Fraud Identification Training Sept-Oct 2022

CASE STUDY 8

You review the various lending policies for guidance on leases and note that there are still no written guidelines for this type of lending, which was noted at the previous examination. The policy does not specify desirable or undesirable types of leases or underlying collateral, structuring terms, concentration levels, collection procedures, or approval standards. When you ask SVP Baird whether you perhaps were not provided with a copy of the policy, he indicates that the bank has operated this area without formal guidance since inception. Mr. Baird indicates that he reviews and approves all lease purchases. In his opinion, the leases are similar to small consumer installment loans, and there is no need to either aggregate the credits or require Board approval. SVP Baird questions why you are doing such an extensive review of this area, when examiners have never had any problems with leases in the past. He tells you that your time would probably be better spent reviewing some of the bank’s commercial real estate loans, since that is where the past problems have been centered. He also mumbled something about conducting risk-focused examinations. You thank him for his input but tell him that you would still like to sample a few of the lease files. Your review of the files indicates that lessee financial capacity appears satisfactory in all instances. Some files do not include UCCs (Uniform Commercial Code), but a checklist in each file indicates that the customer called in to verify receipt of equipment. With some of the newer files, you note that the certificates of insurance show a single insurance carrier with signatures by John Barkhouse as agent. You also note that the equipment appraisals for some of the newer leases were prepared and signed by John Barkhouse. A quick discussion with SVP Baird indicates that the bank has not had an independent review of lease operations. SVP Baird stated that bank personnel have been too busy for such matters, since they have been required to implement all recommendations previously made by examiners to improve the bank’s overall condition and ensure that enforcement actions were lifted. Besides this, Mr. Baird also emphasizes that the level of past-due leases is low, and the lease portfolio has never been one of the bank’s problems.

2