A federal program to bail out distressed banks has had unintended consequences in Beaufort County, where some borrowers say they have been forced into foreclosure or been unable to develop their properties.
They claim that Bank of the Ozarks' arrangement with the Federal Deposit Insurance Corp. is giving the lender an incentive to prevent borrowers from paying off their loans, so the bank can collect reimbursements from the federal agency.
The arrangement, known as a shared-loss agreement, is designed by the FDIC to assist banks willing to acquire a troubled lender, as the Little Rock, Ark.-based Ozarks did in 2010 when it assumed the assets of the failing Woodlands Bank, which had branches in Bluffton and Beaufort.
Borrowers contend the agreement encourages the bank to call notes prematurely and devalue property.
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"They came to town and took us to the cleaners," said David Brown, a Hilton Head Island developer who said he lost millions when the bank foreclosed on a note he had signed with Woodlands. "They made our life miserable for six to eight months."
Attempts Friday to reach a Bank of the Ozarks representative were unsuccessful.
Under shared-loss agreements, the FDIC promises to absorb part of the bank's exposure to losses for a five-year period in a effort to minimize risk for the assuming lender. Those losses are based on the value of the assets when the bank takes over.
If the assets' values drop during the agreement period, the FDIC covers around 80 percent of those losses. That provides an incentive, borrowers say, to keep the value of assets down -- through foreclosure or other means.
In lawsuits filed by some borrowers against the bank, the bank has said the terms of the loans that are drawing complaints were defined by Woodlands, before Ozarks was involved.
Ben Gecy, who owns River City Real Estate in Port Royal, said he had been working to restructure a $569,000 loan with Woodlands after he had fallen behind on his payments. Woodlands reacted well to a suggestion he had to bring in a developer to install water lines and roads at his 26-lot site on Lady's Island, a move that would improve the property value, he said.
But when Ozarks took over, the lender balked at the plan, he said.
"Woodlands liked the idea 30 to 60 days before," Gecy said. "Then all of the sudden, the same individuals with the bank got amnesia when Ozarks took over. They argued with appraisal values and eventually called my note."
Gecy has battled Ozarks for three years to try to fend off foreclosure.
From the FDIC's perspective, shared-loss agreements save money by selling troubled assets to a healthy bank instead of liquidating them on the riskier open market. The agreements also ensure customers don't see interruptions in their banking services, which would happen if the bank had been left to fail, the FDIC says.
Attempts Friday to reach a spokesman for the agency were unsuccessful.
Jesse Ray, a Florida attorney who fought BB&T Corp. and other banks in nearly two dozen lawsuits over attempted foreclosures under shared-loss agreements, said such agreements might seem benign, but have "unintended consequences."
"The problem is, if properties are devaluing at such a rate, you actually get more money from the FDIC to call the loan and accept reimbursement than you do to work with the borrower," he said.
In January, the FDIC released a report in which it surveyed 49 borrowers from shared-loss banks about the agreements.
Its findings concluded "just over one-half of the borrowers responded that they were satisfied or neutral, ... while the remainder indicated that they were dissatisfied. ..."
As of June 2012, the FDIC had issued 293 shared-loss agreements for a total of $212.7 billion in covered assets, according to the report.
Ray argues the report was not thorough and did not capture the scope of borrowers' sentiment toward shared-loss programs.
"I know of more than 49 dissatisfied borrowers that dealt with BB&T in Florida alone," Ray wrote to the FDIC in an email.
"For a traditional lender, it has to take something extreme stop a borrower's payments," he added in an interview. "But under these agreements, the more loss the borrower has, the more money you get from the FDIC."
In one federal bankruptcy case, Bank of the Ozarks appraised a 100-acre property near Hampton Hall in Bluffton at about $5 million and wanted to foreclose, according to court records.
Federal trustee Michelle Vieira felt the appraisal was too low and filed an objection. She hired independent broker Jack Cobb, who received an appraisal of the property that was closer to $13 million, according to court records.
The court ruled against foreclosing, the records show.
"The court ruled against them (Ozarks) because it decided that we had a chance to achieve a better sale price over time and that would be more beneficial to the creditors in the bankruptcy case," Cobb said. "If the property had been foreclosed on, the only creditor that would have benefited is Bank of the Ozarks."
Attempts Friday to reach Vieira for comment were unsuccessful.
Gecy says the bank's goals do not include long-term commitment to the community. Instead, the bank came to Beaufort County as "debt collectors."
"This hurts the public," he said. "Jobs are being lost through foreclosures. Property values are being depressed. Borrowers end up as collateral damage, just left behind."
Follow reporter Dan Burley on Twitter at twitter.com/IPBG_Dan.