UPDATE: This story includes quotes from an outside attorney, Arthur Coren of Husch Blackwell.
A Small Business Administration lending scandal that spawned more than a year of legal clashes is headed toward a muted resolution.
The institution at the center of the controversy — Independence Bank in East Greenwich, Rhode Island — is moving to quietly self-liquidate, terminating deposit insurance and surrendering its charter. The Federal Deposit Insurance Corp.
The FDIC conditioned the final liquidation of Independence on the $20 million-asset bank satisfying the conditions of the consent order, including disposing of any remaining SBA loans in its portfolio and ensuring continuance of servicing rights and obligations. The bank was still operating Friday, according to a representative of the Rhode Island Division of Banking, which is also party to the action. The FDIC also lists Independence as active. An FDIC spokesperson declined Monday to comment on the bank's status.
While Independence did not admit to wrongdoing, it agreed to pay $3.5 million to borrowers who the FDIC alleged were charged improper fees for SBA 7(a) loans.
Independence Chairman Thomas Bain did not respond to a request for comment.
The consent order, which was signed Jan. 14, appears to end a legal challenge to the FDIC's powers to regulate liquidations.
Though it's unlikely Independence shareholders will walk away from the liquidation with much money, a voluntary process is preferable to having regulators close the institution, Arthur Coren, a partner with Husch Blackwell in Los Angeles, told American Banker.
"The purpose is to reach an agreement with the FDIC to avoid personal liability that the directors and/or officers may have to the FDIC fund," Coren said. "In most cases, the shareholders rarely receive any money back, under either scenario. It's really avoiding the repercussions of lawsuits with the FDIC to recoup its money. ... At least the directors or officers know the number that they're dealing with is a fixed number and that there should be no further claims or actions by the regulatory agencies."
The FDIC unveiled its consent order with Independence 16 months after the bank sued the regulator in the U.S. District Court for the District of Rhode Island for blocking the bank's initial effort to cease its own operations.
Independence, which in a 2023 court filing denied wrongdoing linked to its SBA 7(a) lending activities, likened the FDIC's refusal to let it close to a "Kafka-esque nightmare." Independence claimed it was being forced to pay mounting operational costs, even after it ceased making loans and gathering deposits.
Independence tried to serve the FDIC with notice of its intent to voluntarily terminate its deposit insurance in September 2023. The agency asserted that before the bank could close, it needed to satisfy outstanding regulatory issues stemming from a 2019 consent order and make restitution to customers impacted by its lending practices. The FDIC estimated at the time that the bank's liabilities to customers could run as high as $6.9 million.
Independence's case was dismissed with prejudice, meaning the bank cannot refile it, on Jan. 15.
Independence opened in 2003. It operated as a small business lender, focused on making SBA 7(a) loans, building over time what appeared to be a solid business. Indeed, the one-branch bank seemed to punch above its weight. SBA credited it with 651 approved 7(a) loans for $70.1 million in the agency's 2017 fiscal year, and 863 loans for $86.7 million in fiscal 2018.
According to the FDIC and the Rhode Island Division of Banking, however, Independence was getting most of its 7(a) volume through referrals from John Ponte, the owner of a West Warwick, Rhode Island firm whose business involved originating small business deals and referring them to third-party lenders.
The FDIC claimed Ponte's firm was providing borrowers with undisclosed high-interest bridge loans, many of them repaid with proceeds from later 7(a) deals. It further claimed that Independence CEO Robert Catanzaro and another bank executive participated in the enterprise and worked to ensure the bridge loans were not documented in the bank's records.
Carrying a heavier burden of debt than the SBA knew at the time the loans were approved, borrowers with bridge loans proved less capable of repaying their SBA obligations, and they defaulted at a rate significantly higher than other SBA borrowers. According to the FDIC, the SBA suspended Independence's participation in the 7(a) program, which provides guarantees of up to 85% on small business loans made by banks and other private sector lenders.
The FDIC removed Catanzaro from his position as CEO in August. When the agency sought to sanction Ponte through its administrative process, he filed three lawsuits challenging the action.
All three of the cases Ponte filed have been dismissed.
