Government LendingLegal

EagleBank settles insider-lending charges brought by regulators

The Bethesda, Maryland-based community bank and mortgage lender will pay some $23M in penalties

EagleBank, one of the largest community banks in metro Washington, D.C., has reached settlements with both the Federal Reserve Board and the U.S. Securities and Exchange Commission (SEC) over insider-lending allegations brought against the bank and its former top executive, Ronald Paul.

The bank, which operates a mortgage-lending unit, along with its holding company, Eagle Bancorp Inc., have agreed to pay a total of $22.9 million in penalties, and Paul some $521,000, to settle the actions brought by both regulators.

The Federal Reserve alleges the bank improperly provided loans of nearly $100 million to family trusts controlled by then-CEO and Chairman Paul without making necessary disclosures to the board or obtaining board approvals. The bank agreed to pay a $9.5 million fine for the violation of insider-lending regulations, according to the Federal Reserve Board’s announcement of the settlement.

“These internal control deficiencies also extended to the bank’s supervision of lending staff, who permitted Paul to participate in matters in which he had a conflict of interest,” the announcement added. “The [Federal Reserve] Board also cited EagleBank for third-party risk-management deficiencies over the same period that resulted in inadequate oversight of contracts between the bank and a local government official.”

In addition, the banking regulator permanently barred Paul, who was employed by EagleBank from 1998-2019, from future bank-industry employment and leveled a $90,000 fine against Paul for “his central role in the bank’s violations of law and unsafe and unsound practices.”

The Federal Reserve Board’s regulatory action indicates that even though all the insider loans have since been repaid, save one, which is still performing, “Paul’s conduct posed risks to the bank.”

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The Federal Reserve Board also notes that it previously barred the EagleBank’s former general counsel, Laurence Bensignor, from banking for his role in the bank’s unsafe and unsound lending practices.

In a parallel action, the SEC also reached a settlement with EagleBank and Paul over charges that they made false statements via press releases, news articles and in meetings with investors in relation to the improper insider loans.

“Adequate disclosures of related-party transactions are essential to enable investors to evaluate an issuer’s corporate governance,” Sanjay Wadhwa, deputy director of the SEC’s enforcement division, said in a statement. “Here, faced with a short seller’s report alleging undisclosed related-party loans by the bank, both Eagle and Paul failed to respond truthfully and accurately.”

As part of the SEC settlement, without admitting or denying the allegations, EagleBank agreed to pay $12.6 million in disgorgement and civil penalties, plus prejudgment interest of $750,493, and Paul agreed to a two-year bar on serving as an officer or director, penalties totaling $409,000, plus prejudgment interest of $22,216. Paul’s settlement is still subject to court approval.

The SEC’s complaint against Paul was filed in the Southern District of New York and charges him with “violating the negligence-based antifraud and proxy provisions and making false certifications,” according to the SEC.

Bethesda, Maryland-based EagleBank, launched in 1998, is a full-service commercial bank with $10.9 billion in assets and some 20 offices in the greater Washington, D.C. metro area. The lender posted second-quarter net income of $25.2 million, down from $45.7 million in the first quarter. 

The bank’s mortgage arm locked $92 million in loan commitments for the second quarter, down from $136.7 million in the prior quarter. “As interest rates continued to rise in the second quarter, refinance activity continued to slow, resulting in fewer locked loans,” the bank’s second-quarter earnings statement notes. 

The lender’s residential mortgage-loan portfolio stood at $72.8 million and its home-equity loan portfolio at $53.2 million as of the end of the second quarter of this year, the bank’s earnings statement shows.

In a press release response to the Federal Reserve Board (FRB) and SEC charges, and the related settlement agreements, EagleBank stated the following:

“We are pleased that the SEC and FRB have approved the settlements and we can now put these legacy matters behind us and continue our focus on running one of the most profitable community banks in the Washington, D.C., region,” said Susan Riel, the current chief executive officer at EagleBank. 

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