By Dan Rivoli
Editing by Andrew Park.
All Content © 2003-2016, Portfolio Media, Inc.
Law360, New York (August 24, 2011, 6:25 PM ET) — Two former First National Bank of Arizona officers “sacrificed safety and soundness” when they marketed risky mortgage loans that returned record profits but ultimately caused the bank to fail, the Federal Deposit Insurance Corp. said Tuesday in a $193 million lawsuit.
The FDIC, as the receiver for the failed bank’s sister in Nevada, hit former FNB Arizona CEO Gary A. Dorris and Vice President Philip A. Lamb with a suit in Arizona federal court seeking $193 million in damages for their alleged promotion of nontraditional so-called Alt-A loans.
These loans were given out — through a mortgage division that had a lending peak of $7.2 billion in 2006 — without proper underwriting, income or asset verification, and with terms that guaranteed high default rates, the FDIC alleges.
“[The executives] promoted this practice at the outset and continued to support the mortgage division’s growth long after they should have known that the loans being made created a substantial risk of harm to the bank,” the FDIC said.
FNB Arizona was one of three banks First National Bank Holding Co. owned, along with FNB Nevada and First Heritage Bank.
The FDIC says that FNB Arizona was relatively conservative until the early 2000s, when it began buying high risk and low quality mortgage loans for resale. The bank’s wholesale mortgage division was created as loan volume increased, according to the suit.
To beat the competition in certain markets, FNB Arizona sold mortgage products that came in a variety of forms, including subprime loans, the complaint says.
“These loans were destined to failure because they were not based on safety and soundness standards,” the FDIC said.
FNB Arizona’s mortgage division sold these loans on the secondary market using “lax” standards that investors set.
Dorris and Lamb ignored warnings around 2005 from senior bank employees that the mortgage division must either be sold off or diversified to become more conservative in its practices, according to the suit. Federal regulators, too, had told the executives that they doubted the viability of the mortgage division’s business model, the suit says.
In 2007, the mortgage division was sold off, with more than 500 employees losing their jobs. Then in June 2008, FNB Arizona was folded into FNB Nevada. But the merged entity lasted for a short while, as federal regulators shut down the bank on July 25, 2008, and tapped the FDIC as its receiver.
“At a bare minimum, [Dorris and Lamb] had a duty to ensure that FNB Arizona had prudent lending policies in place,” the FDIC said.
Representatives for the defendants could not immediately be reached for comment Wednesday.
The FDIC is represented by John M. Brown and Anthony W. Kirkwood of Mullin Hoard & Brown LLP.
Counsel information for Dorris and Lamb was not immediately available Wednesday.
The case is Federal Deposit Insurance Corp. v. Gary A. Dorris et al., case number 2:11-cv-01652, in the U.S. District Court for the District of Arizona.