Feds get tough in enforcing banking anti-bias measure.

FDIC going after Western bank after Fed hits another

The Federal Deposit Insurance Corp. is pursuing a cease and desist order against a Western bank which it says is not complying with the Community Reinvestment Act -- believed to be the first-ever such action by the agency, according to Bob Carmona, head of the FDIC's reinvestment act compliance office in San Francisco.

Just last month, the Federal Reserve Bank issued a cease and desist order on Farmers & Merchants Bank of Long Beach, ordering the bank to comply with the Community Reinvestment Act. Fed officials said that was believed to be the first such action by their agency.

Financial institutions which violate a cease and desist order issued by a federal financial examination agency can be fined up to $5,000 a day, said Caryl Austrian, spokeswoman for the FDIC. In addition, poor reinvestment act ratings can be used as a reason to deny any application by an institution for anything from opening a branch to merging with another institution, Austrian said.

The two rare enforcement actions by federal regulators could foreshadow a crackdown which could hit hard at Los Angeles area financial institutions which have been receiving less-than-satisfactory reinvestment act grades.

The act was passed by Congress in 1977 to prevent banks from discriminating against making loans in minority and low-income communities. Federal regulators monitor banks' compliance with the reinvestment and regularly issue "report cards" on their performance.

Bankers in Los Angeles have been complaining that recent reinvestment act exams are getting tougher, said Sal Serrantino, president of California Research Corp., a top banking consultant who has instituted reinvestment act compliance programs at more than 40 area banks.

"I would not be surprised if we have more C&Ds (cease and desist orders) brought by regulators against area banks," Serrantino said. He has recently reviewed more than 100 reinvestment act reports for area banks and some "are just shocking" for their non-compliance, he said.

In recent months, regulators have given less than satisfactory ratings to several large, Los Angeles County-based financial institutions, including Beverly Hills-based City National Bank, Century City-based Mercantile National Bank, Glendale-based Glendale Federal Bank.

Financial institutions are rated on a number of factors, including ascertaining the credit needs of the community, lending within the geographical area of the community, marketing products to all areas of the community, being aware of community development needs and compliance with federal consumer protection laws.

FDIC's Carmona declined to name the bank which is the target of the cease and desist action, saying the order is not public until it is filed in court. "At this time, to my knowledge, Washington legal is reviewing it for issuance," Carmona said.

A cease and desist order is a legal action regulators can pursue "if they find blatant, I mean blatant, violations of the law," said Louie Couto, reinvestment act compliance officer for the FDIC. But the banking firm may avoid having the C&D order filed against it by negotiating with regulators and agreeing to certain conditions, he said.

There are four federal agencies which examine banks and savings and loans for compliance with the 1977 law: the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Fed.

FDIC, which supervises 7,500 state-chartered banks which are not members of the Federal Reserve, oversees more reinvestment act programs than does any other agency, said Chuck Collier, assistant director of compliance and special action for FDIC.

In the past, regulators would examine institutions for reinvestment act compliance in addition to safety and soundness issues.

Now, FDIC is providing special training to prepare staffers to examine banks just for reinvestment act compliance and compliance to federal consumer protection laws, Collier said. In addition, FDIC is hiring 150 more examiners for the reinvestment act compliance force, he said. Altogether, the FDIC employs 2,300 examiners.

Banks should feel the full impact of the beefed-up staff in 12 to 18 months, Collier said. "We have been somewhat behind in doing our (reinvestment act) exams," he said.

The FDIC action is significant, said consultant Serrantino. "I would suspect that other agencies will follow the lead of the FDIC in conducting tougher exams," he said.

Already, a number of financial institutions have received unsatisfactory grades, he said. Institutions may receive four grades: "outstanding," "satisfactory," "needs to improve" or "substantial non-compliance."

"I would suspect that other agencies will follow the lead of the FDIC in conducting tougher exams," Serrantino said.

Of 148 California banks and thrifts that were checked for reinvestment act compliance by the FDIC between July 1990 and February 1992, a total of 32 received grades of "needs to improve" or "substantial non-compliance." Only seven received "outstanding" grades. The rest were satisfactory.

Marina State Bank in Marina del Rey was cited for substantial non-compliance. Burbank-based Imperial Thrift & Loan Association, Agoura Hills-based Charter Pacific Bank, San Gabriel-based Asian Pacific Thrift & Loan Co., Torrance-based Pacific Heritage Bank and Duarte-based Western State Bank all received grades of "needs to improve."

United Pacific Bank, First Credit Bank, International Bank of California and Lippo Bank, all based in Los Angeles, also received grades of needs to improve.

Of 27 savings and loans examined for reinvestment act compliance by the Western Regional Office of Thrift Supervision in the first quarter of 1992, six received "needs to improve" grades. Only three got "outstanding" grades. The rest were "satisfactory."

Hawthorne Savings & Loan Association and Los Angeles-based First Global Bank both received grades of "needs to improve."

Of 42 banks examined for reinvestment act compliance by the federal comptroller's office between July 1, 1990, and Oct. 31, 1991, a total of 13 received grades of "needs to improve" or "substantial non-compliance." Only two got "outstanding" grades. The rest were satisfactory.

Los Angeles-based United Citizens Bank received a grade of "substantial non-compliance." World Trade Bank of Beverly Hills and OmniBank of Monterey Park both were cited as "needs to improve."

In more recent examinations, City National Bank, the second-largest bank in Los Angeles County, got a "needs to improve" mark and Mercantile National Bank was cited as being in "substantial non-compliance," said Frank Vance, a spokesman for the OCC.

Donald Thornburg, who became president and chief executive of Mercantile National Bank three months ago, said the substantial non-compliance rating was given because the bank did not provide documentation of reinvestment act programs it had in place. "This is a very serious matter and we are taking steps to comply with regulators," Thornburg said.

A grade of "needs to improve" means the institution is not satisfactorily complying with the law, Serrantino said, noting that Farmers & Merchants Bank received a "needs to improve" grade just before the Fed issued it a cease and desist order.

Although the Community Reinvestment Act was enacted in 1977, ratings only became public in 1990, under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. Federal regulators were given the power to issue enforcement actions in 1989 as part of FIRREA, Serrantino noted.

"The law was passed, essentially, to stop the horrible act of redlining," Serrantino said, referring to the practice of delineating communities in which banks would limit or bar lending. "There is nothing in the law that says banks ought to make bad loans. What it merely says is credit ought to be available to all residents irrespective of all discriminatory elements."