Fraud Identification Training - Case Studies

CASE STUDY 20

ACCOMMODATING OFFICER

Situation:

This bank has total assets of $30 million and a management team that is unchanged for numerous years when the bank was purchased. Management purchases and sells loan participations with the affiliate bank in Bracketville, a community 200 miles away. The Federal Deposit Insurance Corporation (FDIC) has been critical of the lax loan administration procedures at subject bank in the two previous Reports of Examination. In 20X5, Loan Officer and Director Doug Douglas reported to the Loan Committee that he solicited and finally won the account of Mr. and Mrs. Smith. Loan Officer Douglas provided the committee with a verbal synopsis of the account relationship and the debtors’ operation. After fo ur years with the bank, policy no longer required that Douglas perform formal structured presentations before the Loan Committee. Bank policy did, however, require that the debtors open a checking account. According to credit file comments, Loan Officer Douglas ceased monitoring the checking account after two years because the debtors never overdrew the account. Loan Officer Douglas was the servicing officer and the only officer who administered the credit. Over the next four years, Loan Officer Douglas monitored this and all of his credit lines and kept the loans off of the past due list with timely renewals. Loan Officer Douglas restructured the line and capitalized the accrued interest (twice) whenever the cash flow became tight. The credit line was above the loan cut at the 20X9 FDIC examination and included in the examiner review. The Sm iths’ abbreviated January 20X9 financial statement (FS) (transcribed at the FDIC February 20X9 examination) showed the following:

$ 829M

$ 650M $1,153M $ 616M $1,769M

Current Assets

Current Liabilities Total Liabilities

Net Worth

$1,769M

Total Assets

Total Liabilities & Net worth

The debtors did not report any credit card debt but did report $57M owed on vehicle lease contracts and to equipment dealers. Loan Officer Douglas ran a credit report on the Smiths in December of 20X8, which showed $145M owed on credit cards, vehicle lease contracts, and to equipment dealers. There is no file commentary about Loan Officer Douglas discussing this matter with the Smiths. In loan discussion with the examiners, Loan Officer Douglas could not explain why the debt went unreported or why he never discussed the issue with the debtors. At the subsequent State examination, the above FS and aforementioned credit report were no longer part of the credit file. (This was learned when the State called the Field Office Supervisor (FOS) to keep him up to date on the bank’s condition).

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