The Federal Deposit Insurance Corp. claims 11 former officers and directors of the defunct Charter Bank committed gross negligence by operating “a highly risky and speculative” subprime lending business in Denver that made loans “no reasonable financial institution would have made at any time” in the years before the bank failed.
The FDIC, which took possession of Charter’s assets when the bank was closed by the federal Office of Thrift Supervision in January 2010, said in a lawsuit that the 11 committed multiple breaches of their fiduciary duties. The suit asks the U.S. District Court in Albuquerque to award the FDIC $8 million in compensatory damages.
Defendants include former Charter chairman and founder Robert Wertheim, his son and former CEO R. Glenn Wertheim, John W. Brown, Ronald Brown, Paul Goblet, Joyce Godwin, Shirley Scott, Bruce Seligman, Stephen M. Walker, and Andrew Feld.
Wertheim referred questions to Frank Caroll, a Dallas attorney who represents the former officers and directors. Caroll could not be reached Friday.
Charter Bank was established in Santa Fe in 1986 when a group of investors bought Charter Bank for Savings. Before it failed, Charter employed 250 people, had assets of $1.25 billion and operated branches in Albuquerque, Santa Fe and Rio Rancho.
The FDIC transferred Charter’s assets to Dallas-based Beal Bank. Beal sold what was left of Charter to Washington Federal, a Seattle bank, in June 2011.
The suit identifies Feld as a Charter executive who ran the Denver subprime mortgage lender, Specialty Lending Group.
According to the FDIC, Charter opened SLG in January 2007 with $50 million of the bank’s $69 million in core capital and started making subprime loans, primarily in Florida, California and Texas. By the time Charter closed SLG in September 2008, loan losses were degrading the bank’s balance sheet and subprime loans totaled almost $50 million, or almost 57 percent of core capital.
Core capital is the minimum amount of capital regulators require savings banks to have on hand.
“Shortly after SLG started originating loans, the loans began to default at a rapid rate,” the suit says. “By the end of 2008, nearly 55 percent ($22 million) of the SLG loans were delinquent and 45 percent ($18 million) were in foreclosure.”
By November 2009, two months before Charter failed, “most of the SLG loans were classified as substandard and the bank recorded a loss of $8.1 million.”
The FDIC says the directors and bank executives approved lending policies “far below the standards any reasonable bank would have employed at any time,” which “allowed the bank to lend to virtually anyone, including a borrower who had declared bankruptcy, gone through foreclosure, or had a history of making late mortgage payments.”
The suit claims SLG intended to sell most of its subprime loans to the secondary market even though regulators were warning that secondary markets for subprime mortgages were drying up.
According to the FDIC, Glenn Wertheim warned the directors in September 2006 “there was not enough volume to drive an efficient secondary market for the mortgages, but he recommended proceeding with the program anyway.”
The FDIC said Charter’s business plan for SLG assumed borrowers would have sufficient equity in their homes so that if the bank had to foreclose on the properties there would be money to be made by selling the homes. “However, the equity buffer quickly evaporated in a large number of instances because SLG was lending into areas that were experiencing rapid price erosion,” the suit says. Even though the Florida real estate market was “in steep decline,” SLG made 82 percent of its loans in Florida between July 2007 and July 2008, according to the suit.