Identifying and Protecting Against Commercial Loan Schemes

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CEIS Review’s Managing Director Ms. Elizabeth Williams moderated a panel for the Risk Management Association’s New England chapter at Bentley University last month. The panel discussed the topic of Fraud among commercial lending. During this discussion panelists informed attendees of the impact fraud can have on their institution, measures to take to prevent their institution from becoming a victim of fraud, and ways in which to  mitigate against any losses.

Financial Impacts of Fraud Schemes

The financial impact that fraud schemes have on an institution’s income and assets is evident. The associated legal, investigative, and collection expenses are additional items which the institution will incur if fraud is experienced. Lastly, there is the risk of receiving heightened scrutiny from your partners and regulators which can affect your institution’s reputation. All of which are reasons to be sure to verify information provided by your borrowers. With that let’s take a look at some common commercial lending fraud schemes.

Common Commercial Loan Schemes

While there are many different types of commercial loan schemes, here are some of the most common categories the schemes fall into:

  • Misrepresentations: False documents such as tax returns, rent rolls, draw requests, lien waivers, appraisals, etc.
  • Misappropriation of funds: diversion or commingling of funds used for other businesses/projects or for personal use.
  • Collateral Transfers: sold without disclosure, proceeds kept, hid or conveyed to associate or another entity.

How to Prevent Fraud

The key to avoiding or minimizing the impacts of commercial loan fraud is to trust but verify the information provided by the borrower. Some methods of verification could be field exams, pre-loan due diligence, checking the borrower’s compliance records, and validating the reasonableness of collateral.  These methods will help you “keep honest people honest and catch dishonest people before loss.”*

How to Mitigate Loss

Once you have discovered fraud it is important to act immediately without notifying the borrower. Employ fraud investigation experts to help you determine the extent of fraud and what your next steps should be. Send a litigation hold letter to the borrower to ensure all electronically stored data that you can use in court is preserved. Mitigating fraud will be an extensive project; however, acting immediately will minimize any of your institution’s losses.

As a lender it is important to remember “most people want to do a good honest job but some people are out to defraud you.”* Verifying the information provided by your borrower is critical if you would like to prevent loss of income, regulators from questioning your practices and preserve your bank’s reputation. To learn more on how to prevent, recognize and mitigate fraud look here on the RMA’s website.