Dive Brief:

• The Federal Deposit Insurance Corp. has approved East Greenwich, Rhode Island-based Independence Bank’s plan to liquidate, according to FDIC enforcement actions released Friday, settling a years-long back-and-forth between the lender and the regulator.
• The bank was required to pay restitution of $3.5 million to affected consumers, according to a Jan. 14 order. The FDIC accused the bank of charging illegal fees for Small Business Administration 7(a) loans and causing the agency to lose an estimated $8.8 million.
• Since the bank seeks to terminate deposit insurance and surrender its banking charter, Independence was ordered to dispose of any SBA loans still in its portfolio and ensure continuance of servicing rights and obligations connected with any of its SBA loans, according to the consent order.

Dive Insight:

The community lender, which neither admitted or denied the FDIC’s allegations, also must ensure it’s compliant with all laws and regulations related to ongoing maintenance of required information technology infrastructure, as well as document and data retention, the FDIC said.  

The development wraps up a saga that stems from a SBA lending scheme the FDIC said was perpetuated between 2017 and 2019 by the bank’s former CEO, Robert S. Catanzaro; former chief operating officer Danielle M. Desrosiers; and John C. Ponte, a loan referral agent who referred small businesses to the bank for SBA loans. 

According to a February 2023 FDIC complaint, Catanzaro “caused the Bank to enter into a high-risk non-diversified SBA lending strategy.” 

Ponte’s company targeted struggling small businesses and referred the “vast majority” of SBA loans the bank funded: On average, about 76% of the dollar amount of SBA loans approved and funded by Independence was from loans referred by Ponte, the FDIC said.

Additionally, Ponte’s company offered high-interest bridge loans to SBA loan applicants while they awaited approval and funding from the bank, the FDIC said; interest rates on these loans were 50% to 100%, the FDIC said. 

Ponte sought to shift the risk associated with these bridge loans, arranging to have the loans repaid from the proceeds of the SBA loans made by Independence, and concealing information about the bridge loans and their repayment from SBA loan proceeds, the FDIC charged.

The SBA found the default rate of loans issued through Independence to be five times higher than those of peer banks, which cost the government agency millions of dollars, the FDIC said.

Catanzaro and Desrosiers participated in the bridge loan scheme, the FDIC contended, and Catanzaro worked with Ponte to ensure the loans were not documented in the bank’s records.

The former CEO, who exhibited “deficient risk management practices,” was “repeatedly notified by the FDIC of deficiencies in the Bank’s SBA Loan program,” the regulator said. 

While employed at the bank, Desrosiers also developed a romantic relationship with Ponte, which she didn’t disclose to the board, and began working for his company. Once aware of the romantic relationship, in February 2017, the board took away Desrosiers’ COO title, but made her executive vice president of independent sales organization lending. Desrosiers left the bank in 2018.

All three faced FDIC fines, according to the 2023 complaint, and the regulator sought to ban each from the industry. The FDIC ordered Catanzaro’s removal as CEO last year. 

The bank sued the FDIC and the Rhode Island Department of Business Regulation in federal court in Rhode Island in October 2023, accusing the regulators of “blatant federal and regulatory agency overreach.” 

The bank, which denied wrongdoing related to its SBA lending, said it was “unable to overcome a Kafka-esque nightmare of the FDIC’s design” because the regulator required Independence to operate for an indefinite amount of time, despite the bank’s intention to wind down its operations, surrender its charter and terminate deposit insurance.

Independence said it had incurred about $3.6 million in operating expenses since first raising voluntary liquidation with regulators. But the FDIC said the termination process couldn’t begin until the bank’s outstanding regulatory obligations were satisfied. The regulator sought to have $6.9 million in restitution paid to bank customers harmed by its SBA lending program.  

The case was dismissed Jan. 15. Cases Ponte filed against the FDIC, in U.S. District Court for the District of Columbia, were also dismissed. The FDIC also terminated a 2019 consent order against the bank. 

A lawyer representing the bank in its Rhode Island district court case declined to comment Wednesday. The bank’s president, Heather L. Marshall, couldn’t immediately be reached for comment.