Never Take Collateral You Have To Feed

Joseph Judge, Special Agent of the FBI, at his session on white collar crime at the ABA Security and Risk Management Conference in Orlando in February raised a few questions for bankers concerned with loan liability and "knowing" their customers.

Joe did a case study on a scheme involving six different individuals. This con game, utilizing phony loans and official checks, could have been stopped by a simple clerical due diligence effort on the part of the bank.

In this case, there were 60 different loans made by three people, all making loans using real names of unsuspecting people-and all 60 loans in all 60 names using the exact, same address. "If there had been some method of address cross check or comparison," said Special Agent Judge, "They would never have been able to get away with this. As it was, the scheme shut the small Florida bank down."

Joe gave some hints for a due diligence process for loans. "If property is used as collateral," he said, "Go and physically see the collateral. Make sure it exists. A camera should be standard equipment for a loan officer for proof of checking collateral. Also, pictures are most helpful in court if that should be necessary later on."

"If anything about the loan is uncommon, unordinary, or unusual, it may be illegal," he went on. "Watch for the red flags."

He listed some sample red flags:
If the loan is closed outside the bank
If papers are mailed or delivered by someone else
If corporate loans are made payable to individuals
If out-of-town collateral is used
If unusual collateral is used (He gave an example of race horses, passing on a good rule of thumb-"Never take collateral that you have to feed.")
If loan is "last minute" or rushed.

Security officers in the know have been pushing for involvement in the due diligence procedure for loans for some time. Now more than ever, in the opinion of Special Agent Joseph Judge, it's time for greater cooperation between loan officers and security.

Ed. note-You may want to pass this article along to your loan officers and/or your risk management person.

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Copyright © 1993 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 3, No. 10, 3/93