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Insider lending at your local banks? Use these tools to find out

fdic headquarters

FDIC headquarters in Washington D.C. (Photo credit: FDIC)

The story doesn’t have to end when the Federal Deposit Insurance Corp. takes over a bank. For Sanjay Bhatt, the takeover and subsequent lawsuits created a treasure trove of information that developed into a two-day series for The Seattle Times.

Sanjay’s focus was on Westsound Bank, a community bank taken over by the FDIC in 2009. In 2011, lawsuits were filed. Last year, the agency banned a loan officer from working for a federally insured bank, which made Sanjay wonder what else was going on. The answer: insider transactions. Through a lot of digging and open-records requests, he found details he used to clearly tell readers what happened.

Sanjay shared some tips for looking into insider lending on your beat:

1. Use the Uniform Bank Performance Report (UBPR) to compare insider lending at local banks to their peer groups. Sanjay’s instructions:

“After you pull up the UBPR for a specific quarter, select the link ‘Allowance & Loan Mix-b,’ which is Page 7A of the report. Look at the line item called ‘Officer, Shareholder Loans.’ This is where you can see how your bank’s insider lending compares to its peer group and how that relationship has changed over time. For the absolute dollar amount of insider loans, click on the link ‘Balance Sheet $,’ which is Page 4 of the report. Add three zeroes to the amount shown and you now know the total amount in insider loans.”

Sanjay Bhatt (Photo credit: Genevieve Alvarez / The Seattle Times)

2.  Determine how local banks approve insider loans. If loans go through a committee and those members have interlocking conflicts of interest, it raises questions about how objective the board members can be in making decisions on insider loans,” Sanjay says.

3.  Use the annual “Y-6” report from the Federal Reserve for banks executives’ disclosures of business interests. Bank holding companies have to disclose businesses in which their executives and board members have a governing capacity as well as their percentage stake, Sanjay says. “You can compare that disclosure to individual disclosures on state applications for, say, a professional license or business license,” he says. “If you see a pattern of large loans being made repeatedly to one or several businesses connected to an insider, that deserves more scrutiny.”

Sanjay points out that insider loans aren’t illegal nor do they lead to bank closures. However, they can indicate an institution’s culture.. “It’s an insidious thing that can slowly weaken the internal controls at a bank to make it vulnerable to fraud or risky loans,” he says.

In Featured, Investigation, Investing | Banking.

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