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FDIC sues former executives at IndyMac's homebuilding loan division

July 12, 2010 |  4:08 pm

Federal regulators have filed a $300-million negligence lawsuit against four former executives at IndyMac Bank, accusing them of granting loans to home builders who were unlikely to repay the debts.

The lawsuit, filed July 2 in federal court in Los Angeles, is the first professional liability suit that the Federal Deposit Insurance Corp. has brought in connection with the spate of more than 200 bank failures that began in 2008. FDIC spokesman David Barr said Monday that the agency generally has three years from the date of the failure to file civil cases.
 
The defendants, who denied the allegations, operated the Homebuilder Division at IndyMac, which was mainly a mortgage lender. The FDIC said they approved 64 loans described in the 309-page lawsuit.

They are Scott Van Dellen, the division’s president and chief executive during six years ending in its seizure; Richard Koon, its chief lending officer for five years ending in July 2006; Kenneth Shellem, its chief credit officer for five years ending in November 2006; and William Rothman, its chief lending officer during the two years before the seizure.

The suit alleges that IndyMac’s compensation policies prompted the home-building division to increase lending to developers and builders with little regard for the quality of the loans.

“HBD’s management pushed to grow loan production despite their awareness that a significant downturn in the market was imminent and despite warnings from IndyMac’s upper management about the likelihood of a market decline,” the FDIC said in its complaint.

The lawsuit targets the four mid-level managers in an attempt to recover damages from insurance policies covering their actions at the company. A separate investigation of IndyMac’s mortgage lending practices could lead to a separate suit, the agency said.

Defense attorneys Michael Fitzgerald of Los Angeles and Kirby Behre of Washington denied that the defendants had been negligent. No one at the company or its regulators foresaw the severity of the housing crash before it struck, they said.  

“The FDIC has unfairly selected four hard-working executives of a small division of the bank … to blame for the failure of IndyMac,” said Behre, who represents Shellem and Koon. “We intend to show that these loans were done at all times with a great deal of care and prudence.”

The Pasadena bank, known mostly for providing variable-rate home loans without requiring proof of income from borrowers, was seized by the Federal Deposit Insurance Corp. in  July 2008 in one of the earliest and biggest bank failures stemming from the mortgage meltdown.

Its builder-loan division began operations in 1994. It loans to residential developers and home builders, like subprime mortgages to the buyers of the homes, imploded as the once-booming housing markets went bust.

The FDIC’s suit said the IndyMac division had about $900 million in land acquisition, development and construction loans on its books when the bank collapsed. Losses on the portfolio are expected to total $500 million -- minus whatever the FDIC can recover through litigation. 

--E. Scott Reckard

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