After the Bank Failure Comes the Debt Collector
Rick Williamson, a Chicago banker turned junk-loan buyer, knew the name-calling would start again when he moved to foreclose on the Fayetteville Athletic Club, a sprawling, family-run gym and spa complex in this corner of northwest Arkansas.
“Vulture, bottom feeder,” Mr. Williamson said, recalling insults thrown his way during his years hunting for bargains in distressed real estate.
And just as he predicted, the insults are flying.
“Trash-eating rat,” is how Robert Shoulders, the club’s owner for the last 13 years, described Mr. Williamson. “What he does is reprehensible. I am not sure how he can sleep at night.”
Mr. Williamson sees it differently. And the government agrees.
As he points out, it isn’t his fault that Mr. Shoulders overextended himself by borrowing $10 million to add the spa, a preschool, tennis courts and other amenities to his once-modest health club. And by moving aggressively to collect on loans like these, Mr. Williamson says, he is playing a crucial role in helping clean up the bad debts that are clogging the economy.
“If you want to fix what is ailing this country, you need to destroy the worthless debt out there,” he said, adding with characteristic candor, “You have to shut down the zombies, liquidate their assets.”
Clashes like this are increasingly taking place across the country, as banks struggle through their worst crisis in a generation. And Mr. Williamson is part of a niche industry that buys at bargain-basement prices the hard-to-collect commercial loans that the Federal Deposit Insurance Corporation auctions off after it seizes a failed bank. They take on the most troubled assets, the ones others aren’t willing to touch, in exchange for potentially lucrative returns.
Nationwide, the F.D.I.C. has seized 58 banks over the last 15 months and through loan auctions has sold about $2.2 billion worth of loans. The $1.2 billion generated for the government has gone into the fund to insure deposits at other banks.
Many of the auctioned loans are considered “performing,” meaning the borrowers are current on their payments. But a portion of them are delinquent, like the one held by Mr. Shoulders and his wife, who stopped making payments after their local bank, ANB Financial of Bentonville, Ark., failed last year.
Loath to throw homeowners out on the street, the F.D.I.C. has made it a national policy to try to avoid foreclosures on the single-family mortgages it inherits from failed banks, even if payments are past due. But there are no such rules to protect struggling small businesses, whose loans are more typically sold at the F.D.I.C. auctions.
The borrowers, like the Shoulderses, suddenly find themselves dealing with aggressive out-of-state loan consolidators, rather than local banks with long-standing community ties. And the consolidators’ primary objective often is to immediately collect on the debt, or seize the collateral.
The single biggest buyer at these auctions has been Andrew Beal, a banking billionaire from Texas who made his fortune buying distressed debt during the savings and loan crisis.
By the end of February, Mr. Beal had paid more than $200 million to buy $438 million worth of loans, according to agency records. Some of the loans came from the failed Arkansas bank.
Mr. Beal is hardly averse to risk. He is famous for trying (and failing) to build his own space satellite launch company, and for luring some of the world’s best poker players to a series of games, with him as a participant, and betting pots worth $2 million. Mr. Beal, in a telephone interview, said he went to great lengths not to push people out of their businesses, but at times he had no choice.
“Borrowers force us into litigation,” he said. “They don’t want to perform on their loan, they won’t talk to our workout people. What are we supposed to do, send them a vase of roses?”
Another buyer here, Daniel C. Cadle of Newton Falls, Ohio, has drawn some of the loudest protests over the years for hardball collection practices.
In 2007, Massachusetts authorities, in denying him a license to operate in the state, accused Mr. Cadle of not having “the character, reputation, integrity and general fitness to engage in the business of a debt collector in an honest, fair and sound manner.” In one instance they cited, a representative of Mr. Cadle’s firm told a debtor that he had photographs of the man outside his house, knew his wife’s name and had information on his bank account.
$6 million in book value sold for $15,000
For nearly a decade, Mr. Cadle faced the threat of arrest by authorities in Texas as the result of a lengthy debt collection dispute in which a county court concluded that Mr. Cadle had tried to financially ruin a debtor and used a pattern of abusive lawsuits.
Mr. Cadle says his run-ins with the law are a consequence of his willingness to demand repayment from some powerful people. And he makes no apologies for working hard to collect from debtors.
“We are heartless because people refuse to pay us even payments they can afford?” he said. “You aren’t taking advantage of anyone if you are simply asking them to pay what they owe you.”
Some of the debts are so hard to collect that the F.D.I.C. lets these loans go for a song. LeMire Schmeglar, a mortgage broker in Chicago, bought 191 delinquent loans with a book value of $6 million. He paid just over $15,000.
F.D.I.C. officials, in a written statement to The New York Times, said the agency had tried to balance its mandate to recoup as much as possible through the sale of loans it acquired while still protecting the interests of borrowers.
“We are statutorily required to sell assets in a way that will get as much money back for the uninsured depositors and other creditors, including our insurance fund,” Andrew Gray, an F.D.I.C. spokesman, said in the statement. “By focusing on a small percentage of particularly distressed assets, the view becomes distorted.” Mr. Gray added that the agency was creating a new unit to field any complaints from customers who had loans at failed banks.
There is a fair amount of mystery about the F.D.I.C.’s auction process. Bidding is not open to the public. And the list of winners is next to impossible to decipher. It is filled with enigmatic names like “Brown Bark III” and “Oceanside, CA 92054,” entities that have no Web sites or telephone listings.
Matthew Anderson, a partner at Foresight Analytics, a California firm that has studied the F.D.I.C. sales, said the buyers of these loans typically hoped to earn a profit of 25 to 35 percent a year — a high rate of return, but achievable only by buying loans with big risks. The forceful collection efforts are spreading nationally as bank failures increase. A search of court records shows cases filed by buyers of F.D.I.C. business loans in states like Florida, Arizona and Michigan.
In Arizona, Michael W. Bauer, 53, an electrician and owner of a vending machine business, said that after 15 years in business, and never once defaulting on a loan, he might have to file for bankruptcy because an entity called SMS Financial XVII, which bought his loans from the F.D.I.C. after the failure of First National Bank of Nevada, had filed a foreclosure lawsuit against him.
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“I owe the money. I know that, and I am prepared to repay my loan over time,” he said. “But to be strong-armed like this, at the moment when you are the most vulnerable, it just does not seem right.”
Northwest Arkansas, home to Wal-Mart and the poultry giant Tyson Foods, is hardly the epicenter of the banking crisis. But because ANB Financial was one of the first reasonably large banks to go bust, just as the wave of mortgage defaults was getting under way, the distressed loan drama is playing out here with particular intensity.
Even before the F.D.I.C.- sponsored auctions took place last fall, some of the agency’s Arkansas staff tried to warn small-business owners in the Fayetteville area to try to quickly clear up any past-due debts or be prepared to face the consequences, according to company owners and a former agency contractor.
“They said it out loud and quite clearly,” said Marsha G. Dunbar, who worked as a contractor for the F.D.I.C. after it took over ANB, where she once was a loan officer. “Settle up these debts now, or it is not going to be pleasant,” Ms. Dunbar said, paraphrasing the warnings.
Mr. Shoulders and his wife, Katherine, who bought the Fayetteville Athletic Club 13 years ago, heard these same warnings. They offered to pay $6 million immediately, and an additional $1 million upon the future sale of the gym, if the agency would agree to forgive their $10 million in debt.
Paying for mistakes
F.D.I.C. officials, seeking to maximize their return for the insurance fund, said they proposed to reduce the loans’ interest rates instead, an offer Mr. Shoulders disputes was ever made. So the loans were bundled with others and auctioned off in late October.
That was where Mr. Williamson came in.
More than a year ago, at the first signs of recession, Mr. Williamson, a one-time Illinois soybean farmer who became a banker in the 1980s, quit his corporate bank job to form his own business specializing in buying up distressed debt.
Like many in this business, Mr. Williamson, 57, is not shy about confrontation. He is openly disdainful of what he calls “the nanny state,” referring to a federal government that he says too often tries to protect delinquent borrowers.
He bought the Shoulderses’ loans for 34 cents on the dollar, an outcome that left the gym owners furious, because the auction produced a price that was far lower than they had offered to pay the F.D.I.C. From the start, relations between the two sides were tense.
“These guys put a gun to our head and said 100 percent is due in 10 days,” said Mr. Shoulders, 54, a tall, wiry man who uses a giant green exercise ball as his desk chair and wears a big name tag on his gym fleece that simply says “Bob.”
Within a matter of weeks, a foreclosure lawsuit was filed, as the Shoulderses, citing credit markets that had grown even tighter, said they could raise only $5 million to repay their loans. After evaluating how much the collateral — the lavish club — was worth, Mr. Williamson rejected the offer. The lawsuit is pending in the local court system.
Business is still brisk at the Fayetteville Athletic Club. Its workout rooms are filled with local doctors, lawyers, Wal-Mart executives, even the local tax assessor. But the Shoulderses, who are prominent figures in the community here, soon may no longer own the club.
“Were we overextended? Yeah, I will not deny it,” Mr. Shoulders said, as he walked through the gym, greeting members by name. “But we have put our heart and soul, and every penny we have earned, into building this place. It is criminal the way we have been treated.”
As Mr. Williamson sees it, a debt is a debt.
“When I grew up, people paid for their mistakes,” he said.