Fraud Identification Training Sept-Oct 2022

CASE STUDY 17

PTC ARRANGEMENT

Situation:

You are on an examination of a $250 million bank in Georgia that was rated "3" at the last FDIC examination. Prior to the last examination, the bank had been rated a "2" for the past 10 years with nominal asset problems and generally satisfactory financial ratios. The trend in loan quality had been steadily declining primarily due to increased competition coupled with a loosening of underwriting standards. The later apparently has been driven, in part, by a recently established incentive program that tied the compensation of the bank's loan officers to loan production goals. Since the last examination, the Board has put a lot of pressure on the lending staff to reduce classifications and book quality loans. The loan review date is as of August 15 th . Portions of the bank's loan download could not be processed by ALERT (Automated Loan Examination Report Tool), so trial balances from the bank's servicer had to be used for portions of the loan review. Your assignment is to prepare the Analysis of Loans Subject to Adverse Classification schedule. While updating the line sheets from the loan trial balance, you note that a significant portion of the previously classified loans was paid out in July. The trial balance does not differentiate between loans that were renewed, consolidated into new loans, or paid out by other means. You determine through discussion with the loan administration officer that all renewed loans or loans that were consolidated, are listed in a monthly report to the Board. Your review of the Board reports titled Monthly Loan Activity shows that only a few of the loans were actually renewed and that the majority of the loans were paid out. Comments on the line sheets from the previous examination indicate that, although all of the loans were classified Substandard, a number of the credits were borderline Doubtful classifications due to questionable collateral protection. Curious as to how the weak borrowers paid out or refinanced their loans, you bring your findings to the attention of the Examiner in Charge (EIC). The EIC agrees that it is unusual for such a large volume of previously classified loans to be paid out since the last examination, and that it is highly unusual that such a large number were paid out in the same month. She directs you to determine the source of the repayments. You provide a list of the previously classified loans to the loan administration officer and request loan histories. The loan history reports show that none of the previously delinquent loans were past due prior to being paid out. Interestingly, you note that almost all of the paid-out loans were coded as being originated by loan officer #800, which is Vice President Bob Wilson. You request a meeting with VP Wilson but find out he is on vacation and will not be back for two weeks.

1