Litigation Begins on ‘Buy-Sell’ Program : FBI Probes Past Lending Practices at FCA
Federal law enforcement authorities in Northern California are investigating past lending practices of Financial Corp. of America at the same time that civil litigation has begun in Sacramento over FCA’s controversial lending program known as the “buy-sell” plan.
FCA, whose operating subsidiary is American Savings & Loan in Stockton, confirmed this week that its records have been subpoenaed by a grand jury in apparent connection with an FBI investigation over “certain transactions” connected with its savings and loan operations “in earlier years.”
FCA, in a quarterly report filed with the Securities and Exchange Commission, said it had received “grand jury subpoenas for the production of records” in early April. The financial institution said the FBI’s investigation had begun earlier this year.
In San Francisco, a spokesman for the FBI confirmed that a probe is under way, saying that the agency is investigating whether there have been “violations of the bank fraud and embezzlement act in connection with State Savings.” He declined to comment further.
State Savings and American Savings merged in 1983 when FCA, then run by Charles W. Knapp, acquired First Charter Financial Corp., run by financier Mark Taper. FCA owned State Savings, and First Charter owned American; the combined savings and loan operations took the name of American Savings.
The latest disclosures have kept the spotlight on FCA’s prodigious problem assets, which have proved to be a sharp drag on earnings. The troubled assets, known as scheduled items, are loans that are delinquent, substandard or in foreclosure.
$1.85 Billion on March 31
In its latest report to the SEC, FCA said scheduled items stood at $1.85 billion on March 31, down from $1.98 billion at the end of February but up from $1.75 billion at the end of last year.
Though law enforcement authorities in Northern California will not say so officially, it is believed that their investigation centers around State Savings’ buy-sell program.
Though there were variations on the buy-sell plans, some lawsuits charge that State Savings would buy property from a developer. Then, they say, it would immediately resell it to another party to the deal in such a way that the S&L; could record a large profit while granting the developer a construction loan.
The buy-sell concept was popularized at a time when most banks and savings and loan institutions had bowed out of the construction lending market because interest rates had increased so much. State Savings jumped into the void, earning a profit of $21.5 million in 1981--a year when the S&L; industry as a whole lost $4.6 billion.
Though long since discontinued, the buy-sell programs ensnarled FCA in dozens of lawsuits. A trial on the first of those suits began May 5 in Sacramento and is expected to continue for weeks.
Critics charge that the buy-sell programs allowed State Savings to report record earnings on projects that often ended up in foreclosure. The lawsuits were filed when State Savings foreclosed on the properties.
State Savings said the construction loans went sour because rising interest costs made the builders’ plans impossible to carry out. But the builders put the blame on general neglect and disinterest by the lender in seeing the project through to completion.
FCA entered into 59 buy-sell agreements in 1980 and 1981, most of which ended up in litigation. Thirty of those lawsuits are still pending, FCA said.
FCA’s latest official comment on the buy-sell suits came this week in its SEC filing, in which it stated that “a majority of the buy-sell transactions experienced problems which the company believes may be attributed to a dismal economy between 1980 and 1982 and inaccurate construction cost breakdowns submitted by or on behalf of the developers.”
Chairman William J. Popejoy, in comments to reporters at the firm’s annual meeting this week, said FCA is continuing to probe its past lending practices, but he gave few other details. The investigation began 13 months ago.
Popejoy did say that FCA has spent about $2 million so far in probing the loan practices that have been held largely responsible for the company’s $591-million loss in 1984, an S&L; industry record.
Popejoy said that he expects the investigation to conclude this year and that the findings will be turned over to appropriate authorities.
Popejoy became chairman and chief executive in August, 1984, after federal savings and loan regulators forced Knapp to resign because of what they considered FCA’s reckless lending policies. Knapp, through a spokesman, has consistently maintained that he did nothing wrong.