Security Bank's failure tied to risky loan unit, audit says

By Paul Donsky

The Atlanta Journal-Constitution

As the housing market boomed last decade, Security Bank of Macon sought to boost its profits through a loan-generating shop it owned called Fairfield Financial Services.

A federal audit into Security’s July 2009 failure, released Friday, said Fairfield was run as a sort of “boiler room” in which loan officers were paid a fee for each transaction -- an unusual practice that helped fuel a flood of risky loans to housing developers and builders.

Regulators said the setup fostered a culture in which volume of sales trumped concerns about loan quality, infecting the bank with risky loans that helped speed its demise.

The audit, by the Federal Deposit Insurance Corp.’s Office of Inspector General, comes six months after Security failed amid an avalanche of bad real estate loans. Security, which had six subsidiary banks, including three in the metro Atlanta suburbs, was one of the largest banks to fail in the current crisis.

According to the audit, federal regulators said Fairfield’s lender-compensation plan was “based upon growth and lacked any consideration of the underlying quality of the assets being booked.”

The Fairfield loans were purchased by most of Security Bank’s subsidiaries, spreading risky loans through the company. Fairfield loans accounted for 91 percent of loan losses at Security’s largest subsidiary, Security Bank of Bibb, the audit said.

Security’s banks also did not appear to have adequately reviewed the Fairfield loans before purchasing them, the audit said.

Fairfield's fee-based compensation system was highly unusual and more closely resembled that of a mortgage loan shop than a traditional bank, said John Kline, a bank consultant based in Decatur. Banks typically pay their loan officers a salary, sometimes throwing in a bonus based on sales volume and loan quality, he said.

Paying a fee for each transaction creates a “perverse incentive” to make a loan without regard to the quality of the project or the borrower’s ability to pay, Kline said.

Fairfield, whose name changed in 2008 to Security Real Estate Services, sold some loans to banks outside the Security family, including some troubled banks Kline has worked with. The quality of those loans “left a lot to be desired,” he said.

The FDIC's inspector general on Friday also issued a report on the July 2009 failure of First Piedmont Bank, a tiny lender based in Winder. The audit blamed the failure on a combination of too many housing-related loans and underwriting weaknesses that left the bank badly exposed to the real estate downturn.