Repurchasing a $500,000 loan from the government sounds simple enough. It isn't, as three prominent Gulf Coast businessmen learned firsthand.
The murky process of selling loans from failed banks, a consequence of the real estate collapse, has oozed into the Gulf Coast.
The mire has spawned a confounding tale of the individual versus the government — the Federal Deposit Insurance Corp., specifically — that could serve as a case study of government run amok in the view of some of the principal players.
It includes accusations of disinterested and non-savvy FDIC bureaucrats as they go about the business of selling loan portfolios from shuttered banks. It also includes allegations of difficult, if not impossible, government employees when it comes to common sense negotiations.
“The FDIC is treating us like scum,” says Sarasota entrepreneur Marvin Kaplan, one-third of a trio of local businessmen that recently found themselves entangled with the government agency responsible for overseeing the nations' banks. “It's crazy.”
The kicker is in the follow-the-money trail: A trio of developers made up of Kaplan, former Manatee County Commissioner Stan Stephens and state Sen. Mike Bennett, R-Bradenton, claim they were rebuffed at least five times by the FDIC in trying to buy back their $562,500 loan that originated with Bradenton-based First Priority Bank, which regulators shut down Aug. 1.
The Bennett group says they made escalating offers to the FDIC to buy back the loan. Their first offer was for 25 cents on the dollar, $140,625, and they went all the way up to having a local bank that was willing to buy back the loan for at least 90% of its value. The FDIC could have received as much as $506,250 if that offer went through.
But the FDIC, through a firm it contracts with to dispose of loans from shuttered banks, instead sold the loan to a company in Texas after bundling it into a portfolio of other loans. The FDIC, Bennett and Stephens say, ended up getting 13 cents on the dollar for the loan, or $73,125 — considerably less than the 60 cents on the dollar, or $337,500, Bennett's group had offered in writing at one point.
And now, after the loan went through at least two more entities, Bennett and his partners have finally bought it back. They paid $320,625, or 57 cents on the dollar, for the loan in a deal that was expected to close by mid-February.
In the end, Bennett and his partners saved as much as $185,000 in buying back their own loan for an undeveloped property in downtown Bradenton.
The FDIC, however, lost out on at least $430,000 by not taking the Bennett led group up on what could have been its final, bank-backed offer.
“We made out, no question,” Bennett says. “But of course the taxpayers didn't.”
FDIC spokesman Dave Barr says he can't legally comment on any individual loans, but he did say the complaints brought up by Bennett and his partners are somewhat unusual. He said that, in general, if a loan is non-performing, in that payments on it are past due by three months, the agency has a standing policy that it won't sell it back to “delinquent borrowers.”
Bennett and his partners said they were making payments on the loan and weren't delinquent — an assertion Barr declined to confirm or deny, again citing borrower's confidentially.
The saga began Aug. 1, when state and federal regulators shut down First Priority Bank, citing a combination of non-performing loans and a declining capital base.
A few weeks later Stephens, head of Bradenton-based Manasota Commercial Construction Co., received a letter from the FDIC. It stated that the loan would be due in full within three months.
Stephens, Bennett and Kaplan decided they wanted to buy back the loan, hopefully at a discounted price. In mid-August, a few weeks after First Priority was shut down, Stephens made the 25 cents on the dollar offer. He says
FDIC officials told him he would need to come back with more.
So Stephens upped the offer to 35 cents on the dollar, $196,875. After not hearing back for a week, he raised the offer again, this time to 50 cents on the dollar, $281,250.
Still nothing from his FDIC counterpart. “We didn't hear anything,” says Stephens. “We didn't even hear a drop dead.”
Indeed, the next time Stephens says his group heard from the FDIC was when, after four or five unreturned phone calls, he was told there was a new government agent on the case. And that new FDIC official told Stephens that his group's loan was put in a portfolio of loans to be auctioned by Boston-based Debt X, a company specializing in selling multimillion dollar distressed loan packages. (See related story)
Bennett, Kaplan and Stephens didn't give up, however. The group decided to put together more offers to buy back the loan.
On Sept. 11, Stephens faxed a written offer to the FDIC to pay $337,500 for the loan, 60 cents on the dollar. The group noted that the property, due to market changes and zoning restrictions, had been reduced to an assessed value of $385,554. The group had initially intended to build an affordable housing project on the property.
Like the others, that offer was turned down. The group then met with a few bankers in Sarasota and Bradenton. They say they found one bank willing to pay nearly full price for the loan and the group would just pay the bank back for it.
“Even though we had a bank willing to talk to [the FDIC] about paying 100% for it, it didn't happen,” says Bennett. “They said it was too late.”
Debt X ultimately sold the loan portfolio that included the Bennett group's loan to a subsidiary of Waco, Texas-based Firstcity Financial Corp. a publicly traded firm that buys loan packages. That company sold the loan to
Hackensack, N.J.-based JKG Financing, which in turn sold it back to Bennett, Kaplan and Stephens.
Multiple phone calls to Firstcity Financial officials weren't returned. JKG Financing officials also couldn't be reached for comment.
Once the Debt X loan portfolio sale to Firstcity Financial was official, Bennett's group kept track of the loan's whereabouts. They negotiated with JKG Financing for about four weeks on the deal to buy back their loan.
Like Bennett and Kaplan, Stephens says the FDIC part of the process was one of the most frustrating experiences he has ever been a part of when it comes to loans and financing.
“Part of the problem is that the FDIC is dealing with so many people,” says Stephens, “that the right hand doesn't know what the left hand is doing.”
Several Gulf Coast bankers who have worked with the FDIC say they could understand that sentiment and the group's frustration. But Tramm Hudson, a retired banking executive who now consults for other banks, says that in defense of the FDIC, the agency has been slammed the past year with bank closings nationwide.
“They've just got an incredible task in front of them,” says Hudson. “It's very challenging to liquidate a bank efficiently.”
Barr, the agency's spokesman, says that over the past six months the FDIC has disposed of 45,000 loans worth more than $12 billion.
Bankers familiar with the FDIC's process in liquidating loans from a failed bank describe it as something akin to a scattered nationwide garage sale. The FDIC hires accounting and financial firms, who supply armies of workers to sort through a bank's loan portfolio.
Those workers are usually based in or near Dallas, where the FDIC's repository for failed bank assets is headquartered. They report to one main boss who works for the government.
As far as the specifics of the Bennett group's loan, several local bankers say the FDIC might have been right in one regard: If the loan was a performing asset, keeping it in a bundle of other loans like they did could have made the entire portfolio more attractive to buyers, as most packages comprised of loans from a failed bank tend to be filled with underperforming loans.
A sour taste
Nonetheless, Kaplan, Bennett and Stephens are left with a sour taste and some lingering questions from the entire experience. Kaplan has gone as far as to sue the FDIC over issues on another loan that stems from the First Priority shutdown.
In that suit, Kaplan's attorneys allege that the FDIC, acting as the receiver for First Priority Bank, is in breach of its agreement with Kaplan over a $6.6 million loan by failing to make previously agreed upon construction advances.
The loan was for Devonshire Park, a 20-unit single-family housing project Kaplan was developing in a neighborhood near downtown Sarasota.
That lawsuit was initially filed in Manatee County Circuit Court but it has since been transferred to federal court.
In Kaplan's view, the bureaucratic binds on the FDIC are so tight they can't get out of the their own way.
“If the government would work with borrowers, things would be a whole lot better for everyone,” says Kaplan. “But they don't seem willing to do that. It doesn't feel right to them to sell the loan back to the borrower.”
A handful of other Sarasota and Bradenton developers and entrepreneurs also had loans with First Priority before the bank was closed down.
One of those borrowers, Sarasota-based luxury homebuilder Mark Miller, says he had about $3 million in loans with First Priority, many of which took the same paper-travel route as did the Bennett/Kaplan/Stephens loan. Miller initially tried to negotiate a buyback deal on his First Priority loan with the FDIC, only he didn't take it as far as the Bennett group did.
Even so, he called his limited experience with the FDIC “terrible.”
Quipped Miller: “It's just government at its best.”
Agency. Federal Deposit Insurance Corp.
Industry. Real estate development, banking
Key. Working with FDIC officials after a bank is shut down can be a frustrating process.
The X Factor
Marvin Kaplan was plenty frustrated in dealing with the mess of federal bureaucracy when trying to buy back a loan he shared with two business partners last year.
But that frustration was puny compared to Kaplan's horror when he discovered Debt X. That's the Boston-based company the Federal Deposit Insurance Corp. uses to dispose of loans from shuttered banks, usually through a sealed-bid auction process.
That process includes allowing potential bidders of loan portfolios to access a litany of information on each borrower, down to social security numbers and driver's license photos in some cases.
In early October — after being thwarted by the FDIC in their efforts to buy back the loan before it hit Debt X — Kaplan and his partners, state Sen. Mike Bennett, R-Bradenton, and Stan Stephens, a former Manatee County commissioner, decided to check out Debt X for themselves.
Kaplan says he paid $75 and after answering a few basic questions, he was in and had access to reams of data. For Kaplan personally, he found parcels including his tax returns going back five years, his son's driver's license and his own social security card.
Says Kaplan: “It had every part of my personal information you could ever want to see.”
Ditto for Bennett and Stephens. The discovery multiplied the frustration level for the businessman, considering they had just spent about two months futilely trying to buy back the loan before it ever got to Debt X.
“It was bad enough that we were not notified that in your mind negotiations were over,” Bennett wrote to an FDIC official Oct. 9, but now you have put our information “in a package on a Web site that anyone from a two-bit hacker to a scam artist in Russia and everyone in between could pull down.”
Bennett and Kaplan's gripe wasn't so much that the information was there, but in who was allowed to access the information. A Debt X spokesman, however, says the company runs a vetting process for all potential buyers, allowing only serious individuals or reputable institutional investors access to the data.
Kaplan says when he applied for entry he wasn't asked any questions that could discern who he was.
Meanwhile, Bennett never heard back from the FDIC official he wrote to so he contacted Bill Isaac, a personal friend who lives in Sarasota and was head of the FDIC under President Reagan.
Isaac says he called his former associates at the FDIC to figure out a solution to the situation.
“[Debt X] was allowing access that wasn't allowed,” Isaac says. “So I called the FDIC and we fixed the problem.”
The spokesman for Debt X says that putting pertinent personal information about borrowers on its Web site is a necessity in selling a loan portfolio, as a buyer would need that information to come up with a bid price.
The spokesman also confirmed that the company's Web site security procedures and access requirements were changed in early November, but he didn't confirm or deny that the move was due to Isaac's intervention with the FDIC.