When dates don't match
Discrepancies between the dates on three bank loans and the resulting mortgages turned a routine audit into a laborious search for possible fraud. The result may have staved off collusion between a loan officer and the mortgagee.
During the course of the large loan review, three new loans - all made to the same borrower - appeared on the list. This wasn't an uncommon event. Because turnover within the large loan selection was normal, loans to borrowers were always in a constant state of flux between advances and repayments. The bank had classified these loans as substandard but again, this wasn't uncommon because loans do go bad from time to time. The only information our team had at this point was that these three loans now fell within the scope of our loan review due to two factors: the aggregate balance of the loans qualified the borrower for the large loan review and the adverse classification also flagged the loans for review.
The bank had loaned the money to the borrower for constructing houses. The loan documents indicated that the borrower was constructing one of the houses to be his personal home. After inspecting the documents - the notes, mortgages, title opinions, and other pertinent papers - we were concerned about one area in particular.
Questions for the loan officer
The three loans had been issued on different dates but the mortgages on each of them actually were recorded three to six months after the loans were made, even though the mortgages carried the same dates as when the loans were made. Occasionally, a mortgage from a borrower won't be recorded in a timely manner due to some mix-up between the loan officer or the attorney handling the closing. However, recording three mortgages at different dates to the same borrower on three loans made by the same loan officer was highly circumspect.
Immediately, we asked the loan officer (we'll call him Fred) why the mortgages were recorded late. Fred said the attorney handling the closings had misplaced the mortgages for months but finally found them and took them to the courthouse for recording. We on the audit team weren't entirely satisfied with the explanation. We decided to ask some more questions. The attorney performing the title searches and the loan closings disavowed the loan officer's story and said that the mortgages had never been given to her for recording.
We then reviewed transactions for disbursements, payments, late fees, and interest rate changes. The histories on two of the three loans didn't show any anomalies. However, the history on the third loan revealed discrepancies between the actual posting date of the loan transaction and its effective date. All but six of the numerous loan postings had been posted on the same date into the system although the effective date of the posting was different in each instance. The longest interval between the posting date and the effective date of the transaction was about 3 1/2 months.
It was obvious these transactions weren't booked in the normal course of business. The immediate question we asked was: "If all these transactions weren't booked to the loan until that later date, and the effective date of the transaction indicated that the transaction occurred at a much earlier date where was the transaction booked from the moment it first occurred until it was posted against the loan?"
The loan history provided us with a starting point to search the transactions and answer this question. We quickly realized that searching backwards from the point at which the transaction was booked to the loan was going to be a very complex process.
Backwards is forwards
When searching backwards we found that instead of a direct line to the originating disbursement the transactions were branching off into many different and seemingly unrelated transactions.
We decided to search the related transactions from the point at which the borrower obtained the loan advance. Loan advances are accomplished in a variety of ways: through escrow accounts, wire transfers, official checks drawn on the lending institution, or by direct deposit into a checking account in the name of the borrower at the lending institution. We found that Fred, the loan officer, used this last choice to disburse the loan proceeds. We then reviewed all the borrower's transactions with the bank. Of course, the review included the borrower's demand deposit accounts (DDAs). One of the DDAs had several deposits that matched the effective date postings to the borrower's loan account. These deposits were then traced to their points of origin, which led to the unmasking of the deception.
The race to trace
The tracing of transactions in a bank (including the tracing to the actual source documents) is a time-consuming process. The tracing must first be located in a specific transaction within the body of the bank's daily work. In our case, we did this by searching an optical disk containing archived transactions. To find the deposits made into the borrower's DDA, we performed a search on those deposit dates for all transactions in the daily work that carried the borrower's identifying DDA account number. The transactions immediately adjacent to the deposit amounts on the daily work usually constituted the debit side of the transactions.
The daily work could not tell us to whom the checks were made out to or the dates on the checks. We found the source documents - the actual checks - to ascertain that information. For disbursements done by official checks the daily work usually supplied the official check number. The source documents would show payees, endorsements, clearing dates, dates on which the checks were written, and signatures of the persons creating the checks. If the check numbers were missing or the disbursement occurred through the use of tickets (debit and credit "tickets" are used at banks to post transactions to accounts) then we'd search for the source documents on microfilm by looking for "proof" numbers that appeared on the reverse of the documents.
A tangled weave
Tracing the deposits from the borrower's DDA to the point of origin revealed a tangle of transactions that resulted in a complex combination of float and lapping of funds involving both general and subsidiary ledger accounts. Not all the proceeds flowed through the DDA. For instance the purchase of the building lot occurred outside of the DDA. Some of the official checks utilized a form of float where the check would clear the bank on the debit side but the credit portion of the check wouldn't be posted for several days or weeks after the check cleared. In some instances, official checks were used and run through the bank and than later voided with the endorsement "Not used for intended purpose." In other transactions, the amounts deposited into the borrower's bank account were posted against the loans of other borrowers. Fred, the loan officer, covered up the transactions by rapidly increasing the volume and amount of transactions. Fred had to implement approximately 150 transactions totaling $1.7 million to cover up a disguised loan with approximately 30 disbursements totaling $100,000 to the borrower.
Fred never gave a reason for attempting to conceal the loan. (I suspected it involved blackmail but I couldn't prove it.) If he had never booked the loan to the borrower with the differences between the posting and transaction dates, the scheme probably wouldn't have been uncovered - assuming Fred continued to manipulate the accounts. Perhaps Fred felt he was juggling too many balls and couldn't keep up the pace. Before he was a loan officer, Fred was a loan clerk at the same bank. When he was promoted to the loan officer position, the bank's controller neglected to delete Fred's access to booking loan transactions. Normally only loan clerks have this authority. This internal control probably wouldn't have prevented the scheme from occurring but it would have made it much more difficult for Fred to execute his plan.
The bank declined to pursue the issue with the borrower because the borrower had already declared bankruptcy and the bank probably didn't want to throw good money after bad. However, the bank ended up charging off a substantial portion of the loan to the borrower, restored the affected accounts to their proper balances, and dismissed Fred. The bank lost money on the loan to the borrower and on other accounts that it had to restore to their previously unaltered balances.
In this case, some sharp eyes noticed an anomaly between the time the mortgages were executed and the time that they were recorded. This discrepancy led to the examination that uncovered the fraud. The examination also revealed some internal control weaknesses previously unknown to the bank. A routine audit discovered an unusual fraud that will prevent future losses at the bank.
brilliant mona :)
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