A Fool and His Money: Fraud in Lending
August 2013
IN THIS ISSUE
— Flying Blind: The Perils of Lending in a Crisis
— Warning Signs: Red Flags Before and After a Loan is Made
GREETINGS!
Welcome to the August edition of our newsletter! In this issue, we’ll examine the role of due diligence in the lending process, whether that lender is a private entity, or the federal government.
FLYING BLIND: THE PERILS OF LENDING IN A CRISIS
Rahm Emmanuel, then the White House chief of staff, reportedly said in 2008 — as financial markets collapsed — that you should “never allow a crisis to go to waste.” Out of this sentiment was born a maze of bailout programs, meant to provide assistance to multiple facets of the American economy, from housing to the continued employment of police, firefighters and teachers. Yet Emmanuel’s maxim does not touch upon the waste created by these measures, some of which has been the product of fraud.
Take, for example, the case of Darryl Lane Woods, whose Mainstreet Bank (Ashland, Missouri) reportedly received $1 million in federal bailout funds from the U.S. Treasury. Within days, prosecutors alleged, Woods used more than $380,000 of those monies to buy himself waterfront Florida real estate. A short time ago, Woods entered a guilty plea after a successful investigation by the Special Inspector General for the TARP program.
WARNING SIGNS: RED FLAGS BEFORE AND AFTER A LOAN IS MADE
Whether the loan originates in the public or private sector, the risks to the lender remain the same. Prior to making a loan, even on an “emergency” basis, the lender should request detailed financial information from the borrower, and examine those records for any irregularities. Is the borrower extended financially beyond its means on a regular basis? has it defaulted on other loans in the past, and been the subject of multiple liens, judgments, or a bankruptcy proceeding? An affirmative answer to any of these questions, which an experienced fraud examiner can help your client determine, could be a sign that repayment may prove difficult if a loan is made.
After a loan is made, however, the dynamic changes somewhat, although the principle remains the same. Monthly or quarterly audits of a borrower’s income and operations will help a lender stay informed so that if fraud like the case detailed above does happen, protective or recovery measures can be taken quickly, not months or years later. Acting in a crisis can cloud a lender’s otherwise sound judgment, but whether in a crisis or not, thorough due diligence can inform decision-making that will cost far less at the outset than it would after a loss (or a fraud) has occurred.