Farmers & Merchants Bank runs afoul of regulators; feds fault bank's record on community investment.

Farmers & Merchants Bank of Long Beach in the last few months has been ordered to pay $130,000 in fines and was denied permission to open a branch by the Federal Reserve Board because of alleged violations of consumer protection statutes and alleged failure to comply with a federal law designed to ensure that banks lend to all segments of the community.

Bank President Kenneth Walker and Charles W. Hagan Jr., an executive vice president, were ordered on May 3 to pay $15,000 each for alleged violations of consumer protection statutes. In December, the bank was ordered to pay a $100,000 fine, also for alleged violations of federal consumer protection laws.

In addition, in February, the Federal Reserve Board in Washington, D.C., voted 6-0 to deny Farmers' application to open a bank branch in Costa Mesa due to "chronic deficiencies" in the bank's compliance with the Community Reinvestment Act and alleged violations of numerous consumer protection laws between 1988 and 1992. Farmers failed to provide details of those alleged violations by press time.

The Community Reinvestment Act was passed by Congress in 1977 to ensure that banks lend to all segments of the communities they serve. Banks are examined regularly and receive grades -- "Outstanding" to "Satisfactory" to "Needs to Improve" to "Substantial Non-compliance" -- according to how closely they comply with the law.

In its last three examinations, Farmers received one grade of "Substantial Non-compliance" and two grades of "Needs to Improve." Regulators were again examining the bank last week for CRA compliance, said Jeri Killian, CRA compliance officer.

Killian told the Business Journal that she would provide the latest CRA examination report, dated June, 1992, which would have provided details of the bank's alleged shortcomings, but the report was not received by press time.

In previous reports and documents obtained by the Business Journal, federal examiners have criticized the bank for failing to ascertain the demographics and credit needs of the community it serves and failing to provide government-insured, assisted or guaranteed loans.

The bank has also been criticized by regulators for its "discriminatory practice" of requiring that credit card applicants under age 25 provide a guarantor for approval, rather than asking for collateral, as the bank requires of applicants over 25.

The Federal Reserve also did not provide details of Farmers' alleged CRA inadequacies or the alleged violations of consumer protection laws in documents which were available to the Business Journal.

The bank allegedly violated consumer protection laws in recent years, including the Equal Credit Opportunity Act, the Consumer Protection Act, the Fair Credit Reporting Act and the Home Mortgage Loan Disclosure Act, according to a Federal Reserve document. They were passed by Congress to protect consumers from unfair lending, reporting and credit practices.

The bank, which is the fourth-largest based in L.A. County, operates 16 branches in Los Angeles and Orange counties.

Walker -- president of the privately owned, $1.5 billion-in-assets bank -- said Farmers agreed to pay the fines because "legally, it would have cost more to defend it." He declined to comment further on the Fed's actions.

Robert Gnaizda, a San Francisco public interest attorney who has negotiated multi-billion-dollar agreements requiring major California banks to increase lending in low-income and minority communities, applauded the Fed's actions.

Fines and denials of branch applications for alleged violations of CRA and consumer protection laws are "a rarity," he said. The Fed's action "sends a message" that bank regulators are "getting tough" in enforcing the laws, Gnaizda said.

He further said that the Fed's denial of Farmers' branch application was "a good penalty; that's the one I favor the most." A bank's ability to expand and to merge with other banks can be "worth millions" to the bank, Gnaizda said. The bank has been under a Fed order to "cease and desist" from violating the CRA since March 1992.

W. Gordon Smith, the bank's vice president of credit and consumer affairs, said the fines resulted from violations of the cease and desist order and that it took Fed officials a long time to determine the amounts of the fines.

In recent months, bank officials "have taken some steps in the right direction" to allay regulators' concerns about lending practices. The bank has hired a CRA compliance officer, is improving its community outreach program and has "done some restructuring of management," Smith said.

The bank, despite its troubles with regulators over alleged CRA noncompliance and consumer protection violations, is one of the best-capitalized and most-profitable banks in Los Angeles County. It earned $32.3 million in 1992, according to the Bauer Financial Reports, a bank rating service in Coral Gables, Fla.

Bauer rates Farmers as a four-star bank and would have given it the highest five-star rating, if not for the March 1992 enforcement action against it, said Karen Dorway, Bauer's director of research. Its policy withholds a five-star rating from any financial institution under an enforcement action by federal regulators, she explained.