GAO Audit Supports RTC in Loan Pricing Dispute

The Resolution Trust Corp. has prevailed in its long-running quarrel with seven banks over the pricing of loans in its minority assistance program.

Just days before the RTC closed its doors for good last Friday, the General Accounting Office released an audit - more than a year in the making - supporting the bailout agency's position on its loan pricing and methodology.

"We felt our approach was fair and reasonable, and we're happy that the GAO has agreed with us on that," RTC spokesman Stephen Katsanos, said when the audit was released. "If a convincing argument was presented to us that our methodology was flawed, then we were more than willing to consider that and make adjustments. But that was not the case."

The audit all but brought to a close a nearly two-year struggle over a program designed to assist minority bidders in acquiring RTC-controlled institutions and branches in minority neighborhoods.

"It's just horrendous to have it go on this long and then for them to come out with this report," said Emma C. Chappell, chairman of United Bank of Philadelphia. "It's as unfounded as you can get. It's disheartening, but I guess we should've expected it."

The seven banks had previously bought branches and deposits from the RTC, and then sought income-producing loans to offset the cost of the deposits. They claimed, however, that the loan prices were as much as 10 basis points too high.

As a result of not being able to afford the loans, United Bank will likely have to close down the branch it bought from the RTC, Ms. Chappell said. The deposit runoff there has been about $17 million, leaving it just $3 million, she said. The branch is now used only for loan applications.

Of the seven institutions involved in the dispute, United Bank has probably been hurt the most. Though its bottom line is improving, it finished the year in the red, partly as a result of the troubled branch, Ms. Chappell said.

United Bank is not letting the matter drop. It has filed suit against the RTC, charging that the agency did not honor its agreement over interest payments on loans United expected to buy. The suit is unrelated to the actual pricing of the loans.

The RTC program entitled the banks to the accrued interest on the loans for the period between letter of intent and closing, even if the bank decided not to buy the loans.

The United suit alleges that the RTC misled United Bank on how much interest it would receive from the agency during this period.

The RTC subtracted the federal funds rate from the accrued interest amount because it lent the banks money - through the capital assistance aspect of the program - to buy the loans in the first place. Ms. Chappell said she had not been told that would be the case. The RTC said that was always its stated policy.

"They are alleging that they should get both the earnings on the assets and the earnings on the loans we gave them to buy the assets," Mr. Katsanos said last week. "We are saying that the agreement was always clear on what the payment would be."

Ms. Chappell expects lawyers to meet this month to set a court date. The remaining six banks are not expected to pursue the dispute any further.

"It's water under the bridge for City National," said Louis E. Prezeau, chief executive of City National Bank of New Jersey, Newark. "We are moving forward with more important things to do."

Disagreements marred the RTC's minority assistance program from its start in February 1994. The program was designed to keep the big regionals from buying up all the RTC-controlled branches in low-income neighborhoods; it provided minority bidders with capital assistance, rent-free office space for up to five years, and the option to buy performing assets.

Of the 14 institutions from around the country that bought failed thrifts from the RTC under the program, 11 subsequently bought a total of $290 million of loans from the agency.

According to the GAO audit, 69% of the loans were bought at more than 91 cents to the dollar. The seven banks that balked at buying most of the loans offered them pegged the average value at closer to 85 cents on the dollar.

The other banks that disputed the pricing were Founders National Bank of Los Angeles, Pan American Bank of San Mateo, Calif., Harbor Bank in Baltimore, Dryades Savings Bank in New Orleans, and Douglass Bank of Kansas City.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER