses can be attributed to a number of factors, such as high overhead, including personnel expenses, associated with the institution’s attempt to initiate a mortgage-banking operation and continuing losses in its loan portfolio,” according to the report.

While the FDIC and the state took necessary regulatory actions against the institution, the change in lending strategy was too much to overcome.

“The de novo bank operated as a classic ‘one-man bank,’ with the chairman-CEO dominating the bank’s affairs,” the report concluded.

Related Posts

Centex Home Equity Announces Name and Brand Change to National Mortgage, LLC

Third-Quarter 2012 Mortgage Litigation Index

Lawsuits involving excessive fees, servicing fees and loan fees beyond state maximums. Defendant Plaintiff Court Amount Overview Case Title Case Number Date Filed Date of Activity Link to Story Fannie Mae and Freddie Mac Orangeburg County, Richland County, South...

Centex Home Equity Announces Name and Brand Change to National Mortgage, LLC

Net Branch Lawsuits

Litigation involving net branch operations. Defendant Plaintiff Court Amount Overview Case Title Case Number Date Filed Date of Activity Link to Story PHH Mortgage Corp. Mathews Supreme Court of Virginia na Court held that the term "branch office" includes not only...

Centex Home Equity Announces Name and Brand Change to National Mortgage, LLC

Whistleblower Lawsuits

Litigation related to loan servicing, including escrow issues, transfer of servicing and servicing borrowers in bankruptcy and foreclosure.   Defendant Plaintiff Court Amount Overview Case Title Case Number Date Filed Date of Activity Link to Story Bank of...

Popular posts

How Long Does It Take to Refinance a Mortgage
How Long Does It Take to Refinance a Mortgage

So, you’re interested in refinancing your mortgage. Maybe you want some extra capital to do that home project you’ve always dreamed of, interest rates are nearing record lows, or you want to start consolidating debt. Regardless of the motivation behind the refinance,...

How Does Refinancing a Mortgage Work
How Does Refinancing a Mortgage Work

A home purchase is considered an investment, and a robust one at that. Savvy owners are constantly looking for new ways to reduce debt, save money, pay less in interest, and ultimately build equity. Refinancing is one way to leverage your investment and do just that....

What Does It Mean to Refinance Your Home
What Does It Mean to Refinance Your Home

You can think of refinancing your mortgage as a debt redo. Essentially, you’ll swap out the existing loan for a new one - ideally with better terms and conditions. Only this time it could help you save money on high mortgage payments, rather than just borrow it....

Setting up the Utilities in My New House
Setting up the Utilities in My New House

All the tedious, time-consuming paperwork has been signed, sealed, and delivered. Your belongings are packed into what seems like a million boxes and you have a solid plan to haul all your existing furniture to the new place. Just as your boxes and furniture need to...

When Is My First Mortgage Payment Due?
When Is My First Mortgage Payment Due?

Navigating your way through a brand-new mortgage loan can be a difficult task, especially for first-time homeowners.   After handing over a large sum of money for the down payment and closing costs, it’s important to pay attention to the timing of your first...

Newsletter

Don’t worry, we don’t spam