FDIC as Receiver for City Bank vs. Conrad D. Hanson and ...

Case 2:13-cv-00671 Document 1 Filed 04/15/13 Page 6 of 97
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corrected.
21. For example, in 2005, the examiners noted that almost all of City Bank's loans for
the construction of single-family residences ("SFR") had loan-to-value ("LTV") ratios that
exceeded the supervisory LTV limit set forth in the Interagency Guidelines for Real Estate
Lending, 12 C.F.R. app. A to subpt. A of pt. 365 ("Interagency Guidelines"). Since at least
1993, the supervisory LTV limits for real estate loans under the Interagency Guidelines have not
changed and are as follows: 65 percent for raw land, 75 percent for land development, 80 percent
for commercial, multifamily, and other nonresidential construction, 85 percent for one- to fourfamily
residential construction, and 85 percent for improved property. Loans with LTV ratios in
excess of the supervisory LTV limit must be identified in a bank's records, and the aggregate
amount of all loans with LTV ratios above their respective supervisory LTV limits must be
reported at least quarterly to the bank's board of directors. In addition, the Interagency
Guidelines provide that the aggregate amount of all loans with LTV ratios above their
supervisory LTV limits should not exceed 100 percent of a bank's total capital. In 2005, the
examiners warned the Board and senior management that the aggregate amount of City Bank's
loans with excessive LTV ratios was 305 percent of total capital. As a result of this high
percentage, the examiners warned City Bank's management that they would be subject to
increased scrutiny.
22. In addition, the examiners recommended that the Bank's management implement
prompt, comprehensive appraisal reviews to ensure sufficient value in real estate collateral
because the examiners found that the Bank's appraisal review function appeared to be
perfunctory in nature and to be performed after loans were committed.
23. In 2005, the examiners also recommended to City Bank's Board and senior
management that management establish minimum liquidity guidelines for construction loan
borrowers. In a memorandum to the Board in May 2006, Sheehan dismissed this
recommendation, noting that "putting liquidity constraints on the builders we finance would
subsequently decrease their chances for success."
COMPLAINT - Page 6
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