Small Rhode Island Bank Asks Federal Court to Allow It to Stop Being a Bank

The odd story of Independence Bank v. FDIC

In late October 2023 Independence Bank, a small Rhode Island bank, sued the FDIC and the Rhode Island state banking regulator in federal court.¹

The lawsuit includes some of the typical tropes you would expect to see in a lawsuit against a regulator. There are accusations of “blatant federal and regulatory agency overreach,” of regulatory bad faith, of secret rulemaking, and of other “Kafka-esque” circumstances.

What is much less typical about the lawsuit is that Independence Bank’s complaint is not about any specific regulation or the manner in which the FDIC is requiring the bank to operate. Instead, Independence Bank purports to be upset that the FDIC is requiring it to operate at all.

In its telling, Independence Bank is desperate to wind down its operations, pay off all its depositors, and stop being a bank. But the FDIC, according to the lawsuit, refuses to let Independence Bank do so. From the complaint:²

Independence Bank brings this action against Defendants Federal Deposit Insurance Corporation and Rhode Island Department of Business Regulation because Plaintiff has been unable, is still, and will continue to be unable to overcome a Kafka-esque nightmare of the FDIC’s design: it is requiring Independence to operate — despite the Bank’s stated intention to wind down its operations, surrender its banking charter and terminate its deposit insurance — for an indefinite, potentially infinite period of time until the FDIC in its apparently unfettered discretion determines that the Bank may cease operating.

The FDIC insists that forcing Independence to continue operating — despite the Bank performing no lending, no underwriting, holding no loans, and essentially only maintaining a rapidly dwindling deposit base — is required by law.

A Brief History of Independence Bank

The bank that is now Independence Bank opened for business in Rhode Island in 2003. Its founder and still CEO is Robert Catanzaro, who according to local media reports originally operated a private investment firm before in the early 2000s deciding to get into banking.

As described by the FDIC in a CRA evaluation released in 2005:

Independence Bank became insured by the FDIC in March 2003. Prior to becoming an insured financial institution the bank operated as a finance company specializing in franchise loans. The bank, which operates out of its only office located in East Greenwich, Rhode Island, continues to specialize in small business loans to franchises throughout the country.

A subsequent CRA evaluation provides a few more details about the specific focus of the bank’s lending activities:

Independence Bank offers limited loan and various deposit products and services. Loan products are mostly limited to small business loans guaranteed by the Small Business Administration (SBA). The bank specifically offers 7(a) loans, including the Small Loan Advantage (SLA) program. The SBA created the SLA program to encourage lenders to offer business loans of smaller amounts, particularly in underserved communities. The program allows approved lenders to perform streamlined underwriting and obtain a guarantee of up to 85 percent of the loan amount. The streamlined application process reduces the burden on small businesses to access capital. Through the combined efforts of the bank, local brokers, and independent selling organizations, Independence Bank has become a top SBA lender within Rhode Island. In addition, Independence Bank is an approved United States Department of Agriculture (USDA) Business and Industry loan program lender.

Early 2010s Consent Orders

In December 2010, the FDIC required Independence Bank to enter into a consent order.³ The consent order, among other things, required the bank to enhance its compliance program, to hire a qualified compliance officer, and to correct assorted violations of law, including under the Truth in Lending Act, Truth in Savings Act, the Home Mortgage Disclosure Act and the Equal Credit Opportunity Act.

Independence Bank was able to work its way out of the 2010 consent order, and that order was terminated in May 2012.

By August 2014, however, the FDIC had again found issues with the bank, and so the bank was required to enter into a new consent order with the FDIC and RI DOB. This one required Independence Bank to take a series of actions, including by adopting plans to improve earnings, increase capital, improve asset quality, and better manage various risks. The bank was also required to come up with a plan to exit its line of business that provided services to money services businesses.

The 2014 consent order was terminated in May 2016.

2019 Consent Order

In July 2019 the FDIC and RI DOB imposed another consent order on Independence Bank.

This 2019 consent order explicitly required the bank, among other things, to take a series of actions to improve its underwriting and other practices in relation to SBA loans. Until these matters are corrected, the 2019 consent order imposes a two-pronged growth restriction.

• First, as a general matter, Independence Bank is prohibited, without first obtaining prior FDIC and RI DOB approval, from engaging in any transaction that would materially change the bank’s risk profile or balance sheet composition. The consent order defines material change to include, but not necessarily be limited to, annual growth in total assets of five percent or more.

• Second, until Independence Bank implements the strategic plan described below, its unguaranteed SBA SLA loans as a percentage of total capital cannot exceed the ratio of unguaranteed SBA SLA loans as a percentage of total capital as of June 30, 2019.

In addition, the consent order requires Independence Bank to develop and submit to the FDIC and the Rhode Island DOB for their prior non-objection a revised strategic plan for operation of the bank. As will be discussed below, Independence Bank has yet to satisfy this requirement of the consent order.

Halt to Lending Activity

According to a CRA evaluation released in 2023 but covering the period from October 2015 to early 2022, Independence Bank ceased all lending activity after 2019.

The bank’s CRA lending performance during the first half of the evaluation period was generally reasonable; however, the sharp decline in lending activity in 2019, the absence of lending activity in 2020 and 2021 and poor performance under the geographic distribution and borrower profile criteria supported an overall poor performance under the Lending Test.

This lack of lending activity,⁴ combined with an illegal credit practice it had identified, led the FDIC to issue to the bank a rating of Substantial Noncompliance.

2022 Sale of Loan Portfolio

According to Independence Bank’s lawsuit against the FDIC, the bank in 2022, with the prior approval of the FDIC, sold its entire loan portfolio. As such, Independence Bank no longer lends to anyone and its approximately $28 million in total assets now consist nearly entirely of cash. On the liability side of the bank’s balance sheet are around $5.57 million in deposits, a contingent liability of $1.4 million, and not much else. A copy of the bank’s most recent call report is available here.

2023 Notice of Charges

In February 2023 the problems at Independence Bank escalated further when the FDIC brought charges against the bank’s CEO Robert Catanzaro, its former Executive Vice President Danielle Desrosiers, and John C. Ponte, allegedly an institution-affiliated party. Ponte is the sole owner of a firm called Ponte Investments, which served as a loan-referral agent for SBA loans, and in that capacity referred business to Independence Bank.

The FDIC’s notice of charges includes various allegations of misconduct over a period from June 2017 to 2019. Some of the allegations against Catanzaro center around risk management failures, without necessarily alleging fraud or other wrongdoing.

Respondent Catanzaro was repeatedly notified by the FDIC of deficiencies in the Bank’s SBA Loan program.

The FDIC took multiple and increasingly severe regulatory actions against the Bank as a result of Respondent Catanzaro’s failure to address deficiencies in the Bank’s SBA program.

Upon information and belief, Respondent Catanzaro purposefully failed to supervise Respondent Ponte and Ponte Investments because Respondent Ponte was a driver of the Bank’s profitability.

The bulk of the allegations, however, go further. For example:

Through the Bridge Loan Scheme, Respondent Ponte targeted struggling small businesses by purporting to offer financial relief. Typically, only businesses in weak financial condition agreed to take on Bridge Loans offered by Respondent Ponte and Ponte Investments. Nevertheless, Bridge Loans were highly lucrative for Respondent Ponte and Ponte Investments because, for loans approved by the SBA, Respondent Ponte shifted the risk of the Bridge Loans to the Bank and the SBA by having Bridge Loans repaid from SBA loan proceeds.

Respondent Catanzaro and Respondent Desrosiers participated in the Bridge Loan Scheme.

Respondent Catanzaro was aware of the Bridge Loan Scheme and worked with Mr. Ponte to ensure that Bridge Loans were not documented in the Bank’s records. Respondent Catanzaro knowingly made false certifications on SBA forms to conceal the Bridge Loan Scheme from the SBA.

Respondent Desrosiers knew that SBA Loan applications to the Bank failed to document Bridge Loans but permitted applications with inaccurate information to be submitted anyway. Respondent Desrosiers did not alert Bank underwriters or the Bank’s Board to the missing information in the Bank’s files.

As a result of all of the Respondents causing or participating in the Bridge Loan Scheme, material information was concealed from the regulators, including the FDIC and the SBA.

Exemplar Loan A

Paragraphs 124-153 in the notice of charges lay out a series of allegations that the FDIC says “evidence and typify” the misconduct at issue.

These paragraphs tell the story of a $150,000 SBA loan Independence Bank wanted to make to a small auto-repair business. The business in question had a low credit score, a “large amount of past-due state taxes,” and “questionable ability to service its debts.”

Given these issues, the bank’s credit policies required approval from three different individuals, including the bank’s president. The bank’s president declined to provide approval because he “did not believe [the loan] met prudent lending standards.” So Catanzaro and Ponte allegedly found a workaround:

Respondent Ponte informed Respondent Catanzaro via email that he no longer wanted the Bank’s president to be involved with loans referred by Ponte Investments. Thereafter, the Bank’s president no longer reviewed any SBA Loans referred by Ponte Investments.

Even after that, however, there was still trouble getting the loan approved. A bank director brought in to approve the loan a few days later also declined to provide approval, “citing, inter alia, excessive business debt and questionable cash flow.” There was a workaround to this issue too:

On or about June 5, 2017, a revised credit memo was generated by the Bank after loan applicant A’s SBA score improved to the point where approval of SBA Loan A would not require an exception to policy. Upon information and belief, loan applicant A’s SBA score improved because, inter alia, he used a Bridge Loan A to pay-off some of his debts. The revised credit memo did not disclose Bridge Loan A.

This was enough to get the SBA loan near to the finish line, but even then one of the bank’s directors “mandated that the back taxes owed to the state be paid in full prior to the closing of the loan.” Once again, the FDIC alleges that Catanzaro and Ponte found a way:

On or about June 22, 2017, Respondent Ponte sent Respondent Catanzaro a bank document, signed by Respondent Ponte, purporting to evidence a wire transfer in the precise amount of back taxes from Hydrangea Capital to the state taxing authorities on behalf of loan applicant A (the Tax Wire document). The Tax Wire document was a forgery; no funds were distributed from Hydrangea Capital to the state.

Upon information and belief, Respondents Ponte and Catanzaro used the Tax Wire document to evidence that SBA Loan A’s condition precedent had been satisfied. The Bank approved SBA Loan A and funded it on June 26, 2017, for $150,000. A check from loan Applicant A to Hydrangea Capital was deposited on June 27, 2017, to pay-off the Bridge Loan

SBA Loan A wound up resulting in a loss for the bank and, according to the FDIC, would have given the SBA grounds for it to revoke its guarantee, which would have caused the bank to suffer an additional loss.

Other Exemplar Loans

After its discussion of SBA Loan A, the FDIC goes on to discuss other exemplar SBA loans evidencing misconduct by one or more of the charged individuals. These paragraphs allege, among other things, that someone at Ponte Investments was an enthusiastic user of Wite-Out.

Paragraph 167:

Some written information on SBA Loan B’s application, including evidence of the 1st Bridge Loan B, was deleted using correction fluid.

Paragraph 262:

It appears that loan applicant C’s business debt schedule, submitted to the Bank by Ponte Investments, was altered using correction fluid.

Paragraph 315:

The section on Applicant D’s updated May 11, 2018, business debt summary that evidenced Bridge Loan D was covered in correction fluid.

Alleged Conflicts of Interest

The FDIC also includes a series of paragraphs (339-368) setting out alleged misconduct by Desrosiers relating to conflicts of interest. As told by the FDIC, in 2016 Desrosiers “was relocated to work out of the office of Ponte Investments to improve the coordination between the Bank and Ponte Investments.”

Coordination improved and, sometime after that relocation, “Respondent Desrosiers and Respondent Ponte developed a romantic relationship.” The FDIC alleges that this relationship was not disclosed to the bank’s board, in violation of the bank’s ethics policy.

Also undisclosed to the bank, Desrosiers allegedly began to receive payments from Ponte Investments or another entity owned by Ponte.

Respondent Desrosiers received in excess of $120,000 in direct payments from Ponte Investments and Hydrangea Capital from January 6, 2017, through her resignation from the Bank effective January 31, 2018. In addition to direct payments to Respondent Desrosiers, Ponte Investments began making payments on a Mercedes-Benz in Respondent Desrosiers’s name starting on or about July 24, 2017. Respondent Desrosiers did not disclose the above payments to the Bank.

Furthermore, according to the FDIC, during a portion of the relevant period Desrosiers served as an officer of the bank while also at the same time taking on the duties of a senior employee of Ponte Investments.

Over time, Respondent Desrosiers began to take on roles and responsibilities of a Ponte Investments senior employee. This progression occurred even while she was still employed by the Bank and had responsibilities for Bank loans referred by Ponte Investments to the Bank. While still an officer of the Bank, Respondent Desrosiers was issued and began using a Ponte Investments email address. While still an officer of the Bank, Respondent Desrosiers would correspond directly with borrowers about loans using her Ponte Investments email address, without disclosing which entity she worked for.

[…]

In May 2017, while still serving as an officer of the Bank, Respondent Desrosiers took over responsibility for payroll at Ponte Investments. In August 2017, while still serving as an officer of the Bank, Respondent Desrosiers assumed the title of Director of Operations for Ponte Investments. Beginning in at least December 2017, while still serving as an officer of the Bank, Respondent Desrosiers had a business credit card from Hydrangea Capital in her name.

The FDIC says all this amounted to a conflict of interest that should have been, but was not, immediately disclosed to the bank’s board of directors. The FDIC also says that Desrosiers improperly signed a yearly conflicts of interest disclosure statement required by the bank that “did not list any conflicts of interest.”

***

For all the above and other alleged misconduct, the FDIC is seeking to remove Catanzaro from his role as CEO of Independence Bank and to prohibit each of Catanzaro, Desrosiers and Ponte from further work in the banking industry. The FDIC also seeks to impose fines on each individual.

According to a spokesperson for the bank quoted in local media reports, “CEO Catanzaro denies that he engaged in any prohibited conduct and will vigorously defend himself against the FDIC allegations.” The same reports say that “Ponte and Desrosiers have also denied the allegations.”

The enforcement action continues to work its way through the FDIC’s administrative process.⁵

The October 2023 Lawsuit

All of that is in the background to the lawsuit Independence Bank filed last month. The complaint is a little messy chronologically but, piecing it together, the substance of Independence Bank’s grievances seem to be as laid out below.

Note that at this stage we have only the bank’s side of the story — the FDIC and RI DOB have not yet responded to the complaint.

No Strategic Plan Approval

The FDIC’s position, as characterized by Independence Bank in the lawsuit, is that the bank cannot voluntarily terminate its deposit insurance and wind down its operations “until all outstanding regulatory matters have been satisfactorily resolved.”

The key “outstanding regulatory matter” is the 2019 consent order, which according to the lawsuit has three undertakings the FDIC believes have not yet been satisfied: provisions relating to (1) management, (2) board oversight and (3) development and adoption of a revised strategic plan.

Independence Bank says that, by their terms, the provisions relating to management and board oversight cannot be resolved until a strategic plan is in place, so everything effectively turns on the strategic plan.

And, according to Independence Bank, the bank is now 0 for 5 in getting the FDIC to approve the strategic plans it has submitted.

Since entering the 2019 Consent Order, the Bank has submitted at least five (5) revisions to its Strategic Plan to the FDIC. Each subsequent submission has been revised to reflect and address all regulatory recommendations from the FDIC examiners and all comments from each prior FDIC visitation. . . . [E]ach time, the FDIC nonetheless objected to the strategic plan revisions.

To be clear, not all of these strategic plans have embraced a wind down and termination strategy. For example, the bank says that one iteration of the strategic plan proposed to engage in a new type of SBA lending, but the FDIC was not receptive to that.

[T]he SBA recommended that the Bank engage in direct lending under a working capital commercial loan program recommended by the SBA. The Bank then submitted a Strategic Plan to the FDIC on or about August 7, 2021 that proposed a Direct Working Capital Small Loan program. The FDIC rejected this proposed plan, saying only that it not comfortable with the Bank lending to existing borrowers.

The bank also asserts, without going into more detail, that other “standard requests by the Bank that require FDIC non-objection have been consistently met with objection or no response at all.”

The complaint says that the bank has “incurred approximately $3.6 million in operating expenses since first raising voluntary liquidation with FDIC and RIDBR” and “expects that by 2025 it will have spent another $4 million after notifying FDIC of its plan to terminate operations and submitting a formal plan of liquidation to RIDBR.”

In sum, Independence Bank says, “despite dedicated and relentless efforts and expense” for more than three years, it has “been unable to satisfactorily resolve a single regulatory concern.”

Not Allowed to Carry Out Liquidation Plan

Ultimately, the complaint says, the bank decided that the best path forward was to wind down its operations. In furtherance of that aim, it sold “its entire loan portfolio to a third party in August 2022 in preparation for its anticipated voluntary liquidation by the end of that calendar year.”

The complaint is not clear about why a liquidation did not happen by year-end 2022, but says that on February 9, 2023⁶ the bank again informed the FDIC that it had “reluctantly commenced a process to voluntarily terminate its FDIC insured status and banking charter which according to our Strategic Plan is targeted to be completed by June 30, 2023.”

The complaint alleges that a few weeks later the FDIC reiterated that the bank would not be allowed to voluntarily terminate its deposit insurance until all regulatory matters have been satisfactorily resolved.

It is not clear whether this happened before or after the February 2023 events described above, but the bank states it has now submitted a liquidation plan to the RI DOB for approval, and avers that is willing to “set significant portions of its cash reserves in an escrowed account to satisfy any potential fines or penalties.”

Treatment of Depositors

Independence Bank says it would really like to tell its remaining deposit customers about its plans to wind down operations, to enable those depositors to “redeposit such funds with another insured financial institution at today’s very favorable interest rates.”

But, according to the complaint, the FDIC has prevented the bank from doing so.

[T]he Bank’s deposit base has decreased drastically from its former size (from $46M to $6M) over the last two years, but the FDIC has instructed the Bank that it cannot notify its remaining depositors of its intent to cease banking operations in the future[.]

[…]

[A]fter recently changing course and informing the Bank’s board and management at an in-person report of examination exit interview on October 4, 2023 that they were not prohibited from notifying the remaining depositors of the Bank’s intent to no longer accept deposits as part of its plan to wind down operations, the FDIC then reversed course again and informed the Bank that they will in fact be required by the FDIC to maintain a minimum level of deposits or be at risk of further regulatory scrutiny—presumably resulting in ever-more assertions that they cannot wind down operations.

As with other aspects of the complaint, you sort of suspect we do not have the full story here and, in any case, depositors (at least those who follow proceedings in the United States District Court for the District of Rhode Island) now of course are in fact aware of the bank’s as-yet-unsatisfied desire to liquidate.

Requested Relief from an Alleged Regulatory Vendetta

In case not already inflammatory enough, the complaint incorporates previous claims from a February letter the bank sent to the FDIC accusing the agency of requiring the bank’s board, senior management and shareholders to “endure[] for over three years what is believed to be a combination of regulatory bad faith, breach of confidentiality, conflict of interest, violations of the FDIC Code of Ethics and an obvious lack of authenticity.”

The FDIC’s actions, according to the bank, have been driven by an “ongoing vendetta” that seeks to “see the Bank bled dry of equity” and “prevent its shareholders from realizing any value.”

Independence Bank thus asks the court to grant it the following relief:

• A declaration that there is no law or regulation requiring the bank to close out all open regulatory matters to the satisfaction of the FDIC before voluntarily liquidating;

• A declaration that the strategic plan submitted by the bank satisfies the strategic plan requirement in the 2019 consent order; and

• A declaration that the FDIC has acted outside it statutory authority, in a manner that is arbitrary and capricious and in violation of the FDIC’s own regulations.

***

As noted above, at this stage we have only the bank’s side of the story. And it is a story that comes from a bank that, if the facts alleged by the FDIC in its 2023 notice of charges are true, may have credibility issues. Even so, it is quite the story.

Thanks for reading! Thoughts on this post or any other post are welcome at bankregblog@gmail.com

1. I came across the lawsuit while looking for a different case involving the FDIC. The filing does not seem to have yet generated any national coverage, although there has been at least one local media article.

In case you are on a computer that cannot access the link to the complaint, the case is 1:23-cv-00447-JJM-PAS in the District of Rhode Island.

2. I’ve cleaned up the quote by removing the cluttering of defined terms, but otherwise this is verbatim.

3. The FDIC enforcement action database makes it tough to link directly to enforcement actions, so I’ve tried to include Google Drive links throughout this post for consent orders not otherwise directly available online. If those do not work for you, all the consent orders in question can be found by conducting your own search at the link in this footnote.

4. The FDIC in the CRA evaluation makes sure to stress that, though the 2019 consent order made lending more difficult, it did not require the bank to cease lending entirely.

These provisions [of the consent order], particularly the growth restrictions, limited the bank’s ability to extend credit within its assessment area during the evaluation period. The Order required the bank’s Board of Directors to obtain nonobjection from the agencies before engaging in any transactions that would materially change the institution’s risk profile or balance sheet composition, including but not limited to annual growth of five percent or more; however, the Order did not place a moratorium on all lending activity.

5. Ponte has challenged this FDIC administrative process in federal court, but the courts to this point have ruled against him.

6. Perhaps relevant: the FDIC notice of charges against Catanzaro, Desrosiers and Ponte is dated February 10, 2023.