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IntegrityIndependenceAccuracyObjectivityAccountability
FDIC Examinations of Government-Guaranteed Loans
May 2023
EVAL-23-001
Evaluation Report
Audits, Evaluations, and Cyber
REDACTED VERSION
PUBLICLY AVAILABLE
The redactions contained in this report are
based upon requests from FDIC senior
management to protect the Agency’s
information from disclosure.
NOTICE
Pursuant to Pub. L. 117-263, section 5274, non-governmental organizations and business
entities identified in this report have the opportunity to submit a written response for the
purpose of clarifying or providing additional context to any specific reference. Comments
must be submitted to comments@fdicoig.gov within 30 days of the report publication date as
reflected on our public website. Any comments will be appended to this report and posted on
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proprietary or otherwise sensitive information.
Executive Summary
May 2023
EVAL-23-001
FDIC Examinations of Government-Guaranteed Loans
The Federal Deposit Insurance Corporation (FDIC) insures approximately $10 trillion
in deposits at 4,755 commercial banks, savings institutions, and domestic branches
of foreign banks (as of September 30, 2022). Pursuant to its authorities under the
Federal Deposit Insurance (FDI) Act, the FDIC serves as the primary Federal
regulator for approximately 3,100 financial institutions (banks).
Federal agencies administer several Government-guaranteed loan programs to
assist individuals and businesses with, among other things, buying homes, financing
agricultural production, financing businesses, and purchasing equipment. These
programs promote lending to rural and underserved communities and to borrowers
with collateral weaknesses or that lack adequate credit history. Private lenders, such
as banks insured and supervised by the FDIC, originate Government-guaranteed
loans on the Federal agencies’ behalf.
In Fiscal Year (FY) 2021, more than $1 trillion was disbursed in Government-
guaranteed loans by lenders on behalf of the U.S. Federal Housing Administration,
U.S. Department of Veterans Affairs, U.S. Small Business Administration and U.S.
Department of Agriculture. This figure grew by more than 154 percent since FY
2019 (from $433 billion). The lenders disbursed nearly $3 trillion in Government-
guaranteed loans during this time. FDIC-supervised banks participate in these
programs, originating billions of dollars in Government-guaranteed loans.
Without proper due diligence and supervision, Government-guaranteed loan
programs can present substantial risks to banks. If a bank engages in Government-
guaranteed loan programs without fully understanding or conforming to program
requirements, their participation introduces risks to both the financial institution and
to consumers, including operational risk, compliance risk, reputational risk, and
strategic risk.
Banks may also subject themselves to increased fraud risk through Government-
guaranteed loan programs. For example, there has been an estimated $64.2 billion
in fraud in the recent Paycheck Protection Program (PPP). These risks, if left
unmitigated, can impact the safety and soundness of the bank, leading to
deterioration or failure. In turn, this could result in increased risk or loss to the
FDIC’s Deposit Insurance Fund.
Executive Summary
May 2023
EVAL-23-001
ii
Our evaluation objective was to determine the effectiveness of the FDIC’s
examinations in identifying and addressing risks related to Government-guaranteed
loans for banks that participate in Government-guaranteed loan programs.
Results
FDIC bank examinations were not always effective in identifying and addressing
risks related to Government-guaranteed loans. We determined that the:
•
FDIC’s guidance did not adequately address risks present in Government-
guaranteed loan programs;
•
FDIC could improve its supervision of bank activities in Government-
guaranteed loan programs, including the PPP;
•
FDIC’s guidance differed from that of other Federal bank regulators;
•
FDIC did not provide adequate training to examination personnel on
Government-guaranteed lending programs;
•
FDIC did not maintain adequate data to identify, monitor, and research bank
participation in Government-guaranteed loan programs; and
•
FDIC did not effectively share information externally and internally to enhance
risk oversight of banks that participated in Government-guaranteed loan
programs.
In addition, the FDIC’s examination guidance did not provide clear instructions on the
retention of examination workpapers.
Recommendations
We made 19 recommendations to improve the FDIC’s supervision of banks that
participate in Government-guaranteed loan programs. We recommended that the
FDIC develop and implement guidance on the risks, treatment, and identification of
Government-guaranteed loans to promote consistency within the FDIC and with
other Federal bank regulators; train FDIC personnel on the requirements and risks of
Government-guaranteed loan programs; obtain improved data on Government-
guaranteed lending activities; develop and implement guidance to facilitate
information sharing with Federal agencies and examination staff to enhance risk
oversight; and develop and implement updated guidance on the retention of
supervisory business records.
The FDIC concurred with 13 recommendations and partially concurred with the
remaining 6 recommendations, offering acceptable alternative actions. The FDIC
plans to complete all corrective actions by March 31, 2024.
Contents
Background .............................................................................................................................. 4
Safety and Soundness Examinations............................................................................................. 5
Consumer Compliance Examinations ............................................................................................ 5
Supervisory Actions ........................................................................................................................ 6
Significance of Government-Guaranteed Loan Program Lending ................................................. 6
Risks of Government-Guaranteed Loan Program Lending ............................................................ 8
Fraud Risk .............................................................................................................................. 9
Evaluation Results ..................................................................................................................12
FDIC Guidance Did Not Adequately Address Risks in Government-Guaranteed Loan Programs
...................................................................................................................................................... 13
Guidance on Risks of Government-Guaranteed Loan Programs to Banks ......................... 14
Guidance on Loan Classification, Assessment of Off-Balance Sheet Risk, Concentration
Risk, and Monitoring Specific to Government-Guaranteed Loans ....................................... 18
The FDIC Could Improve Its Supervision of Bank Activities in Government-Guaranteed Loan
Programs ...................................................................................................................................... 21
Requests for Government-Guaranteed Loan Information During Examination Planning .... 22
Assessment of Government-Guaranteed Loans Against Program Requirements .............. 23
Classification of Government-Guaranteed Loans ................................................................ 25
Assessment of Off-Balance Sheet Risk for Government-Guaranteed Loans ...................... 26
Assessment of Government-Guaranteed Loans for Concentration Risk ............................. 28
The FDIC Did Not Adequately Supervise Risks of the Paycheck Protection Program for Certain
Banks ............................................................................................................................................ 31
FDIC Examination of Bank 1 ................................................................................................ 34
FDIC Examination of Bank 4 ................................................................................................ 35
FDIC Examinations of the Other Six Banks ......................................................................... 36
The FDIC’s Guidance on Examination of Financial Institutions Differed from Other Federal Bank
Regulators .................................................................................................................................... 38
Concentrations ..................................................................................................................... 39
Loan Classification ............................................................................................................... 40
The FDIC Did Not Provide Adequate Training to Examination Staff on Government-Guaranteed
Loan Programs ............................................................................................................................. 41
The FDIC Does Not Have Adequate Data to Identify, Monitor, and Research Bank Participation
in Government-Guaranteed Loan Programs ................................................................................ 43
Contents
May 2023
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ii
The FDIC Did Not Effectively Share Information on Government-Guaranteed Loan Programs
Externally and Internally ............................................................................................................... 46
External Information Sharing ................................................................................................ 46
Internal Information Sharing ................................................................................................. 50
The FDIC’s Examination Guidance Lacked Instructions on the Retention of Examination
Workpapers .................................................................................................................................. 52
Conclusion .................................................................................................................................... 55
FDIC COMMENTS AND OIG EVALUATION ............................................................................55
Appendices
1. Objective, Scope, and Methodology
59
2. Acronyms and Abbreviations
3. Risks Related to Guaranteed Lending
62
64
4. Fraud Investigations – Government Guaranteed Loan Programs
65
5. Fraud Investigations – Paycheck Protection Program (PPP)
70
6. Bank Name Reference
75
7. FDIC Comments
76
8. Summary of the FDIC’s Corrective Actions
95
Figure
Figure 1. PPP Timeline ................................................................................................................. 32
Tables
Table 1. Federal Government-Guaranteed Loan Programs .......................................................... 7
Table 2. FDIC-Supervised Financial Institutions Reviewed by the OIG ....................................... 22
(b) (8)
.................. 33
Table 4. FDIC-Supervised Financial Institutions' Participation in
Government-
Guaranteed Loan Program ........................................................................................................... 45
Federal Deposit Insurance Corporation
Office of Inspector General
Office of Audits, Evaluations, and Cyber
May 2023
EVAL-23-001
May 10, 2023
Subject
FDIC Examinations of Government-Guaranteed Loans
The Federal Deposit Insurance Corporation (FDIC) is responsible for carrying out a
supervision program to promote safe and sound operations at financial institutions,
protect consumers’ rights, and promote community investment initiatives.1 The FDIC
insures approximately $10 trillion in deposits at 4,755 commercial banks, savings
institutions, and domestic branches of foreign banks (as of September 30, 2022).2
Additionally, pursuant to its authorities under the Federal Deposit Insurance Act (FDI
Act),3 the FDIC serves as the primary Federal regulator for approximately 3,100
financial institutions.4
Federal agencies5 administer several Government-guaranteed loan programs to
assist individuals and businesses with, among other things, buying homes, financing
agricultural production, acquiring businesses, and purchasing equipment. Between
FY 2019 and FY 2021, lenders disbursed nearly $3 trillion in Government-
guaranteed loans to borrowers on behalf of four of the most prevalent agencies that
administer Government-guaranteed loan programs.6 These programs promote
lending to rural and underserved communities and to borrowers that lack a history of
established credit or that have collateral weaknesses. For example, the U.S.
Department of Agriculture administers the Business and Industry Guaranteed Loan
Program that specifically targets rural businesses by providing loan guarantees to
banks, thus encouraging lending. The intent of the program is to save and create
jobs in rural America.
Financial institutions insured and supervised by the FDIC originate Government-
guaranteed loans with the Federal agencies’ providing a guarantee for repayment to
the bank in the event of default. When financial institutions participate in
Government-guaranteed loan programs with the appropriate level of due diligence,
these programs may serve as an avenue to realize earnings and mitigate credit risk,
and as an opportunity to expand their loan portfolios.
1 12 U.S.C. § 2901 et seq. (2022). The Community Reinvestment Act requires the FDIC to assess an institution’s record of helping
to meet the credit needs of the local communities in which the institution is chartered.
2 FDIC, Quarterly Banking Profile (Third Quarter 2022).
3 12 U.S.C. §§ 1811-1835a (2022).
4 For the purposes of the report, a financial institution represents an FDIC-insured depository institution. The word bank is used
interchangeably with financial institution throughout this report.
5 These agencies include, but are not limited to, the U.S. Department of Agriculture, the U.S. Small Business Administration (SBA),
the Department of Housing and Urban Development, and the U.S. Department of Veterans Affairs.
6 See Table 1 for additional details.
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However, these Government-guaranteed loan programs are not without risk to
financial institutions. When financial institutions fail to materially comply with
Government-guaranteed loan program requirements in the areas of loan
underwriting, closing, and servicing, the Federal agencies guarantying the loans can
be released from their obligations.7 If a financial institution engages in Government-
guaranteed loan programs without fully understanding or complying with program
requirements, their participation can introduce risks to both the financial institution
and to consumers.8 These risks include, among others, the following:
•
Operational risk: A financial institution that does not have the requisite
knowledge and familiarity of the workings of a Government-guaranteed loan
program may realize losses due to its inability to perform within the
Government-guaranteed loan program requirements.
•
Compliance risk:9 A financial institution that fails to comply with the
Government-guaranteed loan program requirements, resulting in loss to the
bank or consumers, could face civil money penalties or restitution.10
•
Liquidity Risk: Financial institutions can sell Government-guaranteed loans
in the secondary market at a premium, which increases liquidity for the
institution. When a financial institution relies on selling Government-
guaranteed loans for liquidity, an economic downturn could reduce the
market participation, resulting in a negative impact to the bank’s liquidity.
•
Reputation risk: Banks that mishandle Government-guaranteed loan
programs, violate program requirements, or engage in fraudulent acts may
experience reduced liquidity or revenue due to customers removing deposits
and seeking other sources to obtain financing as a result of the bank’s poor
reputation and costly litigation.
•
Strategic risk: A financial institution that makes a strategic decision to
concentrate on originating Government-guaranteed loans may realize
reduced revenue, resulting in operating losses, if a Federal agency suspends
its ability to originate Government-guaranteed loans.
7 This situation generally occurs after a financial institution or secondary market holder requests the administering agency to honor
the guaranty. The underwriting phase of a loan application includes, among other things, determining the borrower’s capacity to
repay. Closing refers to the execution of the loan documents and disbursement of loan proceeds. Servicing a loan occurs after
closing and includes, but is not limited to, processing loan payments and loan monitoring.
8 OCC Bulletin 2021-34, Small Business Administration Lending: Risk Management Principles (August 2021).
9 Operational risk may lead to compliance risk when inadequate staff knowledge results in a bank’s noncompliance with
Government-guaranteed loan program requirements.
10 According to the FDIC Formal and Information Enforcement Actions Manual, civil money penalties are punitive and imposed to
punish for misconduct involving violations, practices, or breaches, and to create, by example, a disincentive for similar misconduct
by others. Further, restitution involves compensating the consumer (or other customer) for losses suffered as a result of violations.
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•
Fraud Risk: Financial institutions that administer Government-guaranteed
loans may be subject to increased fraud risk. In addition to fraud risks
introduced by bank insiders and customers, Government-guaranteed loan
programs can introduce additional third parties into loan transactions. These
third parties often have a financial incentive in the origination or servicing of
the Government-guaranteed loans in the form of fee income. If these third
parties do not act in good faith on behalf of the financial institution, the
financial institution may realize increased losses, reputational harm, and legal
impacts from the third parties’ fraudulent actions, such as fraudulent loan
approvals. See Appendix 4 for examples of Government-guaranteed loan
fraud.
FDIC-supervised financial institutions participate in Government-guaranteed loan
programs.
Within
the last 5 years, approximately 1,281 of the 3,082 FDIC-supervised financial
institutions (42 percent) approved loans totaling approximately $66.1 billion under the
loan program.12
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES
Act)13 created the Paycheck Protection Program (PPP) in order to provide financial
relief and Government-guaranteed loans to small businesses adversely affected by
the Coronavirus Disease 2019 (COVID-19) pandemic.14 More than 2,600 FDIC-
supervised financial institutions originated over 3 million PPP loans, totaling
approximately $270 billion.15 Banks with less than $10 billion in assets accounted for
approximately 45 percent of PPP loans. In addition, these banks issued PPP loans
at a rate disproportionate to their total assets, and disproportionate to their loan
portfolios to small businesses before the pandemic.16
12 This is based on active FDIC-supervised financial institutions as of
. The approved loans include
loans that were cancelled subsequent to approval or may be
cancelled in the future.
Public Law No. 116-136, 134 Stat. 281 (March 27, 2020).
14 The PPP is administered by the SBA. The SBA provides a 100 percent guaranty on PPP loans if lenders comply with program
requirements.
15 This amount excludes PPP loans that were cancelled or voluntary terminated subsequent to original approval. The FDIC is not
able to determine the full amount of PPP loans associated with FDIC-supervised financial institutions due to a lack of unique
identifiers in the PPP loan data. Further, this amount reflects any changes made after origination.
16 FDIC Center for Financial Research, Bank Technology and the COVID-19 Pandemic (February 2022).
(b) (8)
(b) (8)
(b) (8)
(b) (8)
(b) (8)
(b) (8)
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If left unmitigated, the risks associated to hazardous activities in Government-
guaranteed programs have actual consequences for banks. In October 2020, an
FDIC-supervised financial institution failed17 due in part to deficient Government-
guaranteed loan administration and underwriting practices. The FDIC has also
issued enforcement actions against other financial institutions due to deficiencies in
their Government-guaranteed loan programs.
Our evaluation objective was to determine the effectiveness of the FDIC’s
BACKGROUND
The Division of Risk Management Supervision (RMS) and the Division of Depositor
and Consumer Protection (DCP) conduct examinations to evaluate financial
institutions as part of the FDIC supervision program. The FDIC supervision program
is intended to help ensure that FDIC-supervised financial institutions operate in a
safe and sound manner and comply with banking laws and regulations in providing
financial services and engaging with consumers.
RMS conducts safety and soundness examinations of FDIC-supervised financial
institutions to assess their overall financial condition, management practices and
policies, and compliance with applicable laws and regulations. RMS also conducts
specialty examinations of FDIC-supervised financial institutions, covering information
technology (IT) and operations; Bank Secrecy Act (BSA)18 and anti-money
laundering (AML) compliance; and Trust Department19 operations. The Large Bank
Supervision Branch and each Region of RMS share the responsibility for the
supervision and oversight of Large Insured Depository Institutions (LIDI). LIDIs are
institutions with total assets greater than $10 billion.
In addition, DCP conducts compliance examinations of FDIC-supervised financial
institutions to assess compliance with Federal consumer protection laws and
regulations.
17 OIG Report, Failed Bank Review, Almena State Bank, Almena, Kansas (FDIC OIG FBR-21-003) (March 2021).
18 31 U.S.C. §§ 5311-5336; 31 C.F.R. Part 1020 (2021). The BSA established anti-money laundering (AML) recordkeeping and
reporting requirements for financial institutions. Federal bank regulators play a key role in helping to ensure that banks maintain
adequate BSA/AML compliance programs to assist U.S. government agencies in detecting and preventing money laundering.
19 According to the FDIC RMS Manual of Examination Policies, a bank’s trust department acts in a fiduciary capacity when the
assets it manages are not the bank’s, but belong to and are for the benefit of others.
loans for banks that participate in Government-guaranteed loan programs. We
conducted this evaluation in accordance with the Council of the Inspectors General
on Integrity and Efficiency Quality Standards for Inspection and Evaluation.
Appendix 1 presents our evaluation objective, scope, and methodology.
examinations in identifying and addressing risks related to Government-guaranteed
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Safety and Soundness Examinations
According to the FDIC RMS Manual of Examination Policies (FDIC RMS Manual),
“onsite examinations help ensure the stability of the [insured depository institutions]
by identifying undue risks and weak risk management practices.” RMS examinations
of well-managed banks engaged in traditional, non-complex activities are risk-based,
point-in-time examinations.20 RMS also conducts continuous examinations21 of
institutions that are large22 and complex.23 Examiners may review Government-
guaranteed loans during RMS examinations when assessing the bank’s asset
quality.24 RMS examination staff also perform visitations to assess changes in a
financial institution’s risk profile, investigate unusual situations, and determine
progress in correcting deficiencies. The FDIC implemented a Forward-Looking
Supervisory initiative in 2011 as part of its risk-focused supervision program.25 The
goals of this supervisory approach are to identify and assess risk and weak risk
management practices before they impact a financial institution’s financial condition.
Consumer Compliance Examinations
To promote consumer protection, DCP compliance examinations focus on
operational areas where compliance errors present the greatest potential risk of
negative impact on bank customers, possibly resulting in consumer harm. During
compliance examinations, examiners assess the quality of an FDIC-supervised
institution’s compliance management system and review compliance with relevant
laws and regulations.26 FDIC consumer compliance examinations include gaining an
understanding of the financial institution’s risk profile, assessing the quality of the
institution’s compliance management system, and may also include transaction
testing. The FDIC also conducts compliance visitations to review progress on
corrective actions. The FDIC uses the Uniform Interagency Consumer Compliance
20 According to the FDIC 2021 Annual Report, RMS conducts point-in-time examinations every 12 to 18 months. The FDIC’s
examinations may alternate with the appropriate State banking department under certain circumstances.
21 According to the FDIC 2021 Annual Report, the continuous examinations include targeted reviews during an annual examination
cycle. A dedicated FDIC team works jointly with the appropriate State banking department. The team prepares examination
findings throughout the review cycle, upon completion of the targeted reviews of specific risk areas. The team prepares a roll-up
report of examination at the end of the annual examination cycle. These are separate from any reviews conducted by the FDIC’s
Division of Complex Institution Supervision and Resolution which were not covered by this evaluation.
22 According to the FDIC 2021 Annual Report, large banks are generally those with total assets of $10 billion or greater.
23 According to the FDIC RMS Manual, to determine the bank’s complexity, examiners evaluate a combination of factors such as
sophistication of an activity, the risk presented by the activity, and the volume of the activity. Examiners also consider the strategic
initiatives of the institution.
24 According to the FDIC RMS Manual, RMS examination staff assess and rate six financial and operational components - Capital
adequacy, Asset quality, Management capabilities, Earnings sufficiency, Liquidity position, and Sensitivity to market risk - commonly
referred to as CAMELS ratings. Examiners assign the component and composite ratings based on a numerical scale from 1 to 5,
with 1 indicating the strongest performance and risk management practices. A 5 rating indicates the highest degree of supervisory
concern.
25 OIG Report, Forward-Looking Supervision (FDIC OIG EVAL-18-004) (August 2018).
26 According to the FDIC Consumer Compliance Examination Manual, “[c]onsumer [h]arm is an actual or potential injury or loss to a
consumer, whether such injury or loss is economically quantifiable (e.g., overcharge) or non-quantifiable (e.g., discouragement).”
FDIC Examinations of Government-Guaranteed Loans
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Rating System to assign each financial institution a consumer compliance rating
based on its evaluation of three factors: Board and management oversight;
compliance program (policies and procedures, training, monitoring and/or audit,
consumer complaint response); and violations of law and consumer harm.27 The
FDIC also uses a Community Reinvestment Act (CRA) rating system to evaluate a
financial institution’s performance under the CRA.28
Supervisory Actions
The FDIC may issue a supervisory recommendation to a bank “…so that it can make
appropriate changes in its practices, operations or financial condition and thereby
avoid more formal remedies in the future, such as enforcement actions.”29 The FDIC
may issue a Matter Requiring Board Attention (MRBA)30 when it identifies a material
issue or risk of significant importance requiring immediate board attention. Informal
and formal enforcement actions against financial institutions may be issued by the
FDIC in order to address weak operations, deteriorating financial conditions, or other
actionable misconduct. Informal enforcement actions include Bank Board
Resolutions and Memoranda of Understanding.31 Formal enforcement actions
include cease-and-desist and consent orders,32 restitution,33 and civil money
penalties.34
Significance of Government-Guaranteed Loan Program Lending
In Fiscal Year 2021, more than $1 trillion was disbursed in Government-guaranteed
loans by lenders on behalf of the U.S. Federal Housing Administration, the U.S.
Department of Veterans Affairs, the U.S. Small Business Administration (SBA) and
27 According to the FDIC Consumer Compliance Examination Manual, the rating is based on a scale of 1 through 5, with 1 indicating
the lowest degree of supervisory concern.
28 12 U.S.C. 2901. According to the FDIC Consumer Compliance Examination Manual, the CRA rating is based on several areas
such as the geographic distribution of loans, borrowers’ profiles, and community development activities. The FDIC assigns a CRA
composite rating of outstanding, satisfactory, needs to improve, or substantial noncompliance.
29 FDIC RMS Manual, Section 16.1, Report of Examination Instructions (December 2020).
30 According to the FDIC, an MRBA requires the attention of the financial institution’s Board of Directors.
31 According to the FDIC Formal and Informal Enforcement Actions Manual, Bank Board Resolutions are informal commitments
adopted by an institution’s Board of Directors (often at the request of the FDIC) directing the institution’s personnel to take corrective
action regarding specific noted deficiencies. A Memoranda of Understanding is an informal agreement between an institution and
the FDIC, which is signed by both parties. A Memoranda of Understanding is designed to address and correct identified
weaknesses in an institution’s condition, or violations or unsafe or unsound practices.
32 According to the FDIC RMS Manual, the purpose of a cease and desist order is to remedy unsafe or unsound practices or
violations and to correct conditions resulting from such practices or violations. The FDIC issues a consent order when the financial
institution agrees to the proposed enforcement actions. The institution executes a stipulation and consent to the issuance of a
consent order (Consent Agreement) that is accepted by the FDIC.
33 According to the FDIC Formal and Informal Enforcement Actions Manual, restitution is an equitable and remedial action because
its purpose is to compensate the institution or consumer (or other customer) for losses suffered or to obtain the disgorgement of
unjust enrichment as a result of misconduct involving violations or practices.
34 According to the FDIC Formal and Information Enforcement Actions Manual, civil money penalties are punitive and imposed to
punish for misconduct involving violations, practices, or breaches, and to create, by example, a disincentive for similar misconduct
by others.
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the U.S. Department of Agriculture. This figure grew by more than 154 percent since
FY 2019 (from $433 billion). The lenders disbursed nearly $3 trillion in Government-
guaranteed loans during this time. See Table 1 below.35
Table 1. Federal Government-Guaranteed Loan Programs
Federal Agency
Loan Amount,
Principal Disbursed
Fiscal Year 2019
Loan Amount,
Principal Disbursed
Fiscal Year 2020
Loan Amount,
Principal Disbursed
Fiscal Year 2021
U.S. Federal Housing
Administration
$229,855,000,000
$331,420,000,000
$366,731,000,000
U.S. Department of
Veterans Affairs
$155,382,000,000
$329,020,000,000
$394,496,000,000
SBA
$26,790,570,000
$542,948,707,000*
$308,925,787,000
U.S. Department of
Agriculture
$21,036,000,000
$29,559,000,000
$32,112,000,000
Totals
$433,063,570,000
$1,232,947,707,000
$1,102,264,787,000
Source: OIG analysis of Federal Agency Annual Reports.
*The increase is due to the CARES Act Paycheck Protection Program.
During this timeframe, FDIC-supervised financial institutions have significantly
increased their participation in
(b) (8)
.36
(b) (8)
Further, the approval amount of these loans
increased from approximately $12 billion in 2020 to approximately $19.6 billion in
2021, an increase of 63 percent.
Financial Institutions’ recent experience with the SBA’s PPP has resulted in
increased financial institution participation in Government-guaranteed loan
programs.38 In March 2020, the Coronavirus Aid, Relief, and Economic Security Act
(CARES Act)39 created the PPP in order to provide financial relief and Government-
guaranteed loans to small businesses adversely affected by the Coronavirus
Disease 2019 (COVID-19) pandemic.40 FDIC-supervised financial institutions
35 This table does not include all Federal Government-guaranteed loan programs. We identified FDIC-supervised financial
institutions participated in Government-guaranteed loan programs administered by the Federal Agencies included in the table.
36 Loans made under the
(b) (8)
(b) (8)
38 American Banker, PPP Boosts Banks’ Interest in Other SBA Loan Programs (February 2021).
39 Public Law No. 116-136, 134 Stat. 281 (March 27, 2020).
40 The PPP is administered by the SBA. The SBA provides a 100 percent guaranty on PPP loans if lenders comply with program
requirements.
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awarded PPP loans to borrowers41 on behalf of the SBA. According to the SBA,
more than 11 million PPP loans, totaling nearly $800 billion, were approved by more
than 5,400 lenders.42
More than 2,600 FDIC-supervised financial institutions originated over 3 million PPP
loans, totaling approximately $270 billion.43
This approval rate reflects a loan approval
every 3 seconds. Due to the expedited development and delivery of the PPP
program in combination with an increased reliance on borrower self-certifications,44
fraud risk was elevated for the PPP. It appears relaxed program requirements made
the PPP a target for fraud.
Risks of Government-Guaranteed Loan Program Lending
Participation in Government-guaranteed loan programs introduces unique risks. For
example, Government-guaranteed loan programs often have complex requirements
and documentation standards that present compliance challenges for financial
institutions.
If financial institutions do not exercise appropriate due diligence or comply with
program requirements, they face exposure to, among others, additional credit risk,
operational risk, compliance risk, liquidity risk, and strategic risk.
The Office of the Comptroller of the Currency (OCC) issued a bulletin in August 2021
highlighting the various risks associated with engaging in SBA guaranteed lending
activities.45 The OCC bulletin stated that “[t]he primary risks associated with SBA
lending are credit, operational, compliance, liquidity, price, and strategic, with many
of the risks interrelated.” See Appendix 3 regarding risks associated with SBA
lending. Other Government-guaranteed loan programs share similar risk
characteristics, such as unique program requirements, borrowers lacking traditional
41 According to the CARES Act, eligible borrowers are small business concerns, nonprofit organizations, veterans organizations, or
tribal business concerns that employ not more than the greater of 500 employees or, if applicable, the size standard in number of
employees established by the SBA for the industry in which the business concern, nonprofit organization, veterans organization, or
tribal business concern operates. Eligible borrowers also include individuals who operate under a sole proprietorship or as an
independent contractor, and self-employed individuals.
42 SBA, Paycheck Protection Program (PPP) Report (Approvals through May 31, 2021).
43 This amount excludes PPP loans that were cancelled or voluntary terminated subsequent to original approval. We were unable to
determine the full amount of PPP loans associated with FDIC-supervised institutions due to a lack of unique identifiers in the PPP
loan data. Further, this amount reflects any changes made after origination.
44 The Paycheck Protection Program Borrower Application Form required the authorized representative of the applicant to certify,
amongst other things, that (1) the applicant was eligible to receive a loan under the programs rules, (2) all loan proceeds would be
used for business-related purposes as specified in the application and consistent with the program rules, (3) the applicant was in
operation on February 15, 2020, and (4) the applicant has not and will not receive another loan under the Paycheck Protection
Program.
45 OCC Bulletin 2021-34, Small Business Administration Lending: Risk Management Principles (August 2021).
(b) (8)
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credit or cash flow characteristics, financial institution responsibility for loan servicing
and collateral liquidation, and the ability to sell the Government-guaranteed portion of
the assets on the secondary market for a premium. For these reasons, it is critical
that financial regulators consider the risks associated with Government-guaranteed
loan programs in their supervisory oversight.
FDIC Reports of Examination (ROE) have acknowledged that lending in
Government-guaranteed loan programs is complex and requires significant
infrastructure to comply with underwriting and collection rules. The risks associated
with Government-guaranteed loan programs have affected multiple FDIC-supervised
financial institutions.
•
Almena State Bank, a financial institution that failed in 2020, had an
aggressive growth strategy that focused on originating large Government-
guaranteed loans. However, the Board and bank management lacked the
requisite skills and experience to ensure appropriate loan underwriting and
credit administration.46 These deficiencies resulted in increased credit risk,
operational risk, compliance risk, and strategic risk for the bank, ultimately
contributing to its failure.
•
Community South Bank, had an aggressive growth and funding strategy
related to Government-guaranteed lending. This strategy led to the bank’s
failure in 2013, resulting in an estimated loss to the Deposit Insurance Fund
(DIF) of $72.5 million.47
Fraud Risk
Government-guaranteed loan programs have been the target of fraudulent actors
seeking financial gain. According to the FDIC RMS Manual, “[c]riminal conduct and
fraudulent acts undermine public confidence in the financial system and contribute to
financial institution failures. Confidence is especially eroded when offenses involve
bank insiders. When failures occur, the FDIC Deposit Insurance Fund can suffer
significant losses.”48
The OCC issued a bulletin on Operational Risk, which highlights fraud risk:49
46 OIG Report, Failed Bank Review, Almena State Bank, Almena, Kansas (FDIC OIG FBR-21-003) (March 2021).
47 A material loss to the deposit insurance fund has been defined as any estimated loss in excess of $150,000,000, if the loss
occurred during the period beginning on January 1, 2012, and ending on December 31, 2013. FDI Act §38(k)(2). Since the
estimated loss associated with Community South Bank’s failure was below the material loss threshold, the FDIC OIG completed a
failed bank review to meet requirements associated with losses that are not material and summarized the results of the review in the
October 2014 Semiannual Report to the Congress. FDI Act § 38(k)(5). Since February 2018, in addition to summarizing the results
of any such reviews in the Semiannual Reports to the Congress, the FDIC OIG has issued separate failed bank review reports.
48 FDIC RMS Manual, Section 10.1, Suspicious Activity and Criminal Violations (November 2017).
49 OCC Bulletin 2019-37, Operational Risk: Fraud Risk Management Principles (July 2019).
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Fraud risk is a form of operational risk, which is the risk to current or
projected financial condition and resilience arising from inadequate or
failed internal processes or systems, human errors or misconduct, or
adverse external events. Operational risk management weaknesses can
result in heightened exposure to fraudulent activities, which can increase
a bank's exposure to reputation and strategic risks. Failure to maintain an
appropriate risk management system could expose the bank to the risk of
significant fraud, defalcation (e.g., misappropriation of funds by an
employee), and other operational losses.
Fraud in Government-Guaranteed Loans and in the Paycheck Protection
Program: The FDIC OIG in coordination with the U.S. Department of Justice have
publicly reported on multiple significant investigations of alleged fraudulent activities
associated with Government-guaranteed loan programs50 since 2016 (see Appendix
4, summarizing these fraud investigations). Most of these investigations involved
bank insiders and bank-associated third parties colluding over multiple years to
abuse Government-guaranteed loan programs for personal profit or to transfer the
risk of failing assets to the Government. In September 2022 a regional bank in
Texas settled an allegation of PPP loan fraud.51 The bank processed a loan in
violation of PPP loan requirements to an individual who was known to the bank to be
under criminal charges. As a result, the bank was required to pay back its loan
processing and other fees totaling over $18,600. In another case, the Board of
Governors of the Federal Reserve System (FRB) imposed a $2.3 million civil money
penalty on a bank for processing PPP loans that had known indications of fraud and
for not reporting the fraud timely.52
According to the OCC Semiannual Risk Perspective53 (Spring 2021), programs such
as the PPP “featured increased compliance responsibilities, high transaction
volumes, and new fraud typologies, at a time when banks continue to respond to a
changing operating environment.” 54 The report presented that “it is essential for
[banks] to conduct appropriate due diligence commensurate with the risks that the
new services and providers pose to the bank, and to monitor third-party activities to
ensure compliance with applicable laws and regulations.”
50 This does not include fraud related to PPP loans, which is presented separately below.
51 Department of Justice, United States Attorney’s Office, Southern District of Texas, First-ever False Claims Act settlement received
from Paycheck Protection Program lender (September 2022).
52 FRB, Federal Reserve Board announces it has fined Popular Bank $2.3 million for processing six Paycheck Protection Program
(PPP) loans despite having detected that the loan applications contained significant indications of potential fraud (January 2023).
53 The OCC issues Semiannual Risk Perspective reports that address key issues facing banks, focusing on those that pose threats
to the safety and soundness of banks and their compliance with applicable laws and regulations.
54 OCC, Semiannual Risk Perspective (Spring 2021).
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Other Federal agencies, academic researchers, and advocacy groups have reported
on the fraud and accompanying financial institution reputational risks and legal risks
associated with the SBA PPP. For example, a study by the McCombs School of
Business, University of Texas, Austin (August 2022) determined that around 1.4
million of the 11.5 million PPP loans — more than 12 percent — and representing
$64.2 billion — had at least one indication of potential fraud.55 This study stated that
this figure is likely substantially understated, and total suspicious lending may be as
high as $117.3 billion.
Further, the SBA OIG reported in January 2021 that nearly 55,000 PPP loans worth
$7 billion went to potentially ineligible businesses or fraudulent recipients.56
According to a report by the Pandemic Response Accountability Committee
(PRAC)57 (January 2022), the SBA stated that the more rigorously that PPP lenders
applied “Know Your Customer”58 requirements, the more likely that individual loan
fraud issues, like identity theft, would be identified.59
The Congressional Select Subcommittee on the Coronavirus Crisis requested that
two banks,
both FDIC-supervised institutions, provide
documents and information related to their origination of PPP loans to understand
the PPP fraud detection processes applied by FinTech60 lenders and their bank and
non-bank partners.61 The Select Subcommittee referenced materials and
information describing fraud associated with PPP loans approved by
The Select Subcommittee’s investigation found that FinTechs failed to stop
obvious and preventable fraud.62 It also found that the lending partners of the
FinTechs often did little to oversee the activities of the companies to which they
delegated their responsibilities.
According to a Memorandum issued on June 13, 2022 by the U.S. House of
Representatives, Select Subcommittee on the Coronavirus Crisis, the Government
has criminally charged 1,481 defendants related to 1,003 pandemic relief fraud
investigations involving more than $1 billion in losses.63 The FDIC OIG alone has
55 McCombs School of Business, University of Texas at Austin, Did FinTech Lenders Facilitate PPP Fraud? (Updated August 2022).
56 SBA OIG Report, Inspection of SBA’s Implementation of the Paycheck Protection Program (21-07) (January 2021).
57 The CARES Act created the PRAC to support and coordinate independent oversight of pandemic relief spending.
58 In an effort to mitigate the risk of fraud and money laundering activities in the banking sector, the BSA requires, among other
things, that federally regulated financial institutions establish a customer identification program and conduct ongoing customer due
diligence to verify the identity of and monitor customers. These requirements are generally referred to as “Know Your Customer.”
59 PRAC, Small Business Administration Paycheck Protection Program Phase III Fraud Controls (January 2022).
60 FinTechs are companies that use technology to support banking and financial services.
61 Congress of the United States, House of Representatives Select Subcommittee on the Coronavirus Crisis,
.
62 Congress of the United States, House of Representatives Select Subcommittee on the Coronavirus Crisis, “We Are Not The
Fraud Police”: How Fintechs Facilitated Fraud In The Paycheck Protection Program (December 2022).
63 Congress of the United States, House of Representatives Select Subcommittee on the Coronavirus Crisis, The Biden
Administration’s Efforts to Root Out Fraud in Pandemic Relief Programs and Bring Wrongdoers to Justice (June 2022). These
numbers reflect fraud within other pandemic relief programs beyond the PPP.
(b) (8)
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initiated 154 investigations related to PPP, as of March 31, 2022 (see Appendix 5 for
examples of PPP fraud investigations). FDIC OIG investigations of PPP fraud have
resulted in 180 criminal charging actions, 117 arrests, 68 convictions, and recoveries
of approximately $100 million.64 Insiders at FDIC-supervised or insured banks were
involved in 14 percent of these investigations (22 cases).65 Recognizing the
significant fraud in the PPP, the President extended the statute of limitations to
prosecute fraud in the PPP.66
EVALUATION RESULTS
FDIC examinations were not always effective in identifying and addressing risks
related to Government-guaranteed loans for financial institutions that participate in
Government-guaranteed loan programs. We determined that the:
•
FDIC’s guidance did not adequately address the risks present in
Government-guaranteed loan programs;
•
FDIC could improve its supervision of bank activities in Government-
guaranteed loan programs, including the Paycheck Protection Program;
•
FDIC’s guidance differed from that of other Federal bank regulators;
•
FDIC did not provide adequate training to examination personnel on
Government-guaranteed lending programs;
•
FDIC did not maintain adequate data to identify, monitor, and research bank
participation in Government-guaranteed loan programs; and
•
FDIC did not effectively share information externally and internally to enhance
risk oversight of banks that participated in Government-guaranteed loan
programs.
Moreover, the FDIC examination guidance did not provide clear instructions on the
retention of examination workpapers.
During this evaluation, FDIC officials stated that Government-guaranteed loans have
historically not caused a financial burden to the FDIC. The FDIC views these
programs primarily as credit risk mitigants, and FDIC officials stated that FDIC
examiners emphasize credit risk above other risk factors, as it is historically the most
direct cause of bank failures. We found instances in which FDIC examiners – when
observing clear violations of program requirements, or unsafe and unsound banking
practices – did not question the financial institution’s ability to collect on the
64 This information is as of March 31, 2022. Criminal charging actions include complaints, informations, indictments, superseding
indictments, and superseding informations. The recoveries includes fines, restitution ordered, and asset forfeiture. It does not
include seizures and cost avoidance monies.
65 Insiders include financial institution executive managers, employees, and the financial institution.
66 Public Law No. 117-166, 136 Stat. 1365 (August 5, 2022).
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Government-guaranty. FDIC officials and examination staff asserted that the
Federal agencies administering the Government-guaranteed loan programs are
responsible for determining the validity of the guaranty.
However, the FDIC is responsible for examining the safety and soundness practices
and compliance with consumer protection laws for supervised financial institutions.
In addition, the statements of FDIC’s officials were not consistent with its guidance
for examiners. Specifically, the FDIC RMS Manual established the responsibility for
examiners to determine whether Government-guaranteed loans issued by a bank are
compliant with the underlying guaranty issued by another agency. Further,
consistent with statutory authorities, the FDIC RMS Manual and examination
guidance from other Federal financial regulators established the authority for
examiners to criticize or classify these assets in the event that noncompliance with
Government-guaranteed loan program requirements is determined or inadequate
risk management by the bank is observed.
Until the FDIC addresses the recommendations in this report, there is risk that the
safety and soundness of certain financial institutions participating in Government-
guaranteed loan programs may deteriorate, leading to failure or consumer harm and
ultimately increased risk or loss to the DIF. As detailed in this report, multiple FDIC-
supervised financial institutions have realized risk from applying imprudent banking
practices or perpetrating fraud in Government-guaranteed loan programs. Such
activities contributed to the failure of multiple FDIC-supervised financial institutions
including Almena State Bank, Valley Bank, and Community South Bank. These
failures resulted in estimated losses to the FDIC’s DIF of over $140 million.
FDIC Guidance Did Not Adequately Address Risks in Government-
Guaranteed Loan Programs
The FDIC provided limited guidance67 for examiners and Case Managers to
understand the risks related to Government-guaranteed loan programs. The FDIC
guidance did not address or provide sufficient detail on the unique operational risk,
credit risk, compliance risk, servicing risk, liquidity risk, and strategic risk arising from
bank activities in these programs. In addition, FDIC guidance did not provide
detailed information to allow examiners and Case Managers to consistently assess
bank activities in Government-guaranteed loans for loan classification, off-balance
sheet risk, concentration risk, and ongoing monitoring.
67 For the purposes of this report, guidance includes policies, procedures, manuals, memorandums, handbooks and bulletins.
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According to the U.S. Government Accountability Office (GAO) Standards for Internal
Control in the Federal Government, “[i]nternal control comprises the plans, methods,
policies, and procedures used to fulfill the mission, strategic plan, goals, and
objectives of the entity.”68 In addition, GAO’s A Framework for Managing Fraud
Risks in Federal Programs (Fraud Risk Management Framework) notes that
managers who effectively manage fraud risks design and implement specific control
activities—including policies, procedures, techniques, and mechanisms—to prevent
and detect potential fraud.69
However, the FDIC did not maintain separate internal policies, procedures, and
guidance for Government-guaranteed loan programs, other than a memorandum
specific to the SBA Paycheck Protection Program (RMS Regional Directors
Memorandum (RD Memo) 2020-022-RMS (June 2020)). FDIC officials stated that
the FDIC RMS Manual applied both to guaranteed loans and non-guaranteed loans.
However, the FDIC RMS Manual does not distinguish between the different loan
structures, requirements, and associated risks for Government-guaranteed loans.
We found that the FDIC guidance could be improved as it (1) lacked guidance on
risks unique to Government-guaranteed loan programs that banks face, and (2)
lacked guidance on loan classification, off-balance sheet risk, concentration risk, and
monitoring for Government-guaranteed loans.
Guidance on Risks of Government-Guaranteed Loan Programs to Banks
Operational and Fraud Risks: Government-guaranteed loan programs are often
complex and have unique requirements for compliance and underwriting that require
specialized knowledge. In addition, Government-guaranteed loan programs have
been the target of fraudulent actors seeking financial gain. The FDIC RMS Manual
does not discuss the operational risks, including fraud risk, associated with
Government-guaranteed loan programs for consideration by supervision staff during
monitoring, examination planning, and examination execution. As a result, FDIC
examination staff are not provided guidance regarding these risks for bank
participation in Government-guaranteed loan programs. Such guidance could assist
FDIC examiners in fraud detection techniques, in applying sound judgment, and in
the appropriate identification and response to indications of fraudulent acts.
According to the GAO’s Fraud Risk Management Framework, “[t]he expectation that
government will detect and punish fraud helps deter would-be fraudsters.” It also
states that, “the likelihood that individuals who engage in fraud will be identified and
punished serves to deter others from engaging in fraudulent behavior.” Individuals
aware of the limited guidance on FDIC examinations over a financial institution’s
68 GAO-14-704G, Standards for Internal Control in the Federal Government (September 2014).
69 GAO-15-593SP, A Framework for Managing Fraud Risks in Federal Programs (July 2015).
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participation in Government-guaranteed loans may be more likely to commit fraud in
these programs.
According to the FDIC RMS Manual, “[the] early detection of apparent fraud and
insider abuse is an essential element in limiting the risk to the FDIC’s deposit
insurance funds and uninsured depositors.” If FDIC examiners are not aware of the
fraud trends or past fraud
schemes related to
Government-guaranteed
loans, they may not
identify future
occurrences and report
them to the appropriate
authorities. Themes in
Government-guaranteed
fraud investigations
involved:
•
Disguising
impermissible
use of proceeds
as working
capital: Ineligible
use of proceeds
such as past-due
payroll taxes and
personal debt
were falsely
presented on loan
applications as
working capital to
cover business operating expenses;
•
Using working capital loan proceeds to fund the borrower’s equity
injection: In certain circumstances, as part of a loan transaction, owners of a
borrower (small business) are required to inject cash into the business as
equity capital. Loan proceeds were falsely designated on the loan settlement
statement as working capital and instead used to fund the borrower’s
required equity injection;
•
Masking bank insider ownership interests: The Chief Executive Officer
(CEO) of a bank secretly solicited and received bribed payments on
Government-guaranteed loans issued by the bank in which the CEO had
secret ownership interests; and
Since 2016, there are several examples where bank
insiders and third parties colluded to abuse
Government-guaranteed loan programs for personal
profit or to pass the bank’s risk for failing assets on to
the Government.
In one investigation involving Banc-Serv Partners,
LLP, a lending service provider, the defendants and
co-conspirators originated dozens of loans, totaling
over $10 million in disbursements, which were not
eligible for the Government-guaranties. The
defendants and co-conspirators, including bank and
third party employees, made false statements on
loan-guaranty applications and purchase requests,
such as misrepresenting the use of loan proceeds.
In another investigation, the owner of a Louisiana
company was indicted for lying on applications for
Government-guaranteed loans. The defendant
provided inflated estimates of his inventory to an
appraiser he hired and presented inflated and
fraudulent appraisals in loan guaranty applications
with the Department of Agriculture and SBA for two
loans totaling $4 million at banks in Texas and
Louisiana. Both loans went into default, causing a
total loss of approximately $1.1 million to the banks.
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•
Falsifying documents and masking fees: Loan brokers were charged with
allegedly fabricated federal tax forms submitted in support of fraudulent loan
applications, falsified applicant signatures, and falsely indicated that no
broker had assisted in preparing or referring the loan applications. The loan
brokers allegedly charged borrowers fees for obtaining the fraudulent loans.
Credit and Compliance Risks: The FDIC RMS Manual did not provide adequate
guidance on the unique credit and compliance risks associated with Government-
guaranteed loans.
While the International Banking section70 within the FDIC RMS Manual provides that
examiners should review documents to determine whether Government-guaranteed
loans comply with program conditions, it does not describe the program
requirements and conditions that may render a guarantee invalid, such as:
•
Borrower eligibility,
•
Creditworthiness,
•
Repayment ability,
•
Use of proceed restrictions, and
•
Citizenship requirements.
It also does not refer examination staff to any additional resources, such as FDIC
reference materials or training guides, from which examiners can obtain the specific
conditions and requirements of agency Government-guaranteed loan programs.71 In
addition, the International Banking section in the FDIC RMS Manual may not be
routinely referenced by examination staff evaluating the domestic activities of
financial institutions.72
Bank negligence or material noncompliance with these requirements can impact the
performance of the loan and ultimately result in the Federal agency administering the
Government-guaranteed loan program to reduce or cancel the guaranty. For
example, a Federal agency may rescind its guaranty if a bank makes a loan to an
ineligible borrower or to a borrower that lacks creditworthiness or repayment ability.
70 According to the FDIC RMS Manual, the International Banking section “provides a broad perspective of international banking. It
begins by addressing the concept of country risk, which is the primary risk associated with international banking activities. The
section then discusses common international banking products and services such as foreign loans, investments, placements,
currency exchange, and funds management.”
71 Additional resources also include the standard operating procedures and regulations of the Federal agencies that administer the
programs.
72 The Government-guaranteed loan programs focus on assistance to domestic businesses and individuals.
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Servicing Risk: Servicing activities within Government-guaranteed loan programs
include, among other things, loan monitoring, perfecting liens on collateral, and
processing loan payments. For servicing risk, the FDIC RMS Manual states that
“[e]xaminers should be aware of the risks that can affect an institution from the failure
to follow the servicing rules related to securitized assets.”73 The FDIC RMS Manual
states that “[i]n most cases, the government agency that provided the guarantee or
insurance against ultimate default will also impose guidelines and regulations for the
servicer to follow. If the servicer or others involved in the servicing function fail to
follow the rules and guidelines, then the government agency that is providing the
guarantee or insurance may refuse to honor its commitment to insure all parties
against loss due to default.”
The FDIC guidance, however, does not describe how examiners should treat the
Government-guaranteed loans when these risks occur. For example, the FDIC RMS
Manual does not articulate how examiners should consider or evaluate the off-
balance sheet risk74 for financial institutions that sell Government-guaranteed loans
to third-party investors and are non-compliant with program servicing requirements.
Without proper guidance, examiners may not ensure banks have established
adequate liability accounts for off-balance sheet risk.
Liquidity and Strategic Risks: The FDIC RMS Manual did not address the unique
liquidity and strategic risks arising from bank activities in Government-guaranteed
loan programs. As described above, a bank may rely on selling Government-
guaranteed loans to meet its liquidity needs. However, if the bank gets suspended
or is prohibited from selling loans in the secondary market due to material
noncompliance with program requirements, it can significantly affect its business
model and liquidity. As a result, a bank may be unable to meet its contractual or
financial obligations in a timely manner. Further, banks that engage in new,
expanded, or modified Government-guaranteed lending activities are exposed to
strategic risk as market demand changes could make the activity no longer
economical. 75
73 FDIC RMS Manual, Section 3.7, Other Assets and Liabilities (March 2012).
74 Off-balance sheet risk is associated with the potential losses on Government-guaranteed loans sold on the secondary market.
The FDIC RMS Manual states that contingent liabilities reflect potential claims on bank assets. Any actual or direct liability that is
contingent upon a future event or circumstance may be considered a contingent liability. It further states that a loss contingency is
an existing condition, situation, or set of circumstances that involves uncertainty as to possible loss that will be resolved when one or
more future events occur or fail to occur.
75 OCC Bulletin 2021-34, Small Business Administration Lending: Risk Management Principles (August 2021).
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Guidance on Loan Classification, Assessment of Off-Balance Sheet Risk,
Concentration Risk, and Monitoring Specific to Government-Guaranteed Loans
Loan Classification: The FDIC RMS Manual does not include guidance for
examiners to consider when classifying loans that have a Government-guaranty.
The FDIC RMS Manual states that a financial institution must maintain an Allowance
for Loan and Lease Losses (ALLL) to absorb estimated credit losses.76 In assessing
the appropriateness of the ALLL, examiners may review loans for credit quality and
classify loans based on the degree of non-payment.77 However, the FDIC RMS
Manual does not describe how examiners should classify Government–guaranteed
loans and assess the appropriateness of the ALLL related to Government-
guaranteed loans. In addition, the FDIC RMS Manual does not detail the various
situations where adverse classification of the guaranteed portion of a loan may be
warranted.
Assessment of Off-Balance Sheet Risk: The FDIC RMS Manual instructs
examiners to consider the risks associated with off-balance sheet activities when
evaluating capital. The guidance explains that the impact contingent liabilities may
have on capital accounts is an important consideration in rating capital. The FDIC
RMS Manual states that, “[a]n estimated loss from a loss contingency…should be
recognized if it is probable that an asset has been impaired or a liability incurred as
of the examination date and the amount of loss can be reasonably estimated.” This
requires judgment and an interpretation of accounting standards. As described
above, servicing risks for financial institutions may be realized when selling loans to
investors. Specifically, if the financial institution does not comply with program
requirements for loan servicing, the government agency may refuse to honor the
guaranty or seek recovery from the bank.
However, the FDIC RMS Manual does not describe how examiners should consider
and assess the off-balance sheet risks associated with portions of Government-
guaranteed loans sold to investors when they observe financial institution
noncompliance with Government-guaranteed loan program requirements, including
servicing requirements. The FDIC RMS Manual also does not articulate how
examiners should coordinate with internal experts or other Federal agencies that
administer Government-guaranteed loan programs to determine whether contingent
76 According to the FDIC RMS Manual, estimated credit losses is an estimate of the current amount of the loan and lease portfolio
(net of unearned income) that is not likely to be collected; that is, net charge-offs that are likely to be realized for a loan, or pool of
loans.
77 According to the FDIC RMS Manual, examiners categorize adversely classified loans as Substandard, Doubtful, or Loss, based
on the risk of nonpayment. Substandard loans have a weakness that jeopardizes the liquidation of debt, and pose loss to the
financial institutions if deficiencies are not corrected. Loans are classified Doubtful when the collection or liquidation are highly
questionable and improbable. Loans classified as Loss are regarded as uncollect ble and of little value, but partial recovery may
occur in the future. Loan amounts classified as Loss should be eliminated from the financial institution’s books.
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liabilities for Government-guaranteed loans sold on the secondary market should be
established.
Concentration Risk: The FDIC RMS Manual does not address the treatment of
Government-guaranteed loans for concentration risk. According to the FDIC RMS
Manual:
Asset concentrations are pools of assets that share common risk
characteristics or have heightened sensitivity to similar economic,
financial, or other risk factors. An institution's asset quality, earnings,
or capital can be disproportionally affected by a single or localized
economic event or market conditions if the institution holds significant
asset concentrations.
An FDIC-supervised bank with a large percentage of Government-guaranteed loans
may be subject to concentration risk, as Government-guaranteed loans share
common risk characteristics and have heightened sensitivity to similar economic,
financial, or other risk factors. For example, SBA loans provide financial help for
small businesses with special requirements and financial institutions sell SBA loans
on the secondary market. In addition, the U.S. Department of Agriculture loans
provide financial assistance to agricultural and rural businesses. An economic event,
such as the recent COVID-19 pandemic, or significant climate-related event could
impact the viability of these businesses.
Further, market conditions could impact the financial condition of FDIC-supervised
banks that depend on selling Government-guaranteed loans to secondary market
investors for earnings and liquidity. If a bank does not comply with the Government-
guaranteed loan program requirements, there is a risk that the Federal agency will
prohibit the bank from participating in the program, which could impact the bank’s
business model, earnings, and liquidity. Nevertheless, the FDIC does not provide
sufficient guidance to examiners on determining concentrations in Government-
guaranteed loan portfolios, including treatment of Government-guaranteed loans sold
on the secondary market.
Monitoring: The Case Manager Procedures do not include guidance for Case
Managers for monitoring FDIC-supervised institutions’ activities in Government-
guaranteed lending. The purpose of monitoring by Case Managers is to identify and
mitigate emerging risks and to encourage a more proactive supervisory approach.
Case Managers, in coordination with senior management, direct the supervisory
approach for the financial institution. Without guidance on the risks of Government-
guaranteed loan programs, Case Managers may not be able to properly assess the
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risk and develop an informed and adequate supervisory approach for financial
institutions that participate in Government-guaranteed loan programs.
FDIC Perspectives on Government-Guaranteed Lending
The FDIC does not view bank participation in Government-guaranteed loan
programs as a significant risk to the FDIC. According to FDIC officials, RMS looks at
banks’ practices with the most risk, and government guaranteed loans typically do
not fall into that category. FDIC officials stated that these Government-guaranteed
loan programs are primarily credit risk mitigants and have not been the proximate
cause of bank failures.78
In addition, we found the FDIC is reluctant to question the bank’s ability to collect on
the Government-guaranty during its examinations. As described below, we observed
this reluctance in our interviews with examiners and in FDIC examinations when the
FDIC concluded that the bank engaged in unsafe and unsound practices with its
Government-guaranteed loan portfolio and examiners observed material non-
compliance with program requirements.
This practice is inconsistent with the FDIC RMS Manual.79 The FDIC guidance in its
Manual requires examiners to scrutinize documents when reviewing Government-
guaranteed loans to determine whether the loans are compliant with the guaranty.
Further, consistent with statutory authorities, the FDIC RMS Manual and examination
guidance from other Federal financial regulators establish the authority for examiners
to criticize or classify Government-guaranteed loan assets in the event a bank does
not comply with program requirements or has inadequate risk management
practices.
In addition, the FDIC is responsible for examining the bank’s safety and soundness
practices and compliance with consumer protection laws and regulations for
supervised financial institutions.
Absent adequate guidance, examiners may not be able to proactively and
consistently identify emerging Government-guaranteed loan risks or material
noncompliance that could render conditional loan guarantees at risk and negatively
78 Borrowers that receive Government-guaranteed loans are generally not able to receive conventional bank loans due to their
credit, cashflow, or collateral weaknesses. The guarantee issued by the Federal agency serves as means for banks to mitigate the
inherent credit risk in these loans and reduce losses.
79 FDIC RMS Manual, Section 11.1, International Banking (January 2018). The FDIC RMS Manual states that “[a]s with any
government-guaranteed financing, familiarity with the specific conditions and requirements of each agency and program is
paramount. Like domestic transactions, failure by the lender to comply with the program’s conditions may allow the agency to
rescind the guaranty. Documentation should be maintained for each participating transaction to show compliance with the
outstanding guaranty. These documents should be scrutinized by the examiner when reviewing these credits to determine that the
loan is compliant with the guaranty. Failure to comply with the terms of the guaranty may warrant adverse classification or criticism
by the examiner.”
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impact the safety and soundness of the institution. As described below, in some
cases, examiners did not adequately and consistently identify and address risks
related to Government-guaranteed loans for banks that participated in Government-
guaranteed loan programs.
Recommendations:
We recommend that the FDIC Director of RMS:
1. Develop and implement guidance to examination staff on the credit, operational
(including fraud), liquidity, and compliance risks related to Government-
guaranteed loans to ensure staff adequately plans and conducts examinations to
identify and address emerging risks.
2. Develop and implement guidance to examination staff to ensure the staff
consistently evaluate Government-guaranteed loans in their review of loan
classification, assessment of off-balance sheet risk, concentration risk, and
ongoing monitoring.
The FDIC Could Improve Its Supervision of Bank Activities in
Government-Guaranteed Loan Programs
We determined that FDIC examiners did not regularly:
•
Request information related to financial institution Government-guaranteed
lending activities during examination planning;
•
Assess financial institution compliance with Government-guaranteed loan
program requirements;
•
Classify Government-guaranteed loans;
•
Assess off-balance sheet risk associated with guarantees sold on the
secondary market; and
•
Consider guaranteed portions of loans in determining concentrations.
We analyzed FDIC examinations and visitation activities for five banks (see Table
2).80
80 As described in Appendix 1, we interviewed RMS examiners, Case Managers, and FDIC officials responsible for the examination
and oversight activities of the selected banks and other FDIC-supervised financial institutions. We also interviewed additional
examiners identified by RMS as having significant experience in examining the Government-guaranteed loan activities at financial
institutions.
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Table 2. FDIC-Supervised Financial Institutions Reviewed by the OIG
Bank Name
Region
Total Assetsa
Total
Government-
Guaranteed
Loans
Approvedb
Almena State Bank81
Kansas City
$65,733,000
$0c
Bank 2
(b) (8)
Bank 4
Bank 5
Bank 3
Source: FDIC OIG Analysis of Reports of Condition and Income (Call Reports) and
.82
a These figures represent the assets reported by the banks on the December 31, 2021 Call Report. However, the
assets for Almena State Bank are as of September 30, 2020. Almena State Bank failed and closed on October 23,
2020. The total
Government-guaranteed loans approved amount should not be calculated as a percentage
of total assets. The total
Government-guaranteed loan amount is a cumulative amount of loans approved
and the total assets represent the value of the assets at a point in time.
b This reflects loans approved by these banks from 2012 to 2021. The figures do not include approved loans that
were cancelled. Banks may have sold
loans on the secondary market. Accordingly, these loans may be
removed from the banks’ balance sheets and not reflected in the assets. Further, due to Government-guaranteed
loan program data limitations in the Call Report, these data points may underreport the amount of Government-
guaranteed loans approved by the financial institutions.
c We were unable to determine the volume of
l
(b) (8) oans approved by Almena State Bank because it closed.
Requests for Government-Guaranteed Loan Information During Examination
Planning
FDIC examiners did not consistently request financial institutions to identify
Government-guaranteed loans in their loan data submissions to the FDIC during the
examination planning phase. According to the FDIC RMS Manual, during the
planning phase, examiners submit an Examination Profile Script (EPS) to banks to
help them tailor the examination procedures to the institution’s operations. The EPS
includes a list of questions related to the bank’s operating environment, lending
areas, and deposit products. The EPS asks financial institutions whether they
participate in Government-guaranteed loan programs, but it does not request any
information designed to inform examiners about the size of the associated loan
portfolios; the status of the individual Government-guarantees and if any are at risk
for partial or full denial; or whether the loans are current, past due, or defaulted.
FDIC examiners acknowledged that additional information on banks’ participation in
Government-guaranteed loan activities would benefit them when planning or
conducting examinations. Questions that could better inform examiners about the
financial institution activities and performance in these programs include:
81 Almena State Bank failed in October 2020. Because failed banks have ceased operations they are directly named in this report.
82 Call Reports are consolidated reports of the bank’s condition and income that must be filed by each bank on a quarterly basis.
The FDIC receives loan data through the mandatory Call Reports, which provide the only bank-specific quarterly data consistently
available for all banks.
(b) (8)
(b) (8)
(b) (8)
(b) (8)
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a) What is the value (in dollars) of the loan portfolio attributed to the
Government-guaranteed loan programs by program type?
b) What is the amount (in dollars) of delinquent or defaulted Government-
guaranteed loans by program type?
c) What is the amount (in dollars) of Government-guaranties that Federal
agencies did not honor for each program?
FDIC examiners also submit a Safety and Soundness Request List (Request List) to
financial institutions to obtain documents and portfolio information in preparation for
an examination. The Request List asks financial institutions to provide a list of loans
originated under a Government-guaranteed program. However, the Request List
does not require the historical performance of the Government-guaranteed loan
portfolio or the status of the guaranty for each loan. FDIC examiners also
acknowledged that FDIC off-site tools83 that indicate participation in Government-
guaranteed loans are limited, and depending on the financial institution’s maturity in
using software, its portfolios may not identify Government-guaranteed loans.
One FDIC examiner explained that knowing the status of the guaranty for
Government-guaranteed loans would be helpful during an examination due to the
risk-based approach for examinations and associated time constraints. The
examiner stated that one aspect of reviewing loans from an overall risk perspective is
knowing whether the guaranty is valid, especially when there are identified risks to
loan repayment.
According to FDIC guidance, loans typically comprise a majority of a bank’s assets
and ordinarily present the greatest credit risk and potential loss exposure to financial
institutions. Absent sufficient information on the Government-guaranteed loan
portfolio, the FDIC is limited in its ability to effectively conduct examination planning
activities to identify and address emerging risks that could impact the financial
institution’s financial condition.
Assessment of Government-Guaranteed Loans Against Program
Requirements
We determined that FDIC examiners did not consistently evaluate Government-
guaranteed loans against associated program requirements. The FDIC RMS Manual
states, “in all instances, examiners should sample enough credits, including new and
various-sized credits, to assess the adequacy of asset quality, underwriting
83 According to the FDIC Case Manager Procedures, FDIC offsite rating models include the Statistical CAMELS Offsite Rating
model and Growth Monitoring System. The offsite tools are used to, among other things, identify institutions with an increased
likelihood of a downgrade at the next examination.
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practices, and credit risk management, in order to support ROE findings and
assigned ratings.”84 However, only two of the nine FDIC examiners we interviewed
(22 percent) stated that they would determine whether Government-guaranteed
loans meet program requirements. Other FDIC examiners we interviewed stated
they focused on the risk management practices over such programs or relied on
other Federal agency oversight reports and other third-party audit reports85 to
determine whether the banks complied with program requirements.
For example, the FDIC did not consistently evaluate Bank 2’s participation in
Government-guaranteed loan programs after the bank entered into a business
strategy to originate
Government-guaranteed loans.
Bank 2 embarked upon a
business strategy to originate
loans through the Government-
guaranteed loan program
beginning in 2013. However,
there was no evidence that the
FDIC reviewed Bank 2’s loans
against the Federal Government
Agency’s requirements during
the 2015 and 2016 safety and
soundness examinations.
According to an FDIC official,
Bank 2’s participation in the Government-guaranteed loan program was new, and the
FDIC did not consider the loan volume to be significant. During the 2017 and 2018
safety and soundness examinations, the FDIC identified issues with Bank 2’s
participation in the Government-guaranteed loan program.
We also found that the FDIC did not consistently review Government-guaranteed
loans to ensure banks’ compliance with program requirements for financial
institutions with large Government-guaranteed loan portfolios
(b) (8)
For example, to highlight the inconsistency we
observed, during the safety and soundness examination of Bank 3 in 2019, FDIC
examiners conducted a review of the bank’s
lending practices. The examiners
84 FDIC RMS Manual, Section 3.2, Loans (November 2020).
In
, the Federal Government
Agency
under the Government-
guaranteed loan program due to Bank 2’s
historically poor performance and material
noncompliance with the program
requirements. The Federal Government
Agency, not the FDIC, identified that Bank 2
charged impermissible fees to loan applicants
during a
,
which was subsequent to the FDIC’s
examinations of Bank 2. We conservatively
estimated the impermissible fees to be $7
million.
(b) (8)
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relied on the bank’s internal auditors’ review of
loan files and
onsite review of Bank 3 to determine whether the bank complied with
requirements. In contrast, examiners conducted targeted reviews of Bank
4’s
program in 2018 and 2022, which included evaluating bank-originated loans
against
program requirements.87 Bank 3’s
Government-
guaranteed loan portfolio represented approximately 38 percent of its assets at the
time of the examination. Bank 4’s
loan portfolio represented approximately
3 percent of its assets in 2018. As a result, examiners evaluated the Government-
guaranteed loans against program requirements for Bank 4 while they did not do so
for Bank 3 where
exposure was more significant.
Consistent examination approaches for banks with large Government-guaranteed
loan portfolios would promote the early identification of undue risks and weak risk
management practices. Inconsistent examination approaches and assessments of
Government-guaranteed loans for asset quality may allow significant noncompliance
with program requirements or potential consumer harm to go unnoticed.
Classification of Government-Guaranteed Loans
FDIC examiners did not classify the guaranteed portion of Government-guaranteed
loans despite evidence that a bank engaged in hazardous lending practices and
concluding that the bank had deficient loan administration practices. Examiners also
did not classify the guaranteed portion of loans when directly observing that the
financial institution did not materially comply with program requirements. For
example, in the case of Bank 5, FDIC examiners did not classify the guaranteed
portion88 of a Government-guaranteed loan retained by the bank even though they
concluded that this loan may become ineligible for the Government-guaranteed
program. Specifically, FDIC examiners did not classify the guaranteed portion of the
loan ($741,564), but classified the unguaranteed portion89 as substandard.
Almena State Bank failed in 2020, causing an estimated loss to the DIF of
approximately $18 million.90 Our previous review of the failure found that the bank
had an aggressive growth strategy that focused on originating large Government-
guaranteed loans, and the bank board and management did not ensure appropriate
loan underwriting and credit administration. We found that the FDIC examiners
87 Bank 4 is considered a large bank and under the continuous examination process. Due to the size and complexity of large
financial institutions, the FDIC generally assigns dedicated staff and employs a continuous examination process. This examination
process includes regularly scheduled onsite targeted reviews.
88
89 Examiners classified $136,406 of the loan (outstanding balance was $988,752). Examiners reduced the unguaranteed amount of
$247,188 by a fair value adjustment of $110,782 to arrive at the substandard classification amount. The substandard amount of
$136,406 represents the bank’s net exposure after considering the unguaranteed portion of the expected value of collateral at
liquidation.
90 OIG Report, Failed Bank Review, Almena State Bank, Almena, Kansas (FDIC OIG FBR-21-003) (March 2021).
(b) (8)
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alerted bank management to the increased risk associated with originating
Government-guaranteed loans and the need to meet all requirements to ensure the
Government guaranty. We also reported that the FDIC’s supervision identified and
effectively addressed the issues that led to the bank’s failure. In conducting a more
in-depth review of Almena’s Government-guaranteed loan portfolio during this
evaluation, we found that the FDIC examiners did not classify guaranteed portions of
certain loans retained by the bank, even when concluding that the bank had
hazardous loan administration practices for both its commercial and guaranteed loan
program business lines. Classifying the guaranteed portions of these loans as
Substandard or lower may have resulted in the bank setting aside additional
reserves, which could have mitigated losses to the DIF.
Despite FDIC guidance providing the authority for examiners to adversely classify
the guaranteed portion of loans, FDIC examiners stated that they would “never”
classify the guaranteed portion of a Government-guaranteed loan, absent direct
evidence that the guaranty was in jeopardy from the administering Federal agency.
Classifying loans adversely results in an increase in bank reserves to offset the risk
of loss.91 Specifically, banks are required to maintain an ALLL that is appropriate to
absorb estimated credit losses associated with the loan and lease portfolio.
Assessment of Off-Balance Sheet Risk for Government-Guaranteed Loans
FDIC examiners did not always recommend that banks appropriately disclose or
recognize the off-balance sheet risk for government guaranteed loans such as
establishing a contingent liability92 for possible losses93 to account for Government-
guaranteed loans sold on the secondary market.
On loans totaling $2.8 million originated by Almena State Bank, FDIC examiners
appropriately classified the unguaranteed portion of $972,000 as Substandard and
removed the guaranteed portions of Government loans sold totaling $1,845,000 from
classification considerations.94 However, the FDIC did not recommend that the bank
disclose a possible loss or establish a contingent liability to address the off-balance
sheet risk for the sold portion of the classified loan even though it identified
91 The ALLL must be maintained to absorb the appropriate estimated losses related to loans classified as Substandard, Doubtful,
and Loss.
92 According to the FDIC RMS Manual, contingent liabilities reflect the potential claims on bank assets. It further states that a bank’s
exposure to Category II contingent liabilities normally depends solely on the probability of the contingencies becoming direct
liabilities. It requires examiners to deduct the contingent liability amount directly from regulatory capital. This liability account
reduces regulatory capital.
93 According to the FDIC RMS Manual, a loss contingency is an existing condition, situation, or set of circumstances that involves
uncertainty as to possible loss that will be resolved when one or more future events occur or fail to occur. Potential loss refers to
contingent liabilities in which there is substantial and material risk of loss to the bank. An estimated loss from a loss contingency (for
example, pending or threatened litigation) should be recognized if it is probable that an asset has been impaired or a liability
incurred as of the examination date and the amount of the loss can be reasonably estimated.
94 The guaranteed portion of the loan was sold by Almena State Bank on the secondary market prior to the examination. The
examiners observed that the bank lacked adequate collateral documentation.
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deficiencies in Almena State Bank’s administration of the loan, observed that the
bank engaged in hazardous lending practices, and concluded that the bank had
deficient loan administration practices. Approximately 6 months after the
examination, the Federal Government Agency issued a letter to Almena State Bank,
requesting repayment of the total amount that the Federal Government Agency had
paid to the secondary market ($1,456,187) due to the bank’s failure to comply with
Agency program requirements.
The FDIC, during the examination of
Bank 2 in
, identified deficiencies
with management’s underwriting and
credit administration for a Government-
guaranteed loan program and in
, the Federal
Government Agency that administers the
program took enforcement action
against Bank 2. The FDIC established
an MRBA to address Bank 2’s lack of
appropriate risk identification and
oversight of the Government-guaranteed
loan program. According to the report of
examination (ROE),95
,
examiners also identified that the
Federal Government Agency that administers the program denied guaranties on
loans totaling
. They deducted
from Tier 1 Capital to recognize
an off-balance sheet exposure, and Bank 2 established a contingent liability to
address the denial risk for these loans. However, the FDIC did not recommend that
Bank 2 disclose a possible loss or establish a contingent liability to address the risk
of loss related to the guaranteed portions of the other loans sold on the secondary
market associated with the classified loans. The ROE acknowledged there was a
high potential for off-balance sheet exposure, which represented a significant threat
to the viability of Bank 2. Given the substantial risk that the Federal Government
Agency that administers the program would not honor its guaranty, we believe the
FDIC should have made appropriate adjustments or recommended that the Bank
make disclosures to address the off-balance sheet risks for these loans. Instead, the
FDIC examiners left corrective action to the discretion of the bank’s Board -- which
was already found by the FDIC to be unsatisfactorily managing the bank - and the
FDIC recommended that the Board identify and establish reserves for any future
Government-guaranteed loan denials by communicating directly with the Federal
Government Agency that administers the program.
95 RMS presents examination results in a report of examination at the conclusion of the full-scope examination.
Bank 2 management established a
reserve for off-balance
sheet risk associated to potential
Government-guaranteed loan denials.
The FDIC examiners determined that
nearly half of the “Substandard” loans
and 85% of loans classified as “Loss”
during the examination were
Government-guaranteed loans. FDIC
examiners did not recommend that
Bank 2 disclose a possible loss or
establish a contingent liability to
address the risk of loss related to the
guaranteed portions of the other sold
loans.
(b) (8)
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According to the FDIC RMS Manual, examiners should review the risks and controls
associated with off-balance sheet activities during examinations. FDIC examiners
should assess contingent liabilities to determine the likelihood that such
contingencies may result in losses to the financial institution and assess the pending
impact on its financial condition. As described above, FDIC guidance states that an
estimated loss from a contingent liability should be recognized if it is probable that an
asset has been impaired or a liability incurred as of the examination date and the
amount of loss can be reasonably estimated. FDIC officials opined that the
estimated loss, in this context, would not occur until the bank receives notification
that the Government will not honor the guaranty. However, we believe that waiting
for a denial letter may be too late in some circumstances. These circumstances
could include when the FDIC has concluded that a poorly performing bank has
deficient underwriting and credit administration practices and there is clear evidence
that the bank had not complied with the Government-guaranteed loan program
requirements for loans that are in default.
As previously discussed, FDIC guidance does not articulate how examiners should
coordinate with internal experts or other Federal agencies that administer
Government-guaranteed loans to assess off-balance sheet risks and determine if the
conditions meet the thresholds of being “probable” and “reasonably estimable.”
Absent such guidance, we believe that the FDIC could have recommended that
Almena State Bank and Bank 2 disclose the possible losses or consider the sold
portions of the classified loans described above as a contingent liability and deduct
any associated amounts from Tier 1 Capital. Establishing reserves to address
contingent liabilities reduces the potential loss to the DIF in the event of a bank
failure.
Assessment of Government-Guaranteed Loans for Concentration Risk
FDIC examiners did not consistently identify Government-guaranteed loans as
concentrations for banks. For example, they did not identify Government-guaranteed
loans retained on the balance sheet as a concentration for one financial institution,
but did for two others.96 Concentrations in a single area have the potential to harm
the bank’s financial condition. Therefore, it is important to identify concentrations
and assess the risk they have on a bank’s financial condition.
96 According to FDIC guidance, asset concentrations are generally (1) 25% or more of Tier 1 Capital plus the ALLL or the ACL
related to loans and leases (for loans) or Tier 1 Capital (for securities and all other) by individual borrower, small interrelated group
of individuals, single repayment source or individual project; or (2) 100% or more of Tier 1 Capital plus the ALLL or the ACL related
to loans and leases (for loans) or Tier 1 Capital (for securities and all other) by industry, product line, type of collateral, or short term
obligations of one financial institution or affiliated group. These assets may in aggregate present a substantial risk to the safety and
soundness of the institution.
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Bank 2: FDIC examiners determined that the Government-guaranteed loan program
for Bank 2 was a concentration, based on the portion of the loans retained by the
bank (on-balance sheet), with minor exception.97 The FDIC identified that the
unguaranteed portion of Bank 2’s Government-guaranteed loans represented 242
percent of Total Capital and 69 percent of Total Loans. The FDIC also determined
that the total exposure of on-balance sheet Government-guaranteed loans
(guaranteed and unguaranteed) was 309 percent of Total Capital.
Bank 5: FDIC examiners determined the bank had a concentration based on its
Government-guaranteed loan program. The entire Government-guaranteed loan
program was a concentration based on combining the guaranteed and unguaranteed
portions of loans retained by the bank. The FDIC examiners also determined the
Government–guaranteed loan program was a concentration based solely on the
unguaranteed portions retained by the bank. The FDIC examiners identified that
loans
retained by the bank represented 720 percent of Tier 1
Capital.98 They noted that the exposure was reduced to 300 percent when
considering only the retained unguaranteed portions.
Bank 3: FDIC examiners did not identify the Government-guaranteed loan program
for Bank 3 as a concentration.
portfolio retained by the bank had an
estimated concentration of 100 percent of Total Capital when considering both the
guaranteed and unguaranteed portions of the loans.99
In addition, although each of the above banks sold guaranteed portions of loans on
the secondary market, FDIC examiners did not calculate the off-balance sheet
exposures for concentration risk purposes.100 For example,
.
One FDIC examiner stated that the FDIC does not consider Government-guaranteed
loans a concentration area. Rather, concentration areas include commercial real
estate and commercial and industrial loans, which factor in Government-guaranteed
loans, according to the examiner. Another FDIC examiner stated that obligations of
Government-guaranteed loans are excluded for concentration purposes because
97 The minor exception was a small volume of Government-guaranteed loans held for sale totaling $7.4 million.
98 Per the FDIC RMS Manual, Tier 1 Capital is the sum of Common Equity Tier 1 Capital and additional Tier 1 Capital. In the case of
Bank 5, the concentration calculation was based on Tier 1 Capital due to the bank’s use of the fair value accounting method for the
Government-guaranteed loans.
99 Based on the FDIC concentration guidance descr bed above, Government-guaranteed loans would be considered in the product
line category. Product lines are considered a concentration when they are 100% or more of Tier 1 Capital plus the ALLL or the ACL
related to loans and leases (for loans) or Tier 1 Capital (for securities and all other).
100 The OCC Concentrations of Credit Handbook explains that effectively managing concentrations, including non-credit
concentrations, is important. It further states that non-credit concentrations include operational risks associated with concentrations
of certain lines of business, such as mortgage servicing.
(b) (8)
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they are considered credit risk free and as a general rule they exclude these loans
from concentration calculations.
According to the FDIC RMS Manual, asset concentrations are pools of assets that
share common risk characteristics or have heightened sensitivity to similar
economic, financial, or other risk factors. The FDIC RMS Manual states that “[a]n
institution’s asset quality, earnings, or capital can be disproportionally affected by a
single or localized economic event or market conditions if the institution holds
significant asset concentrations.” The FDIC RMS Manual does not have specific
guidance on how examiners should consider sold portions of Government-
guaranteed loans (off-balance sheet exposures) for concentration purposes.
As previously noted, market conditions can impact the financial condition of FDIC-
supervised financial institutions that depend on selling Government-guaranteed
loans to secondary market investors for earnings and liquidity. For example, an
economic downturn could affect market participation and reduce the premium banks
receive on selling the assets. Further, if a bank does not comply with the
Government-guaranteed loan program requirements, there is a risk that the Federal
agency will remove the bank from participating in the program, potentially impacting
the bank’s business model, earnings, and liquidity. FDIC examiners are expected to
analyze the potential risks and risk management practices for concentrations that
exceed FDIC prescribed thresholds or present elevated risk. A consistent approach
for determining concentration risk for Government-guaranteed loans is important in
order to effectively analyze the financial institution risk and risk management
practices. This approach could include determining whether Government-
guaranteed loans present an off-balance sheet exposure concentration or qualify as
a concentration solely on the unguaranteed portions or when combining the retained
guaranteed and unguaranteed portions of loans.
As noted above, the FDIC provided limited guidance for examiners and Case
Managers to explain the risks related to Government-guaranteed loans and the FDIC
supervisory expectations for Government-guaranteed loan monitoring, pre-
examination, and examination activities. In addition, the FDIC guidance did not
include adequate detail for examiners and Case Managers to consistently assess
bank activities in Government-guaranteed loans for loan compliance, loan
classification, off-balance sheet risk, concentration risk, and monitoring.
If the FDIC does not proactively identify deficiencies -- for example, weak risk
management practices, hazardous lending, inadequate ALLL, and consumer harm --
it may be unable to address the deficiencies prior to their causing harm or
deterioration to the bank’s financial condition and increased risk to the DIF. In turn,
this inability may impact or delay the FDIC’s capacity to issue supervisory
FDIC Examinations of Government-Guaranteed Loans
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recommendations and enforcement actions to financial institutions to, among other
things, address identified concerns, material issues, weak operations, and
deteriorating financial conditions.
Further, the FDIC uses CAMELS ratings, in part, to calculate a financial institution’s
quarterly deposit insurance assessment.101 If the FDIC does not adequately
evaluate a financial institution’s Government-guaranteed loan activities and correctly
rate the financial institution, it will be unable to calculate the appropriate insurance
assessment, commensurate with the level of risk.
The first finding in this report recommends developing and implementing guidance to
ensure examination staff consistently evaluates Government-guaranteed loans in
their review of loan classification, assessment of off-balance sheet risk,
concentration risk, and ongoing monitoring. Therefore, we are not making a similar
recommendation below.
Recommendations:
We recommend that the FDIC Director of RMS:
3. Update and implement the Examination Profile Script to include additional
questions on financial institution participation in Government-guaranteed loan
programs in order to identify and address emerging risk.
4. Develop and implement additional items to the Safety and Soundness Request
List to identify Government-guaranteed loans, the performance of those loans,
and status of the guaranty.
The FDIC Did Not Adequately Supervise Risks of the Paycheck
Protection Program for Certain Banks
The PPP presented unique challenges and risks to financial institutions due to its
expedited implementation, multiple changes in guidance, and minimal underwriting
requirements. On March 27, 2020, Congress enacted the CARES Act, which
established the PPP, and the SBA launched the PPP on April 3, 2020. As illustrated
in Figure 1, the PPP was reauthorized several times through March 2021 to continue
the assistance to small businesses impacted by the pandemic. Each successive
reauthorization provided for a new round of funding for the PPP.
101 The FDIC calculates the deposit insurance assessment for an individual institution using formulas that, in general, assign values
to each CAMELS component and composite rating. The rate calculators are available on the FDIC website
https://www.fdic.gov/resources/deposit-insurance/deposit-insurance-fund/dif-calculator.html. For small institutions in existence less
than 5 years, the CAMELS rating may not factor into the calculation of the deposit insurance assessment rate.
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Figure 1. PPP Timeline
Source: OIG analysis of the various laws that authorized the PPP and information available on SBA’s website.
As previously noted, more than 11 million PPP loans totaling nearly $800 billion were
approved by more than 5,400 lenders. More than 2,600 FDIC-supervised financial
institutions originated over 3 million PPP loans totaling approximately $270 billion.102
Table 3 presents the PPP volume and other information for eight financial institutions
we evaluated.
102 This amount excludes PPP loans that were cancelled or voluntary terminated subsequent to original approval. We were unable
to determine the full amount of PPP loans associated with FDIC-supervised institutions due to a lack of unique identifiers in the PPP
loan data. Further, this amount reflects any changes made after origination.
March 27, 2020
CARES Act,
authorized $349
billion for PPP
loans
April 24, 2020
Paycheck
Protection
Program and
Health Care
Enhancement
Act,
increased PPP
loan
authorization to
$659 billion
August 8, 2020
PPP Round 1 closed.
Round 1 resulted in
5.2 million
approved PPP loans
totaling $525 billion
December 27, 2020
Economic Aid to
Hard-Hit Small
Businesses,
Nonprofits, and
Venues Act through
the Consolidated
Approprations Act,
inceased PPP loan
authorization to
$806.5 billion
March 11, 2021
American
Rescue Plan Act
of 2021,
increased PPP
loan
authorization to
$813.7 billion
March 30, 2021
PPP Extension
Act, which
allowed the SBA
to continue
accepting new
PPP applications
until May 31,
2021
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We found that, in some instances, FDIC examiners did not adequately (1) review
PPP loan portfolios commensurate with the degree of an institution’s participation in
the program and identified concerns;104 (2) assess bank processes to confirm that
PPP lending decisions were made in accordance with SBA guidelines and BSA
requirements; and (3) determine whether an institution had an adequate risk
management framework sufficient to confirm third-party compliance with SBA
requirements for PPP, BSA requirements, and other applicable laws and regulations.
Such practices were not consistent with the FDIC’s requirements. FDIC RD Memo
2020-022-RMS, Examination Considerations Related to the Paycheck Protection
Program, states that:
The scope of review of the PPP loan portfolio should be
commensurate with the degree of an institution’s participation in the
program and with any concerns identified, such as concerns with
documentation standards that could adversely impact the
enforceability of the SBA guarantee or suspicion of fraud.
103 RADD is the official recordkeeping system for the FDIC’s supervisory business records.
104 These concerns included documentation weaknesses, existing financial institution BSA/AML weaknesses, and indications of
fraud.
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Further, the BSA, as amended, requires Federally-supervised financial institutions to
verify the identity of any persons seeking to open an account to the extent
reasonable and practicable; maintain records of the information used to verify a
person’s identity, including name, address, and other identifying information; and
consult lists of known or suspected terrorists or terrorist organizations provided to the
financial institution by any Government agency to determine whether a person
seeking to open an account appears on any such list.105
FDIC Examination of Bank 1
During the safety and soundness examination conducted by the FDIC in 2020, the
examiners selected only 12 PPP loans for review against program requirements.
The examiner noted inconsistencies in file
documentation and that 3 of the 12 sampled loans were missing information related
to BSA compliance, such as business identification and background information.
However, there was no documentation or evidence supporting that the FDIC
105 31 U.S.C. §§ 5311-5336; 31 C.F.R. Part 1020 (2021).
106
ccording to the
McCombs School of Business (University of Texas at Austin), “[f]intech loans [issued through the PPP] are highly suspicious at a
rate of over six times that for traditional lenders.” (Did FinTech Lenders Facilitate PPP Fraud?, Updated August 2022).
107 The FDIC communicates significant recommended improvements to financial institutions in the Report of Examination as
MRBAs. When bank management promptly takes action to address concerns detailed in MRBAs, potential problems can be fixed
early, before they become more difficult to address.
(b) (8)
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examiner evaluated the documentation and BSA weaknesses against the bank’s
.
(b) (8)
108
Given the known weaknesses with the bank’s
, the documentation weaknesses for its PPP loans, and
association to fraudulent PPP loan originations, additional scrutiny and testing of
Bank 1’s PPP activities was warranted.
(b) (8)
Additional scrutiny
and testing of PPP activities by examiners could have identified weaknesses in Bank
1’s administration of the PPP loans, resulting in recommendations to address the
weaknesses during the
examination and accounting for the bank’s future PPP
activities. We note that the FDIC increased its supervision of Bank 1 in 2021. The
FDIC assigned a designated examiner-in-charge to Bank 1 in
, because
they were moving Bank 1 to a continuous examination approach.109
FDIC Examination of Bank 4
During the FDIC’s safety and soundness examination of Bank 4 in
, the FDIC
examiners identified material
that resulted in an MRBA.110
FDIC examiners also explained that fraud was a concern and a consideration
for them because PPP loans could impact the balance sheet and earnings.
Examiners selected nine PPP loans as part of their review of the bank’s compliance
with BSA/AML customer identification program requirements.111 However, the
degree of the bank’s participation in the PPP, known BSA/AML weaknesses at Bank
4, and fraud concerns associated with the PPP, warranted broader transaction
testing of the bank’s PPP loans by examiners to determine compliance with PPP
requirements.
Instead, FDIC examiners noted that they monitored Bank 4’s PPP loan volumes,
reviewed the bank’s controls over PPP, and were in regular contact with bank
management regarding PPP. The degree of the bank’s participation in the PPP,
108 According to the FDIC RD Memo 2020-022-RMS, “[i]f the institution originated PPP loans through, or jointly with, a third-party
lender, or is using platforms developed by a third party, examiners should review whether the institution has a risk management
framework to confirm that third parties are complying with SBA requirements, BSA requirements, and other applicable laws and
regulations.”
109 According to the FDIC RMS Manual, "[a] dedicated or designated [examiner-in-charge] oversees the continuous examination
process and may be supported by additional dedicated examination staff and other staff depending on the size, complexity, and risk
profile of the institution being examined."
110
111 For PPP loans to new customers, banks were expected to apply their existing risk-based approach to BSA compliance. Banks
were also required to collect identifying information, such as name, title, address, and tax identification number, from all natural
persons with a 20-percent or greater ownership stake in the applicant business.
(b) (8)
(b) (8)
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known BSA/AML weaknesses, and fraud concerns with the PPP, warranted
transaction testing of the bank’s PPP loans by examiners.
FDIC Examinations of the Other Six Banks
For the other six financial institutions we evaluated, we found that the FDIC
conducted PPP loan transaction testing during safety and soundness examinations
to determine whether the financial institutions complied with PPP requirements. For
example, during the 2020 commercial loan targeted review for Bank 6, the
examination team identified that Bank 6 originated
The examination team selected and reviewed 11 PPP loans with a total
balance of
. This sample size was one less loan than the Bank 1
examination sample size when Bank 1 originated approximately
. In addition, during the 2020 safety and
soundness examination for Bank 7, the examiners identified that Bank 7 originated
about
PPP loans totaling approximately
. The examiners still selected
and reviewed six PPP loans totaling approximately
. As presented in
Table 3,
Based on our observations, the FDIC
appeared to apply inconsistent examination approaches for the PPP loan activities of
financial institutions and did not give proper consideration to existing BSA/AML
weaknesses and PPP portfolio size when determining the extent of transaction level
testing.
Consideration of Risk for the Paycheck Protection Program
The FDIC does not view bank participation in the SBA PPP as a significant risk to the
FDIC. FDIC guidance supported and FDIC officials stated, citing law and PPP
interim final rules, that unless the financial institution committed fraud in
implementing the PPP or did not comply with the obligations of the PPP, there is no
credit risk given that the PPP loans were 100-percent guaranteed by the SBA. In
addition, based on the law and several interim final rules issued for the PPP, FDIC
officials stated that the established PPP requirements were relaxed and simplified to
expedite the disbursement of funds, that the requirements rendering the guaranty
void were minimal, and that the program had a “low bar” for participation and loan
forgiveness. According to an FDIC senior official, even though there is the potential
for operational risk and compliance risk in banks, the risks are low with respect to the
banks’ PPP portfolios.
However, PPP loans introduce credit risk to financial institutions that did not comply
with PPP requirements as the SBA can review the loans to determine program
compliance and may rescind all or a portion of its guaranty if it does not find
(b) (8)
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compliance. In addition, fraud risk was elevated for the program, and an FDIC-
supervised bank’s association to fraudulent transactions can lead to both
reputational harm and legal risk for the financial institution.
The FDIC’s Guidance Related to the Paycheck Protection Program
We found that the guidance contained in the FDIC’s RD Memo 2020-022-RMS on
the supervision of bank participation in PPP was vague:
•
The FDIC RD Memo failed to specify the level of PPP loan volume that
triggers a heightened review of a bank’s controls over the PPP loan program
and the effectiveness of such controls or how examiners should assess the
PPP activities of banks that had existing BSA/AML weaknesses.
•
The FDIC RD Memo guidance did not address how indicators would increase
the likelihood of fraud and should be considered by examiners. Such
indicators include existing BSA/AML weaknesses, deficient underwriting
practices, inadequate oversight of third parties (including FinTech lenders),
and any evidence of fraud associated with bank loan approvals.
•
The FDIC RD Memo guidance did not establish any expectations for
examination staff to communicate observed concerns with the SBA.
According to OCC guidance, operational risk management weaknesses can result in
heightened exposure to fraudulent activities, which can increase a bank's exposure
to reputation and strategic risks. Failure to maintain an appropriate risk management
system could expose banks to the risk of significant fraud, defalcation, and other
operational losses.112 The guidance states that the actual cost of fraud is greater
than the direct financial loss and includes the time and expense to investigate, loss
of productivity, potential legal and compliance costs associated with remediation, and
impact on a bank’s reputation.
Fraud risk was elevated for the PPP due to its expedited delivery, minimal
underwriting requirements for applicants, and evolving guidance.113 Thorough and
consistent assessment of bank PPP activities during certain FDIC examinations may
have resulted in the timely identification of inadequate risk management practices
and corrective actions by banks.
112 OCC Bulletin 2019-37, Operational Risk: Fraud Risk Management Principles (July 2019).
113 The OCC issued four semi-annual risk perspective reports between June 2020 and December 2021 that highlighted the
increased compliance risks, especially BSA/AML compliance, at banks associated with PPP lending and the introduction of new
fraud techniques.
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According to the FDIC RMS Manual, criminal conduct and fraudulent acts undermine
public confidence in the financial system, as well as contribute to financial institution
failures. The occurrence of fraud at both FDIC-insured and FDIC-supervised
institutions also increases reputational and legal risks to the financial institutions and
the FDIC. In turn, these factors ultimately increase risk to the DIF if the FDIC is
required to absorb losses from a bank failure. Without adequate reviews of PPP
loan portfolios across FDIC-supervised institutions, there is a risk that exposes these
financial institutions to unanticipated financial, operational, and reputational costs.
Recommendations:
We recommend that the Director of RMS:
5. Issue and implement guidance to require that examination staff conduct a fraud
risk assessment on future Government-guaranteed loan programs involving
FDIC-insured and FDIC-supervised financial institutions to inform policy
decisions.
6. Ensure guidance on future Government-guaranteed loan programs includes all
risks associated with such programs and has instructions to allow for consistency
in supervisory activities.
7. Issue and implement guidance for examiners clarifying the FDIC supervisory
expectations for reviewing bank PPP activities, including the level of PPP loan
volume triggering a heightened review, how examiners should assess the PPP
activities of banks that have existing BSA/AML weaknesses, and protocols for
examination staff to communicate observed weaknesses.
The FDIC’s Guidance on Examination of Financial Institutions Differed
from Other Federal Bank Regulators
The Federal Financial Institutions Examination Council (FFIEC) prescribes uniform
principles, standards, and report forms for the Federal examination of financial
institutions and makes recommendations to promote uniformity in the supervision of
financial institutions. The FFIEC consists of the FDIC, FRB, OCC, National Credit
Union Administration, and the Consumer Financial Protection Bureau.114 We
determined that the FDIC’s guidance for the assessment of Government-guaranteed
loan programs differed from that of two other Federal regulators, the FRB and the
OCC.
114 Financial Institutions Regulatory and Interest Rate Control Act of 1978 (FIRA), 12 U.S.C. § 3303 (2010).
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Concentrations
The FRB and OCC consider extensions of credit in a certain product line or type of
collateral (such as a Government-guaranty) to be a concentration when, in
aggregate, they exceed 25 percent of the bank’s capital.
•
The FRB identifies a concentration of credit when an institution advances
extensions of credit and contingent obligations to a person, entity, or affiliated
group that, when aggregated, exceed 25 percent of the bank’s capital.115
FRB guidance requires examiners to include a concentrations page in the
report of examination if there are materially deficient practices in managing
concentrations. FRB guidance states that “[c]oncentrations by industry,
transfer risk, product line, type of collateral, and other characteristics should
be detailed when appropriate. The listing should include amounts due from
depository institutions, federal funds sold, and other assets in which payment
depends on one financial institution or affiliated group and the total
represents 25 percent or more of the bank's capital structure.”116 FRB
guidance also acknowledges that off-balance sheet risks should be
considered when calculating concentrations.
•
The OCC defines a concentration “as the sum of direct, indirect, or contingent
obligations exceeding 25 percent of the bank’s tier 1 capital plus the
allowance for loan and lease losses (ALLL) or allowance for credit losses
(ACL), as applicable.”117 According to the OCC, concentrations are “common
pools of exposures, whose collective performance has the potential to affect
a bank negatively even if each individual transaction within a pool is soundly
underwritten. When exposures in a pool have a common characteristic or
sensitivity to the same economic, financial, or business development, that
characteristic or sensitivity, if triggered, may cause the sum of the
transactions to perform or react similarly.” OCC guidance requires examiners
to include a concentration section in the report of examination when
concentration levels pose a challenge to management or present unusual or
significant risk to the bank.
In contrast, FDIC examiners are required to list industry or product line
concentrations, which could include Government-guaranteed loans, when the loans,
in aggregate, equal 100 percent or more of Tier 1 Capital plus the entire ALLL, or the
115 FRB, Commercial Bank Examination Manual, Section 2050.1, Concentrations of Credit (November 2020).
116 FRB, Commercial Bank Examination Manual, Section 1000.1, Examination Strategy and Risk-Focused Examinations (November
2020).
117 OCC, Comptroller’s Handbook: Safety and Soundness, Concentrations of Credit (Version 2.0, October 2020).
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portion of the ACL118 attributable to loans and leases, as applicable.119 The FDIC’s
defined concentration threshold of 100 percent is 4 times higher than that
established by the FRB and OCC. As a result, the FDIC approach, as compared to
that of the FRB and OCC, may result in fewer concentration determinations for
financial institutions that participate in Government-guaranteed loan programs.120
Loan Classification
OCC guidance issued during the course of this evaluation acknowledges that certain
weaknesses identified during bank examinations could warrant an adverse
classification for the conditionally guaranteed loan amount when a bank has
documentation weaknesses that have been exacerbated by inadequate risk
management.121 It states:
In this situation, even though there may not be a payment default or
SBA guaranty denial, the potential or actual documentation and risk
management weakness could cause the SBA to not honor the
guaranty. As a result, the potential or actual weakness could warrant
a risk rating below pass. Depending on the specific facts and
circumstances, the conditionally guaranteed portion could be
classified substandard or worse, consistent with the risk rating of the
unguaranteed portion. For example, a substandard or worse
classification could be warranted if the bank is experiencing defaults
in conjunction with non-compliance with SBA requirements or
inadequate risk management, or if the SBA has denied liability or
demanded a reduction in the guaranty payment.
OCC guidance122 also states:
Credits with a U.S. government agency guarantee are usually given a
pass rating. Most government guarantees are conditioned on bank
management's performance (proper diligence and reporting), and
mismanagement can void the guarantee and eliminate the rating
118 Per the FDIC RMS Manual, “the allowance for credit losses or ACL for loans and leases is a valuation account that is deducted
from, or added to, the amortized cost basis of financial assets to present the net amount expected to be collected over the
contractual term of the assets, considering expected prepayments.”
119 The FDIC RMS Manual requires examiners to include a written analysis on the concentrations page when an asset product line
concentration is 300 percent or more of Tier 1 Capital plus the ALLL or the ACL related to loans and leases.
120 FDIC examiners have the flexibility to identify concentrations at lower amounts when risk elements are present. The FDIC RMS
Manual states, “[s]ound examiner judgment must be used to determine the most appropriate ROE treatment of concentrations in
relation to the overall risk to the institution. Concentrations not meeting thresholds set forth in these instructions may also be
included and analyzed on this page at the discretion of the Examiner-in-Charge (EIC) if elevated risk is evident or inclusion supports
material examination findings.”
121 OCC Bulletin 2021-34, Small Business Administration Lending: Risk Management Principles (August 2021).
122 OCC, Comptroller’s Handbook, Rating Credit Risk (June 2017).
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enhancement. Although the incidence of mismanagement is very low,
a rating enhancement may not be appropriate for banks with
significant credit administration problems affecting the guaranteed
credits.
The FDIC does not have recent guidance on the treatment of Government-
guaranteed loans for loan classification purposes.123 However, as described above,
FDIC examiners stated they would “never” classify the guaranteed portion of a
Government-guaranteed loan absent direct evidence that the guaranty was in
jeopardy from the administering Federal agency. This position is not consistent with
the FDIC RMS Manual and OCC guidance.124
Recommendations:
We recommend that the FDIC Director of RMS:
8. Revise and implement FDIC guidance and practices for assessing
concentrations and loan classification to ensure uniform application with the other
Federal bank regulators of supervisory approaches to banks.
9. Coordinate with the other Federal bank regulators to ensure uniform application
of supervisory approaches to banks regarding concentrations and loan
classification.
The FDIC Did Not Provide Adequate Training to Examination Staff on
Government-Guaranteed Loan Programs
The FDIC has established a dedicated program to train examination staff. However,
the FDIC has not provided regular and consistent training to RMS examination staff
on the requirements and potential risks of bank participation in Government-
guaranteed loan programs. The GAO Standards for Internal Control in the Federal
Government require that “[m]anagement recruits, develops, and retains competent
personnel to achieve the entity’s objectives … develop competencies appropriate for
key roles … and tailor training based on the needs of the role.” Further, the GAO’s
123 The FDIC issued a Supervisory Insight on SBA lending in 2011 that included information on loan classification. However, the
Supervisory Insight was more than 11 years old and was not cited by FDIC management, examiners, or case managers during our
assignment. The FDIC provided the OIG with the Supervisory Insight information after we briefed the FDIC on our preliminary
evaluation results.
124 According to the FDIC RMS Manual, International Section, failure by the lender to comply with a Government-guaranteed
program’s conditions may allow the agency to rescind the guaranty. Documentation should be maintained for each participating
transaction to show compliance with the outstanding guaranty. These documents should be scrutinized by the examiner when
reviewing these credits to determine that the loan is compliant with the guaranty. Failure to comply with the terms of the guaranty
may warrant adverse classification or criticism by the examiner.
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Fraud Risk Management Framework recommends increasing manager and
employee awareness of potential fraud schemes through training and education.
Seven of the nine RMS examiners we interviewed noted that they had not received
regular or consistent training on Government-guaranteed loan programs.125 For
example, examiners could not recall training in the last 5 years or stated that the
training was only provided in a specific region. Further, FDIC examiners have been
criticized for their lack of knowledge of Government-guaranteed loan programs.
During the FDIC Advisory Committee on Community Banking meeting (July 2019), a
Chief Executive Officer of a bank criticized FDIC examiners about their lack of
knowledge about an SBA Government-guaranteed loan program, noting that the
bank officials have to provide FDIC examiners a lot of education on the SBA
products and recommended that the FDIC provide training to its staff. Bank staff
educating FDIC examiners about certain products places an unnecessary burden on
the resources of the bank and results in inefficiencies in the examination process. In
addition, FDIC examiners may be influenced or misled about Government-
guaranteed loan requirements by bank officials. Examiners also may not identify or
report suspicious activity without the knowledge of common or recent fraud schemes
within Government-guaranteed loan programs.
In addition, the FDIC did not compile and distribute a list of examination staff
experienced in these programs to the Case Managers and examiners. Therefore,
FDIC examiners were not aware of the extent of FDIC examination staff with
experience in examining banks that significantly participate in Government-
guaranteed loan programs so they could consult with them.
FDIC officials stated that the examiners’ approach to evaluating credit risk is the
same regardless of whether a bank participates in Government-guaranteed loan
programs. However, without specific training on Government-guaranteed loan
programs, including their requirements and risks, FDIC examiners may not identify
problems in a timely manner that could materially impact the conditional guarantees
of Government-guaranteed loans. Such problems could include financial institutions
failing to comply with program requirements for years, which may lead to the Federal
agency not honoring the guaranty. If the guaranty is not honored, the bank may
suffer financial losses such as reductions to capital and liquidity levels.
The FDIC Risk Inventory states that, “if FDIC does not have a training program that
prepares its examiners to identify, assess, and communicate supervisory findings
125 In 2020 the SBA Office of Credit Risk Management provided training to FDIC examination staff in the New York Region on FDIC
supervision over banks and SBA loan guaranty program requirements. However, this training was not provided more broadly.
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and recommendations, then the FDIC’s workforce may not be able to carry out
effectively its supervisory responsibilities.”126
Government-guaranteed loan programs have unique, evolving, and often complex
requirements that banks must follow to ensure that Federal agencies honor the
guarantees. For example, the SBA has made several revisions to its program
requirements in the last 5 years.127 Without regular training on these programs, the
examiners may not be aware of the new or revised requirements that could impact
loan guaranties and, ultimately, the safety and soundness of institutions.
Recommendations:
We recommend that the Director of RMS:
10. Develop and implement a training plan to ensure examination staff are trained on
the requirements and risks of Government-guaranteed loan programs.
11. Update, develop, and distribute to FDIC examination personnel a list of FDIC
examiners who have significant experience examining banks that specialize in
Government-guaranteed loan programs to regional offices.
The FDIC Does Not Have Adequate Data to Identify, Monitor, and
Research Bank Participation in Government-Guaranteed Loan Programs
When we asked FDIC officials about the prevalence of Government-guaranteed
loans at FDIC-supervised banks, the FDIC was unable to provide basic aggregated
data about the number and dollar value of Government-guaranteed loans at FDIC-
supervised financial institutions. The FDIC stated that it did not regularly maintain
this information.
Section 7(a) of the FDI Act authorizes the FDIC to collect information for
examinations. According to the GAO Standards for Internal Control in the
Federal Government, management should use quality information to achieve
the entity’s objective.128 It further states that, “[m]anagement obtains relevant
data from reliable internal and external sources in a timely manner based on
the identified information requirements.”
126 According to FDIC Directive 4010.3, Enterprise Risk Management and Internal Control Program, each FDIC Division and Office
is respons ble for identifying its key activities and determining what risks may threaten the FDIC’s ability to achieve success. The
FDIC’s Chief Risk Officer and Office of Risk Management and Internal Controls maintain the Risk Inventory to capture the enterprise
risks identified by the FDIC’s Divisions and Offices.
127 The SBA has issued four versions of its standard operating procedures for 7(a) loan program elig bility requirements since 2017.
The most recent version is 590 pages.
128 GAO 14-704G, Standards for Internal Control in the Federal Government (September 2014).
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Further, FDIC supervisory examination personnel are expected to use data from the
quarterly Call Report filings and other available information to monitor changes to the
institution’s business model, complexity, and risk profile between examinations to
identify and assess risk before it impacts a financial institution’s financial condition
and to ensure early risk mitigation.129
The primary tool for the FDIC to collect bank data is the Call Report. However,
Government-guaranteed loans are not an item listed in this report.130 Between 2016
and 2017, the FDIC conducted a Small Business Lending Survey of FDIC-insured
depository institutions to understand banks’ small business lending practices.131 The
survey results informed the FDIC that the Call Report substantially understates the
true amount of small business lending by banks. Further, according to the GAO,
data reported by community banks do not accurately capture lending to small
businesses because the data exclude some loans to small businesses.132 The report
stated that “the definition of small business loans used for banks’ reporting excludes
loans greater than $1 million and has not been adjusted for inflation since 1992.”133
As a result, the Call Report does not provide adequate Government-guaranteed loan
data to the FDIC for monitoring and examination activities.
During our evaluation,
(b) (8)
134 Based
on this
, from 2017 to 2021, 42 percent of FDIC-
supervised financial institutions (1,281 of 3,082) approved 94,633
(b) (8)
Government-guaranteed loans, totaling approximately $66.1 billion.135 As shown in
Table 4, FDIC-supervised financial institutions’ participation in
Government-guaranteed loan program, increased over this time period, with a
significant increase of 63 percent in total amounts approved between 2020 and
2021.136
129 OIG Report, Offsite Reviews of 1-and 2-Rated Institutions (FDIC OIG EVAL-20-002) (December 2019).
130 The FDIC, in coordination with the FRB and OCC, received emergency approval to collect PPP specific data on the Call Report
beginning with the June 30, 2020 reporting date. The FDIC used this information to mitigate the effects of financial institution
participation in PPP when determining/calculating deposit insurance assessments. The FDIC excluded PPP loans from the
institution’s loan portfolio when calculating the financial institution’s deposit insurance assessment rate.
131 2018 FDIC Small Business Lending Survey (December 2018).
132 GAO Report, Community Banks: Effect of Regulations on Small Business Lending and Institutions Appears Modest, but Lending
Data Could Be Improved (GAO-18-312) (August 2018).
133 GAO recommended that the Chairman of the FDIC collaborate with the Federal Reserve and Office of the Comptroller of the
Currency to reevaluate, and modify as needed, the requirements for the data banks report in the Consolidated Reports of Condition
and Incomes to better reflect lending to small businesses.
134
(b) (8)
(b) (8)
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Table 4. FDIC-Supervised Financial Institutions' Participation in (b) (8)
Government-
Guaranteed Loan Program
Calendar
Year
FDIC-
Supervised
Banks
b) (8)
Government-
Guaranteed
Loans
Approved
Government-
Guaranteed
Loan Amount
Percentage
Change in
Loan Amount
Year Over Year
Average
Loan
Amount
2017
847
21,380
$12,147,992,100
$568,194
2018
827
19,322
$11,437,938,500
(5.85%)
$591,965
2019
794
16,889
$10,919,821,700
(4.53%)
$646,564
2020
834
15,571
$12,012,222,900
10%
$771,448
2021
916
21,471
$19,584,639,700
63.04%
$912,144
Totals
94,633
$66,102,614,900
:
.
(b) (8)
Source
While this information had been obtained by the FDIC Division of Insurance and
Research (DIR) for research-related purposes and studies, it was not shared with
other FDIC Divisions, such as the ones conducting the bank examinations, RMS and
DCP. In addition, FDIC examiners we interviewed were not aware that this data
existed, and as described above, did not request or require that banks identify
Government-guaranteed loans in their loan data submissions to the FDIC during the
examination planning phase.137
In June 2019,138 RMS and
entered into an MOU (
MOU) to
enhance the exchange of information related to FDIC-supervised banks that
substantially participate in the
. However, the
MOU omits any provision to facilitate the sharing of(b) (8)Government-
guaranteed loan portfolio information with the FDIC. In addition, RMS did not enter
into agreements to facilitate information sharing with other Federal agencies that
administer Government-guaranteed loan programs.
Absent sufficient data, the FDIC may be limited in its ability to proactively identify and
monitor emerging risks associated with a bank’s participation in Government-
guaranteed loan programs. Therefore, the FDIC is not able to conduct research into
bank portfolio segments that Government-guaranteed loans support, such as small
and agricultural businesses.
137 FDIC OIG informed RMS of this (b) (8)
data during our evaluation to assist them with bank research,
monitoring, planning, and examination activities.
138
(b) (8)
(b) (8)
(b) (8)
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Recommendations:
We recommend that the Director of RMS, in coordination with the Director of DIR:
12. Develop and implement a process to obtain improved data regarding
Government-guaranteed lending activities of FDIC-supervised financial
institutions.
13. Update the
MOU to include the sharing of loan portfolio information
such as historical loan performance, status of guaranty, and loan-level risk
characteristics.
14. Establish arrangements with other Federal agencies that administer
Government-guaranteed loan programs to facilitate information sharing and
proactive identification of risk.
The FDIC Did Not Effectively Share Information on Government-
Guaranteed Loan Programs Externally and Internally
External Information Sharing
The FDIC did not effectively share information with other Federal agencies or ensure
that it obtained relevant information from Federal agencies regarding banks that
participate in Government-guaranteed loan programs. The GAO Standards for
Internal Control require management to communicate with and obtain quality
information from external parties, including government entities. This information
includes significant matters relating to risks and changes in or issues that impact an
entity’s internal control system.139 Guidance issued by the SBA demonstrates the
need for sharing information with and receiving information from other Federal bank
regulators, such as the FDIC to promote effective oversight. The guidance states
that “the extent of monitoring, [i]ncreased [s]upervision and [e]nforcement will
depend upon the type of SBA Participant overseen, e.g., SBA Supervised Lender[s]
versus 7(a) Lenders regulated by Federal Financial Institution Regulator[s], and the
extent to which SBA may rely on or coordinate oversight with a Participant’s primary
federal regulator.”140
139 GAO 14-704G, Standards for Internal Control in the Federal Government (September 2014).
140 SBA SOP 50 53 (2), Supervision and Enforcement (January 2021).
(b) (8)
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Regarding the FDIC sharing data with other agencies, the FDI Act authorizes the
FDIC in the discretion of the agency:
To furnish any report of examination or other confidential supervisory
information concerning any depository institution to any other Federal
agency with “regulatory authority over the depository institution” or to
any other person that the FDIC determines to be appropriate.141
The FDIC’s regulatory authority allows the Director of RMS, in the Director’s
discretion and for good cause, to disclose reports of examination or other confidential
supervisory information to such entities.142
In addition, the FDIC Case Manager Procedures state that:
In order to properly assess risk, the Case Manager must maintain an
informed position on their caseload through review of reports of
examination and correspondence; processing of applications; review
of press releases and other media sources; consideration of exception
reports generated by offsite monitoring systems; and communication
with regulatory counterparts and financial institution officials.143
As noted above, the FDIC RMS and
e
(b) (8)
ntered into an MOU to enhance the
exchange of information related to FDIC-supervised financial institutions that
substantially participate in the
.
(b) (8)
The
(b) (8)
MOU
(b) (8)
(b) (8)
provided
(b) (8)
to RMS in accordance with the
MOU. As previously noted, RMS also did not enter any other similar
information sharing agreements with other Federal agencies that administer
Government-guaranteed loan programs.
FDIC Case Managers and examiners often did not contact other Federal agencies
(that is, (b) (8)
, or other Government agencies
guarantying loans) to obtain direct and independent information about the financial
institution that may influence the approach in conducting examinations. The nine
141 Section 7(a)(2) of the Federal Deposit Insurance Act; 12 USC 1817(a)(2) (2018).
142 12 C.F.R. § 309.6(b)(3) (2021).
143 FDIC Case Manager Procedures, Case Manager Overview (February 2021).
144
(b) (8)
(b) (8)
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FDIC examiners we interviewed did not contact the Federal agencies to obtain
information about the financial institutions. The examiners noted that such
communication would likely occur at a higher level above examination field staff.
However, only one of the three Case Managers we interviewed communicated with a
Federal Agency that administers Government-guaranteed loans about two problem
banks. As described below, the FDIC has not established a process for regular
engagement with Federal agencies that administer Government-guaranteed loan
programs.
We previously issued a Management Advisory Memorandum to the FDIC regarding
our concerns about its communication with a Federal Government Agency that
administered a Government-guaranteed loan program.145 The Federal Government
Agency identified that Bank 2 and a third party charged impermissible fees to loan
applicants. The FDIC did not effectively coordinate with the Federal Government
Agency to obtain relevant information in order to assess the impact that the
impermissible fees had on the bank’s safety and soundness and consumer
protection compliance. Instead, the FDIC recommended that Bank 2, deemed to be
in unsatisfactory condition, coordinate further with the Federal Government Agency
for resolution. We conservatively estimated that the prohibited fees charged to the
borrowers amounted to at least $7.2 million.
(b) (8)
146
Further, the FDIC did not notify the SBA of issues it identified with an FDIC-
supervised institution that participated in the PPP. As highlighted previously in this
Report,
. However, the FDIC did
not notify the SBA of issues that the FDIC had identified with respect to
either before, during, or after the time that it heavily participated in the SBA’s PPP.
In response to our questions on how FDIC examination activities and results could
assist the SBA in overseeing bank participation in SBA loan programs, SBA officials
stated that:
145 OIG Memorandum, Impermissible Fees Charged by an FDIC-Regulated Bank (FDIC OIG AEC Memorandum 22-001)
(December 2021).
146
(b) (8)
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[i]f an [Federal Financial Institution Regulator] examination identifies
that an institution lacks credit risk management, servicing, and/or
liquidation capabilities and has an impaired financial condition, it
would be helpful for the [Federal Financial Institution Regulator] to
inform the SBA early on so that SBA could assess the impact of this
issue on the SBA operation and loan portfolio performance. In
addition, it would be helpful if an [Federal Financial Institution
Regulator] shared with SBA information on informal enforcement
activities.147
The FDIC did not establish procedures for Case
Managers or examiners to contact
(b) (8)
(b) (8)
concerning institutions listed on the
during the FDIC examination planning
or execution process. Such communications would
enable the FDIC to obtain pertinent Federal agency
Government-guaranteed loan program information
(for example, risk ratings, oversight review results,
concerns on the institutions portfolio or practices,
information on denials of guaranteed portions of
loans, etc.). FDIC officials noted that the FDIC does
not expect examiners to coordinate with or contact other Federal agencies that
administer Government-guaranteed loan programs. FDIC officials specified that it
would be rare for an examiner to call other Federal agencies that do not have a
safety and soundness mandate under the FDI Act without first going through regional
management.
In response to the Management Advisory
Memorandum discussed above, FDIC officials noted
that other Federal Government Agencies that
administer Government-guaranteed loan programs
are subject to their own confidentiality restrictions.
They stated that any engagement between the FDIC
and those agencies would require an MOU between
the agencies or a formal request for disclosure
pursuant to the access policy of the agency receiving
an access request. FDIC officials also stated that
sharing confidential information, including
confidential supervisory information, protected by
147
.
(b) (8)
Effective coordination with
another Federal agency
for Bank 2 could have
resulted in the timely
identification of at least
$7.2 million in
impermissible fees
charged to the borrowers.
This would have been
relevant to the FDIC’s
supervision of the bank’s
safety and soundness and
the potential for consumer
harm.
Effective communication
of
to
another Federal agency
with respect to
could have resulted in
heightened scrutiny or
limitations applied to the
bank’s PPP lending
activities in an effort to
mitigate fraud risk.
(b) (8)
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law or regulation from disclosure would not be a routine practice. However, as
described above, the FDIC has legal authority148 to share confidential supervisory
information, at its discretion and for good cause, with another Federal agency with
regulatory authority over a financial institution, subject to compliance with other
applicable law.
Effective coordination with other Federal agencies that maintain relevant information
about loans at financial institutions is critical in order to obtain and communicate
about the financial institution under review, including Government-guaranteed loan
risks. Absent such coordination, FDIC examiners may not be aware of, or able to
proactively address, emerging risks in financial institutions that significantly
participate in Government-guaranteed loan programs. Conversely, Federal agencies
that administer Government-guaranteed loan programs may not be aware of risks to
their programs identified by FDIC personnel.
In addition, without regular communication with other Federal agencies, FDIC
examiners may not become aware of, identify, understand, or communicate the
significance of deficiencies or concerns that could impact examination approaches,
scoping, testing, or considerations for safety and soundness and consumer harm.
Internal Information Sharing
The FDIC did not effectively share information internally regarding banks that
participated significantly in Government-guaranteed loan programs. The FDIC RMS
Manual states, “[i]n order for examiners to proactively assess potential deficiencies, it
is critical for field supervisors and other personnel to be aware of, and have access
to, pertinent documentation.” According to the GAO Standards for Internal Control in
the Federal Government, effective internal control requires that “[m]anagement
communicates quality information down and across reporting lines to enable
personnel to perform key roles in achieving objectives, addressing risks, and
supporting the internal control system.”149
As noted above, the
lists in 2019 and 2021 to RMS
in accordance with the
MOU. According to FDIC officials, FDIC
examiners would be expected to request or require a bank to disclose detailed
information on the Government-guaranteed lending activities if a bank was included
on the
list. We reviewed four banks (Bank 2, Bank 3, Bank 4,
and Bank 5), that were all on the
list provided under the
MOU. However, FDIC bank examination staff whom we interviewed,
including two Case Managers and eight examiners, either were unaware of, or had
148 Section 7(a)(2) of the Federal Deposit Insurance Act; 12 USC 1817(a)(2) (2018).
149 GAO 14-704G, Standards for Internal Control in the Federal Government (September 2014).
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not seen, either the
MOU or the
lists. As a result,
FDIC Case Managers and examiners did not know that
had identified
increased risks at FDIC-supervised institutions based
(b) (8)
150
In addition, the
MOU provides that the FDIC and
meet semi-annually
to discuss items of mutual interest relating to
and other relevant information. The FDIC and
met several
times between
.
However, the FDIC did not maintain minutes for some of these meetings. Therefore,
the examiners and Case Managers may not be (1) aware that
(b) (8) identified
factors for certain FDIC-supervised banks; (2) aware that the MOU
facilitated the sharing of information on
or (3) informed of
relevant information discussed during these meetings. Further, information from
these coordination meetings could also inform the Division of Depositor and
Consumer Protection (DCP) of risks to consider during examinations of banks’
compliance with the requirements of Federal consumer protection laws and
regulations. However, DCP staff were unaware of the MOU and the
list. Similarly, such coordination information could inform the DIR151 to
assist in identifying and analyzing emerging risks.
Staffing changes affected the FDIC’s oversight and management of the
MOU. In addition, the FDIC had not distributed the (b) (8)
MOU and related
list to all examination staff having a need for the information to
assist in monitoring, planning, and examination execution. During the course of our
evaluation, the FDIC established a new point of contact for the
MOU (the
RMS Senior Deputy Director) and stated it would place the (b) (8)
list on
an internal collaboration platform.
Sharing information internally within the FDIC regarding financial institutions that
participate significantly in Government-guaranteed lending programs is critical in
order to understand the underlying risks present at these institutions. Absent such
information, FDIC examiners and Case Managers may not identify or understand the
significance of deficiencies or concerns that could impact examination approaches,
scope considerations, or testing.
150
(b) (8)
151 FDIC DIR provides comprehensive statistical information on banking. It, among other things, identifies and analyzes emerging
risks, and conducts research that supports deposit insurance, banking policy, and risk assessments.
(b) (8)
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Recommendations:
We recommend that the FDIC Director of RMS:
15. Develop and implement processes and procedures for the routine sharing,
receipt, and storage of confidential information with Federal agencies that
administer Government-guaranteed loan programs.
16. Develop and implement guidance to provide instruction to FDIC bank
examination staff requiring communication and information sharing with Federal
agencies that administer Government-guaranteed loan programs to ensure FDIC
staff and the Federal agencies are aware of any emerging risks.
17. Determine whether other Federal agencies that administer Government-
guaranteed loan programs have a list of FDIC-supervised banks with high risk
factors associated with such programs and develop protocols to share
information with relevant FDIC personnel, including examiners.
18. Develop and implement guidance to ensure relevant risk information exchanged
with Federal Government agencies that administer Government-guaranteed loan
programs is shared internally within the FDIC on an ongoing basis with the
appropriate FDIC employees.
The FDIC’s Examination Guidance Lacked Instructions on the Retention
of Examination Workpapers
Supervisory workpapers related to RMS’s examination of financial institutions’
participation in PPP were added to the Regional Automated Document Distribution
and Imaging System (RADD), the official recordkeeping system for FDIC supervisory
business records,152 subsequent to our evaluation of RADD and our formal request
for such evidence.
Workpapers describe the work performed during RMS examinations of financial
institutions and include detailed information such as test procedures and results,
risks, control weaknesses, and support for findings. In addition, workpapers from
previous examination cycles are important resources for examiners when conducting
their examination planning activities. According to FDIC procedures, examiners
152 FDIC Directive 6000.1, Electronic Supervisory Business Records (July 2019).
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exercise discretionary judgment in determining which electronic workpapers are to
be retained in RADD at the conclusion of an examination or visitation.153
According to FDIC policy, retained documents should support examination and
verification procedures performed, conclusions reached, and assertions of fact or
opinion detailed in Reports of Examination or other supervisory findings.154 FDIC
policy further requires that:
•
All RMS and DCP workpapers supporting examinations should be retained in
an electronic format unless hardware or technical issues require hard copies;
•
Examiners should manage and store electronic documents using the
Electronic Workpapers (EWP) Module in RADD, which is referred to as
RADD-EWP; and
•
Examiners should scan hardcopy documents in a secure location within a
reasonable time after receiving or developing them.
FDIC officials defined reasonable time as “the time between receiving a hard copy
document and the time when the document is scanned in.” The definition provided
by RMS did not disclose an adequate or quantitative measure of time that is
reasonable or necessary to scan hardcopy documents. The FDIC was unable to
provide any other guidance that defined a specific timeframe within which
supervisory workpapers are to be uploaded to RADD.
As noted in Table 3 above, we evaluated FDIC examination of PPP related activities
for eight FDIC-supervised financial institutions. Supervisory workpapers related to
the FDIC’s supervision for four of the eight sampled financial institutions, or 50
percent, were not in RADD at the time of our review or were imported into RADD
subsequent to the OIG’s request for information.
•
Bank 1: The FDIC had concluded its examination of Bank 1 in
(b) (8)
. As of April 2021, the FDIC had not input any documents in RADD
involving RMS’s examination of Bank 1’s participation in PPP. In
(b) (8)
the FDIC added supervisory workpapers to RADD related to its review of the
bank’s participation in the PPP, which was approximately 5 months after the
conclusion of the examination.
153 FDIC RD Memo No. 2019-014-RMS and 2019-005-DCP, Regional Automated Document Distribution and Imaging System (July
16, 2019). According to the RD Memo, RADD is the official recordkeeping and electronic filing system for supervisory business
records for RMS and DCP. It also states that “SOURCE remains a system of record for compliance and CRA examination
activities.”
154 FDIC RD Memo No. 2013-008-RMS and 2013-010-DCP, Scanning Policy for Electronic Workpaper Documentation (September
2013).
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•
Bank 5: The FDIC had concluded its examination of Bank 5 in (b) (8)
. However, the FDIC only provided evidence for its examination of PPP
loans in February 2022, upon our request.
•
Bank 8: In (b) (8)
, the FDIC examined Bank 8’s
participation in PPP and issued a targeted review letter in
.
(b) (8)
155
The FDIC added supervisory workpapers to RADD in
,
approximately 6 months after the issuance of the targeted review letter.
•
Bank 9: The FDIC conducted an ongoing monitoring review of the bank’s
PPP loan participation during the period (b) (8)
.156 The FDIC added the examiner conclusion memorandum for this
review to RADD in (b) (8)
, approximately 1 year after the conclusion of
the review.
FDIC officials acknowledged that certain key examination related to participation in
PPP had been missing from RADD. In addition, from 2017 to 2020, RMS’s Internal
Control Review Section published reports for all six FDIC regions and highlighted
similar concerns about deficiencies in RADD recordkeeping. These reports found
that certain supporting documentation -- such as supervisory program
documentation, supervisory recommendation logs, and ongoing monitoring reports --
was incomplete or missing in RADD, and in some cases, supporting documentation
was found in the wrong folders.
Maintaining complete and timely examination records in RADD supports the FDIC’s
ability to effectively manage and oversee its examination process. Although the
FDIC maintains separate repositories for the records of institutions under the
continuous examination program, this information should be timely documented in
RADD. Inconsistencies in recordkeeping practices and the lack of complete
documentation hinders the ability for auditors to conduct reviews of RMS
examination activities and limits the transparency and accountability of examination
operations. Additionally, FDIC examiners and state banking examiners may not
have access to all relevant information when reviewing workpapers from previous
examinations.
155 Bank 8 is a large institution and under the continuous examination process. The continuous examination process includes
targeted reviews of certain areas of bank operations. The FDIC issues a target review letter to the bank at the conclusion of each
targeted review.
156 Bank 9 is a large institution and under the continuous examination process. Ongoing monitoring reviews are performed
throughout the examination cycle, or planned and completed for a specific purpose. Examiners use the combination of targeted
reviews and ongoing monitoring reviews throughout the examination cycle to determine and support the results presented in the
ROE.
(b) (8)
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Recommendations:
We recommend that the FDIC Director of RMS:
19. Develop and implement updated FDIC examination guidance to establish an
appropriate timeframe for uploading complete supervisory business records to
RADD.
Conclusion
FDIC banks regularly participate in Government-guaranteed loan programs, with
some originating billions of dollars in Government-guaranteed loans. FDIC financial
institutions have realized risk from applying imprudent banking practices or
perpetrating fraud in Government-guaranteed loan programs. Such activities
contributed to the failure of multiple financial institutions. Further, these failures
resulted in estimated losses to the FDIC DIF of over $140 million. It is important that
the FDIC proactively identifies and addresses risks for financial institutions that
participate in Government-guaranteed loan programs, before they result in consumer
harm or significant fraud. Until the FDIC addresses the weaknesses presented in
this Report, there is an elevated risk that the safety and soundness of financial
institutions participating in Government-guaranteed loan programs may deteriorate,
leading to bank failure or consumer harm and ultimately increased risk or loss to the
DIF.
FDIC COMMENTS AND OIG EVALUATION
On April 21, 2023, the FDIC Director of RMS provided a written response to a draft of
this report. The response is presented in its entirety in Appendix 7.
In its response, the FDIC acknowledged that it has limited guidance for examiners on
Government-guaranteed loan activities and that Government-guaranteed loans
present risks to FDIC-insured and FDIC-supervised institutions if conducted without
proper due diligence and risk management. However, the FDIC believes its
guidance was sufficiently detailed to allow examiners and Case Managers to address
risks in certain areas.
The FDIC also stated that it disagreed with certain findings within the draft report.
While the FDIC’s response did not acknowledge the significance of our results, we
note that the FDIC concurred or partially concurred with all 19 recommendations and
proposed sufficient corrective actions that will significantly improve FDIC
examinations and FDIC coordination with other Federal agencies. Furthermore, the
FDIC’s criticisms of our findings mainly focused on two of our eight findings,
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demonstrating that the FDIC agreed with a substantial majority of our findings and
conclusions.
While the FDIC acknowledged that its guidance for determining concentration
thresholds differed from the OCC and FRB guidance, the FDIC dismissed our results
and rationale that a higher concentration threshold may result in fewer
concentrations being identified and analyzed. The FDIC acknowledged its higher
concentration threshold of 100 percent of Tier 1 Capital plus the ALLL or the ACL
related to loans and leases for listing loan product concentrations and explained that
examiners are required to provide written analytical comments for concentrations at
or exceeding 300 percent. We continue to support the position expressed in our
report that a concentration threshold that is 4 times higher than that established by
the FRB and OCC (100 percent vs. 25 percent) may decrease the potential for FDIC
examiners to identify, list, and address potential risks for concentrations.
The FDIC’s response also mischaracterized segments of our draft report. The FDIC
stated that we acknowledged within the report the FDIC’s risk-focused approach to
supervision, but then contradicted that philosophy in presenting a formulaic
approach. This is not accurate. Rather, our findings demonstrated that, in alignment
with the FDIC’s risk-focused approach to supervision, certain institutions should have
received additional transaction level testing due to their higher exposure to risks
related to Government-guaranteed loans and observed areas of noncompliance.
Our report presented examples where banks with a higher level of risk due to their
Government-guaranteed loan exposure or BSA/AML weaknesses either did not
receive transaction testing or received less than that of banks with less risk
exposure. Therefore, we did not favor a formulaic or one-size-fits all approach as
suggested by the FDIC. The FDIC also took exception with our findings on
concentration risks related to Government-guaranteed loans. However, our findings
demonstrated the different ways that examiners considered concentration risk in
order to emphasize the need for improved guidance to ensure consistency. In
addition, guidance from the other Federal regulators emphasizes the consideration of
off-balance sheet risk items when determining and calculating concentrations.
The FDIC stated it disagreed with our interpretations and proposed applications of
U.S. Generally Accepted Accounting Principles (GAAP) outlined in Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC)
Subtopic 450-20, Loss Contingencies. The FDIC also disagreed with our suggestion
that examiners have more latitude than the FDIC believes is prescribed in accounting
guidance. We found that the FDIC RMS Manual neither described how examiners
should assess the off-balance sheet risks associated to sold portions of Government-
guaranteed loans, nor articulated how examiners should coordinate with internal
experts or other Federal agencies that administer Government-guaranteed to
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determine whether contingent liabilities should be established. We acknowledge in
our report that assessing off-balance sheet risk requires judgment and an
interpretation of accounting standards. Absent such guidance, we reiterate our
interpretations that FDIC examiners could have recommended that banks disclose
the possible losses or considered the sold portions of the classified loans as
contingent liabilities. The FDIC’s response also stated that we suggested the FDIC
establish guidance for FDIC examiners to require banks to accrue a contingent
liability when a future event is possible rather than probable in contradiction of
GAAP. This is simply not accurate. Rather, our finding demonstrated that there is
not a black and white interpretation of the terms “probable” and “reasonably
estimable” in order to persuade the FDIC to establish guidance for examiners to
guide them in making such determinations. Significantly, the FDIC concurred with
our recommendation to develop and implement guidance to examination staff to
ensure they consistently evaluate Government-guaranteed loans in their assessment
of off-balance sheet risk.
The FDIC stated it believes its examiners assessed Government-guaranteed loan
program requirements consistent with risk-focused supervision principles. However,
as detailed in our report, and contrary to the requirements and expectations
established in the FDIC RMS Manual, we found that FDIC examiners did not test
Government-guaranteed loans against program requirements for certain banks. As
cited in our report, the FDIC RMS Manual states “in all instances, examiners should
sample enough credits, including new and various-sized credits, to assess the
adequacy of asset quality, underwriting practices, and credit risk management, in
order to support ROE findings and assigned ratings.” It further states “[t]ransaction
testing remains a reliable and essential examination technique for use in the
assessment of a bank’s condition.” Given the prolific Government-guaranteed loan
activity of the banks we reviewed, we believe testing such loans against program
requirements was warranted in compliance with the FDIC RMS Manual in order for
the FDIC to make adequate assessments of the banks’ asset quality and
underwriting.
In addition, the FDIC believes it treated the guaranteed portion of Government-
guaranteed loans appropriately when assigning classifications and claims that the
issues outlined by the OIG in this report with respect to examiners’ treatment of the
guaranteed portion of loans (on-balance sheet) was solely based on hazardous
lending practices by banks. As detailed in our report, examiners adversely classified
the unguaranteed portion of loans but did not adversely classify the guaranteed
portion of those same loans, considering them a “Pass.” In the case of Almena State
Bank, the FDIC rated the bank’s management as “critically deficient”, which
represented the highest degree of supervisory concern, while also identifying
hazardous underwriting and significant loan administration weaknesses. We believe
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that considering the guaranteed portions of loans as “Pass” and not rating them as
“Substandard” or worse was not appropriate for certain Government-guaranteed
loans originated by Almena State Bank given the weaknesses identified by the FDIC.
In addition, the FDIC’s position on the guaranteed portion of such loans appears to
differ from credit risk rating guidance established by the OCC, which supports that a
rating enhancement157 for Government-guaranteed loans may not be appropriate for
banks with significant credit administration problems affecting the guaranteed credit.
The FDIC concurred with 13 recommendations and partially concurred with the
remaining 6 recommendations, offering acceptable alternative actions. The FDIC
plans to complete corrective actions for these recommendations by March 31, 2024.
We consider all 19 recommendations to be resolved.
All of the recommendations in this report will remain open until we confirm that
corrective actions have been completed and the actions are responsive. A summary
of the FDIC’s corrective actions is contained in Appendix 8.
157 A rating enhancement represents a more favorable loan classification. This may include considering the guaranteed portions of
loans with identified weaknesses as “Pass.”
Appendix 1
Objectives, Scope, and Methodology
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Privileged and Sensitive Information - For Official Use Only
Objective
Our evaluation objective was to determine the effectiveness of the FDIC’s
examinations in identifying and addressing risks related to Government-guaranteed
loans for banks that participate in Government-guaranteed loan programs.
We conducted this evaluation from June 2021 through December 2022 in
accordance with the Council of the Inspectors General on Integrity and Efficiency
Quality Standards for Inspection and Evaluation (issued January 2012).158
Scope and Methodology
The scope of our evaluation focused on FDIC safety and soundness examinations of
FDIC-supervised financial institutions that participated in Government-guaranteed
loan programs.
To address our evaluation objective we:
•
Interviewed RMS, DCP, and the Division of Insurance and Research personnel
to obtain an understanding of bank supervision and data collection activities
related to financial institutions that participate in Government-guaranteed loan
programs.
•
Interviewed FDIC Legal Division personnel and obtained information from them
to understand legal proceedings related to financial institutions’ participation in
Government-guaranteed loan programs and the FDIC’s authority to share
confidential supervision information with other Federal agencies.
•
Interviewed personnel from the FDIC OIG Office of Investigations to obtain an
understanding of fraud investigations involving Government-guaranteed loan
programs.
•
Interviewed personnel from the OCC and FRB to obtain an understanding of their
supervision activities related to financial institutions that participate in
Government-guaranteed loan programs.
•
Obtained and reviewed information from the
on its oversight of FDIC-supervised financial institutions that
participate in
Government-guaranteed loan programs.
•
Reviewed FDIC and other Federal regulator criteria related to the financial
institution examination process.
158 In December 2020 the Council of the Inspectors General on Integrity and Efficiency issued an update to the Quality Standards for
Inspection and Evaluation which is effective for all inspections and evaluations beginning on or after January 1, 2022. Because we
initiated this evaluation in June 2021, we adhered to the January 2012 standards.
(b) (8)
(b) (8)
Objective, Scope, and Methodology
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•
Reviewed criteria related to the PPP.
•
Reviewed the GAO’s Standards for Internal Control in the Federal Government
and GAO’s Fraud Risk Management Framework.
•
Reviewed RMS Internal Control and Review Section Regional Reports for the
Atlanta, Kansas City, Dallas, New York, Chicago, and San Francisco regions.
•
Reviewed the FDIC’s Risk Profile and Risk Inventory to determine if there were
any Agency risks related to the objective.
•
Reviewed Government-guaranteed loan program requirements and financial
institution oversight for the SBA, U.S. Department of Agriculture, U.S.
Department of Veterans Affairs, and U.S. Department of Housing and Urban
Development.
o This included the Federal agencies’ standard operating procedures and
regulations for the various Government-guaranteed loan programs.
•
Selected and reviewed RMS examination activities for the below four FDIC-
supervised financial institutions that participated in Government-guaranteed loan
programs.
o Almena State Bank: We selected this bank because it failed in part due to
hazardous Government-guaranteed lending.
o Bank 3, Bank 4, and Bank 5: We selected these banks because they
were identified on the
(b) (8)
list with
159
•
Reviewed FDIC examination activities for Bank 2, which was under enforcement
actions related to its participation in a Government-guaranteed loan program.
•
Selected and reviewed RMS examination activities for Bank 1 due to the bank’s
significant participation in the PPP.
•
Reviewed RMS examination activities related to only the PPP for the following
five FDIC-supervised financial institutions:
o Bank 9, Bank 10, Bank 6, Bank 8, and Bank 7.
•
Reviewed prior Federal OIG audit and evaluation reports related to the
supervision of financial institutions that engage in Government-guaranteed loan
programs and for Agencies that administer Government-guaranteed loan
programs.
•
Analyzed (b) (8)
portfolio data to determine FDIC-supervised financial
institutions’ level of participation in the (b) (8)
159 We also considered the supervisory activity in the FDIC’s regions during our selection to ensure a representation across the
FDIC regional offices.
(b) (8)
Objective, Scope, and Methodology
May 2023
EVAL-23-001
61
o We relied on an OIG Senior Information Technology Specialist to analyze
the FDIC’s public list of FDIC-insured financial institutions160 and
(b) (8)
161.
•
Utilized non-public PPP loan data maintained by the PRAC to determine FDIC-
supervised financial institutions’ level of participation in the PPP loan program.
o We relied on an OIG Senior Information Technology Specialist to analyze
the PPP loan data162 we received from the PRAC and associate
information to FDIC-insured financial institutions.
(b) (8)
162 We analyzed PPP data as of August 31, 2022.
Appendix 2
Acronyms and Abbreviations
May 2023
EVAL-23-001
62
ACL Allowance for Credit Losses
ALLL Allowance for Loan and Lease Losses
AML Anti-Money Laundering
BSA Bank Secrecy Act
CARES Act Coronavirus Aid, Relief, and Economic Security Act
CAMELS Capital Adequacy, Asset Quality, Management Capabilities, Earnings
Sufficiency, Liquidity Position, and Sensitivity to Market Risk
CEO Chief Executive Officer
COVID-19 Coronavirus Disease 2019
CRA Community Reinvestment Act
DCP Division of Depositor and Consumer Protection
DIF Deposit Insurance Fund
DIR Division of Insurance and Research
EPS Examination Profile Script
EWP Electronic Workpapers
FDI Act Federal Deposit Insurance Act
FDIC Federal Deposit Insurance Corporation
FFIEC Federal Financial Institutions Examination Council
FY Fiscal Year
FRB Board of Governors of the Federal Reserve System
GAO Government Accountability Office
LIDI Large Insured Depository Institution
MOU Memorandum of Understanding
MRBA Matter Requiring Board Attention
OCC Office of the Comptroller of the Currency
OIG Office of Inspector General
PPP Paycheck Protection Program
Appendix 2
Acronyms and Abbreviations
May 2023
EVAL-23-001
63
PRAC Pandemic Response Accountability Committee
RADD Regional Automated Document Distribution and Imaging System
RD Memo Regional Directors Memorandum
RMS Division of Risk Management Supervision
ROE Report of Examination
SBA Small Business Administration
Appendix 3
Risks Related to Guaranteed Lending
May 2023
EVAL-23-001
64
In August 2021, the OCC issued a bulletin highlighting the various risks associated
with SBA guaranteed lending activities.163 The bulletin identified and described the
following risks:
•
Credit Risk: Borrowers eligible for SBA programs typically lack adequate
credit or cash flow history or have weak collateral. There is credit risk on the
guaranteed and unguaranteed portions164 of SBA loans that banks hold. The
SBA may not honor the guaranty if the bank does not comply with SBA’s
requirements, causing a loss to the bank when the borrower defaults on its
loan payments.
•
Operational and Compliance Risks: Securing an SBA guaranty requires
significant documentation and administration efforts by the originating bank.
SBA approved lenders are also required to service their entire SBA loan
portfolios, including the portions they have sold.165 SBA may deny its
guaranty for, among other things, inadequate documentation, inappropriate
loan modifications, inadequate analysis of the borrower’s ability to repay the
loan, and impermissible use of loan proceeds. Further, banks contracting
with third parties to assist with SBA lending processing can introduce
additional operational risk. The banks retain responsibility for originating,
closing, servicing, and liquidating their SBA portfolio when using third parties.
•
Liquidity and Price Risks: If a bank relies on selling SBA loans to meet
liquidity needs and gets suspended or prohibited from selling SBA-
guaranteed loans in the secondary market due to material noncompliance
with SBA’s requirements, it can significantly impact its liquidity. Specifically,
in such circumstances, the bank will no longer realize income to increase
liquidity from selling assets on the secondary market. In addition, banks that
depend on selling SBA-guaranteed loans for earnings face price risk when
premiums decline or loan holding periods increase.
•
Strategic Risk: Banks that engage in new, expanded, or modified SBA
lending activities are exposed to strategic risk. Market demand changes
could make the activity no longer economical.
163 OCC Bulletin 2021-34, Small Business Administration Lending: Risk Management Principles (August 2021).
164 The unguaranteed portion represents the amount of the loan not covered by the SBA guaranty. For example, if the SBA offers a
75 percent guaranty on a $1 million loan, the unguaranteed portion is $250,000 ($1,000,000*.25).
165 The SBA allows banks to sell the guaranteed portion of SBA loans to investors on the secondary market for a premium.
Appendix 4
Fraud Investigations – Government-Guaranteed Loan
Programs
May 2023
EVAL-23-001
65
Privileged and Sensitive Information - For Official Use Only
This table presents a sample of criminal investigations related to Government-guaranteed loan
programs.
166 Source: Department of Justice, United States Attorney’s Office, Press Releases (Various Districts).
167 These figures include the amounts related to submission of fraudulent loan applications, loan disbursements, fees generated, or
loss to the financial institution.
Department of
Justice Press
Release
Investigation Summary166
Estimated Fraud
Amount167
Jury Convicts Five
Former Officers and
Employees of Banc-
Serv Partners in $5
Million Scheme to
Defraud the Small
Business
Administration
According to the evidence presented at trial, the defendants — Kerri
Agee, 46, former president, chief executive officer and founder of
Banc-Serv; Kelly Isley, 40, Banc-Serv’s former chief operating
officer; Nicole Smith, 44, Indiana, a former Banc-Serv employee;
Chad Griffin, 48, Banc-Serv’s former chief marketing officer; and
Matthew Smith, 52, of Westfield, Indiana, Banc-Serv’s co-founder
and a former director of a lending institution that originated loans
with Banc-Serv — fraudulently obtained SBA-guaranteed loans on
behalf of their clients, knowing that the loans did not meet SBA’s
guidelines and requirements for the guarantees. The evidence at
trial proved that from approximately 2004 until October 2017, the
defendants helped originate SBA loans on behalf of various
financial institutions and other lenders and, on multiple occasions,
fraudulently obtained guarantees for loans that the SBA had
deemed ineligible. They did so by, among other things, knowingly
misrepresenting what the loans would be used for and unlawfully
diverting previously denied loan applications into expedited approval
channels at the SBA. When the fraudulently guaranteed loans
defaulted, the defendants caused the submission of the
reimbursement requests to the SBA to purchase the defaulted loans
from investors and lending institutions, thereby shifting some of the
losses on the ineligible loans to the SBA.
The fraudulent loans presented at trial totaled approximately $5
million in guaranteed disbursements, which were not eligible for
SBA guarantees.
$5,000,000
French National
Indicted For Six
Million Dollar Bank
Fraud Scheme and
for Lying In an
Application for U.
S. Government
Insured Loans
A man was indicted in for his role in a bank fraud scheme including
lying in an application for Government-guaranteed loans. Three
banks were targeted in two separate schemes involving inflated
inventory as collateral on the loans. The defendant provided
inflated undocumented estimates of his inventory to an appraiser he
had hired. The indictment alleges that the inventory appraised for
$21 million in 2007, was sold for $64,000 in 2010, leaving no
collateral on the loan. The defendant then submitted an inflated and
fraudulent loan guarantee application with the U.S. Department of
Agriculture for a $3 million loan from a bank in Texas. The
defendant defaulted on this loan in 2009, causing a $900,000 loss
to the Texas bank, which forced the U.S. Department of Agriculture
$4,000,000
Appendix 4
Fraud Investigations – Government-Guaranteed Loan
Programs
May 2023
EVAL-23-001
66
to cover the guaranteed portion of the loan listed at $2,107,259. In
March of 2009, the defendant sought from a bank in New Orleans
an additional guaranteed loan from the SBA for a separate business
entity that he controlled. The defendant again, over-inflated
inventory appraisals and collateral levels to obtain the $1 million
loan that later resulted in default. The SBA paid the New Orleans
bank $774,041 to honor the guarantee and the bank suffered an
approximate $225,000 loss on the loan.
Bank CEO
Convicted For
Taking Bribes In
Connection With
Loans Guaranteed
By The Small
Business
Administration
The CEO of a Pennsylvania-based Bank (The Bank), was convicted
for taking bribes in connection with the Bank’s issuance of loans
that were guaranteed by the SBA. The CEO was arrested in May of
2019 and charged with taking bribes by siphoning off a portion of
commissions on SBA-guaranteed loans and causing the Bank to
issue SBA-guaranteed and commercial loans to companies in which
Shin had a secret interest. The CEO secretly solicited and received
bribe payments in connection with SBA-guaranteed loans issued by
the Bank. Specifically, when the Bank issued business loans that
did not involve the use of any actual broker, the CEO nonetheless
arranged to have his longtime friend, a real estate and loan broker
(the Broker), inserted unnecessarily into the transaction solely to
generate a broker fee that could be shared with the CEO; in fact,
the Broker did no actual work to earn a commission on those
transactions, but split the “broker’s fee” with the CEO as an illegal
kickback.
$950,000
Four Executives
Plead Guilty to
Fraud Scheme that
Caused Over $4.5
Million in Losses to
the Small Business
Administration
Three former executives of a failed bank and the founder and
former President of a lending service provider, plead guilty to
scheming to defraud the SBA in connection with its programs to
guarantee loans intended for small businesses. The defendants
fraudulently obtained loan guarantees from the SBA on behalf of
Valley Bank borrowers, knowing that the loans did not meet SBA’s
guidelines and requirements for the guarantees. They did so by,
among other things, altering loan payment histories, renaming
businesses, and hiding the fact that borrowers had previously
defaulted on loans. When the fraudulently guaranteed loans
defaulted, the defendants caused the submission of reimbursement
requests to the SBA to purchase the defaulted loans from investors
and lending institutions, thereby shifting the majority of losses on
the ineligible loans to the SBA. In all, the defendants attempted to
obtain guarantees on over $14 million in loans, were successful in
obtaining guarantees on over $9 million in loans, and caused the
SBA losses of over $4.5 million.
$14,000,000
Farm Equipment
CEO Sentenced to
Prison, Order to Pay
$6.3 Million
Restitution
A Southwest Georgia businessman and owner of a tractor supply
company plead guilty to orchestrating a complicated fraud involving
millions of dollars of loans by multiple creditors, was sentenced to
prison, and ordered to pay restitution to his victims for his crime. In
2016, the defendant falsified documents provided to a bank to
secure an SBA loan for $5 million from the victim Bank. At the
same time, the company obtained a new line of credit and signed a
credit agreement with the Bank in the amount of $625,000. During
$5,625,000
Appendix 4
Fraud Investigations – Government-Guaranteed Loan
Programs
May 2023
EVAL-23-001
67
168 According to the Department of Justice Press Release, check kiting is when checks are continually written back and forth to
fraudulently inflate account balances tricking banks into honoring checks written with insufficient funds.
2015, the company began having financial and cash flow issues
which made it difficult to make payments due on the loans and to
make payroll. During that time, the defendant began a practice of
selling equipment which it held in trust but not paying the cash over
to creditors as required. The defendant sold more equipment to
secure additional financing from other sources while continuing to
use falsified financial information to inflate the company’s net worth.
As part of falsifying financial records, the defendant initiated a
scheme involving reducing accounts payable by generating
payment checks but not deducting the amounts from business
accounts. The defendant was found to be responsible for restitution
for actual monetary losses of $1.5 million to SBA, about $1.23
million to the initial victim bank and about $3.67 million to other
victim banks and financial entities.
Former Chief
Lending Officer of
New Jersey Bank
Sentenced to 18
Months in Prison
for Making False
Statements to
United States to
Secure Federal
Guarantees on
Loans
A man was sentenced to 18 months in prison for securing a Federal
guarantee on certain loans by making false statements to the SBA
about the creditworthiness of those loans while serving as the chief
lending officer of a New Jersey bank. While serving as the chief
lending officer of a New Jersey bank, the defendant became aware
of a SBA lending program to incentivize lenders, including banks, to
loan money to small businesses by providing a 75 percent SBA-
backed guarantee on loans. When a lender applies an SBA
guarantee on a loan, the lender must disclose information related to
the creditworthiness of the small business. The New Jersey bank
hired a consulting firm to help the bank apply for SBA-backed
guarantees. On February 29, 2012, a consultant from the
consulting firm submitted an application to the SBA for a guarantee
of approximately $3.75 million on loans totaling approximately $5
million made to a small business located in Robbinsville, New
Jersey. The application contained false information related to the
creditworthiness of the business. The defendant knew the
application contained false information, but he nevertheless
reviewed and signed the application on behalf of the bank.
$5,000,000
Jury Convicts in
Check Kiting Trial
Tyler Gillum (Gillum) was convicted at trial on 31 counts of bank
fraud, one count of making a false statement in connection with a
SBA guaranteed loan, and one count of making a false statement in
a loan or credit card application. According to court documents and
evidence presented at trial, Tyler Gillum owned and operated
Plainville Livestock Commission Inc. from 2006 until 2019. Between
January 2015 and August 2017, Gillum wrote checks and made
wire transfers between various accounts under his control at various
banks in a scheme commonly known as check kiting168. Gillum’s
scheme resulted in losses of more than $10 million to the banking
system. Gillum also applied for and obtained a $1,500,000 loan,
secured by the SBA, and a $500,000 line of credit from Almena
$1,500,000
Appendix 4
Fraud Investigations – Government-Guaranteed Loan
Programs
May 2023
EVAL-23-001
68
169 Almena State Bank failed in October 2020. OIG Report, Failed Bank Review, Almena State Bank, Almena, Kansas (FDIC OIG
FBR-21-003) (March 2021).
State Bank169, while concealing he’d previously signed an
approximately $6.1 million promissory note to TBK Bank of Dallas,
Texas.
Former President
and CEO of
Georgia-Based
Bank Sentenced to
84 Months in Prison
for Role in Bank
Fraud Conspiracy
A former president and CEO of a Georgia-based bank was
sentenced in February 2016 to 84 months in prison for his role in a
conspiracy to commit bank fraud and major fraud against the United
States. In addition to the prison term, the defendant was ordered to
pay $3,931,018 in restitution to the bank and Federal agencies for
losses suffered. The defendant was President and CEO of the now
closed bank, Tifton Banking Company (TBC). The defendant hid
past-due loans from the FDIC and the TBC loan committee, which
resulted in the bank continuing to approve and renew delinquent
loans and loans for which the collateral was lacking. Several of the
borrowers eventually defaulted on the loans, resulting in millions of
dollars in losses to TBC and others. The defendant admitted that in
certain transactions in which he exercised approval authority, he
made false representations about the loans to TBC’s loan
committee and hid his personal and business interests. The
defendant also admitted to making fraudulent representations that
led to commercial loan guarantees being issued by the SBA and
U.S. Department of Agriculture on two other loan transactions. The
loans were made by the bank and guaranteed by the Government
agencies to refinance earlier non-performing commercial loans
made by TBC as part of the scheme to mislead bank regulators and
hide the bank’s true financial condition. Those guaranteed loans
resulted in more than $2 million in losses to the bank and the
agencies.
$2,000,000
Two Loan Brokers
and One Bank Loan
Officer Charged in
Bank Fraud Scheme
Ted Capodilupo, 56, of South Easton; Joseph Masci, 70, of Boston;
and Brian Ferris, 43, of Braintree, were charged with one count
each of conspiracy to commit bank fraud. According to the charging
documents, between 2015 and 2018, Capodilupo, Masci and Ferris
agreed to defraud the bank and the SBA by submitting fraudulent
loan applications to the bank, which administered the SBA’s small
business express loan program, to secure bank loans guaranteed
by the SBA. Specifically, it is alleged that Capodilupo and Masci,
who operated a loan brokerage business, submitted dozens of
fraudulent loan applications to the bank on behalf of borrowers
ineligible for traditional business loans. These loan applications
misrepresented, among other things, the identity of the real loan
recipients and the businesses for which the loans were sought.
Capodilupo and Masci also allegedly fabricated federal tax forms
submitted in support of the fraudulent loan applications, falsified
applicant signatures and falsely indicated that no broker had
assisted in preparing or referring the loan applications. Capodilupo
and Masci allegedly charged borrowers fees for obtaining these
$270,000
Appendix 4
Fraud Investigations – Government-Guaranteed Loan
Programs
May 2023
EVAL-23-001
69
fraudulent loans. It is alleged that Ferris, who worked as a loan
officer at the bank, caused the bank to issue loans for which
Capodilupo and Masci submitted applications and received a
kickback from Capodilupo and Masci of approximately $500 per
loan. The alleged scheme generated approximately $270,000 in
fees for Capodilupo and Masci. Many of the loans that the bank
issued as a result of the fraudulent applications ultimately defaulted,
resulting in substantial losses to the bank.
Appendix 5
Fraud Investigations – Paycheck Protection Program
(PPP)
May 2023
EVAL-23-001
70
Privileged and Sensitive Information - For Official Use Only
This table presents a sample of criminal investigations related to the PPP.
Department
of Justice
Press Release
Investigation Summary170
Estimated
Fraud
Amount171
Defendant
Pleads Guilty to
Stealing $24
Million in
COVID-19
Relief Money
Through Fraud
Scheme that
Used Synthetic
Identities
On June 29, 2021, Hasan Hakim Brown (Brown), pled guilty to one count
of conspiracy to commit bank fraud for his role in stealing $24 million of
Covid-19 relief funds by using synthetic identities and shell companies
they had created years earlier to commit other bank fraud. Criminals
manufacture synthetic identities by using the personal and financial
information of real people (such as stolen social security numbers) with
fraudulent, made-up information (such as fake names and dates of birth).
They use the new, synthetic identities to open fraudulent bank and credit
card accounts and commit other fraud.
Years before the pandemic, Brown and his co-conspirators used complex
computer data storage and virtualization machines to manufacture
synthetic identities, automatically open bank accounts and shell
companies, and monitor bank activity tied to the synthetic (as well as
stolen) identities. In 2017, they used the synthetic and stolen identities
and associated bank accounts and shell companies to steal money from
a bank in Texas.
Then came the COVID-19 pandemic. In March 2020, the CARES Act was
enacted. It was designed to provide emergency financial assistance to
the millions of Americans suffering the economic effects caused by the
COVID-19 pandemic. One source of relief provided by the CARES Act
was the PPP, which has authorized hundreds of billions of dollars in
forgivable loans to small businesses to use for payroll, rent, utility, and
other approved expenses.
Brown and his co-conspirators used their already-established synthetic
identities and associated shell companies to fraudulently apply for
financial assistance under PPP. They applied for and received $24 million
dollars in PPP relief. The money was paid to companies registered to
Brown and his co-conspirators, as well as to companies registered to
synthetic identities that Brown and his co-conspirators controlled.
$24,000,000
Liberian
National
Sentenced to
10 Years for
$23 Million
COVID-19
Relief Fraud
A Liberian national who orchestrated a fraudulent scheme to secure more
than $23 million in forgivable PPP loans was sentenced to 10 years in
federal prison.
Steven Jalloul, a 43-year-old tax consultant from the Dallas area, was first
charged via criminal complaint in September 2020; he pleaded guilty in
October 2021 to a superseding information charging him with one count
of engaging in monetary transactions using property derived from
$23,000,000
170 Source: Department of Justice, United States Attorney’s Office, Press Releases (Various Districts) and Martinsville Bulletin.
171 These figures include the amounts related to applications for loans, grants, or unemployment benefits.
Appendix 5
Fraud Investigations – Paycheck Protection Program
(PPP)
May 2023
EVAL-23-001
71
unlawful activity. According to plea papers, Mr. Jalloul admitted he
defrauded lenders participating in the PPP — a measure authorized by
Congress in the early days of the pandemic to award forgivable loans to
small business impacted by COVID-19 — while awaiting sentencing in a
separate tax fraud case.
In court documents, he admitted that he submitted roughly 170 falsified
PPP loan applications to lenders (including through a fintech company)
seeking more than $23 million on behalf of over 160 clients of his tax
preparation business, Royalty Tax & Financial Services LLC.
Mr. Jalloul admitted he inflated clients’ employee rosters and monthly
payroll expenses in order to increase the amount of PPP funds for which
their businesses would be eligible. He generally charged clients a 2 to 20
percent commission on the PPP loans they received and even listed his
ex-wife as Royalty Tax’s authorized representative, without her consent,
when seeking an inflated PPP loan for his own business.
In total, 97 false PPP loan applications were ultimately approved, and Mr.
Jalloul’s clients were awarded more than $12 million in PPP money.
Those clients paid him at least $972,114 in fees. Mr. Jalloul also admitted
to submitting a fraudulent PPP loan application on behalf of his tax
preparer company and received $163,500 in PPP funds.
Texas Man
Sentenced for
$24 Million
COVID-19
Relief Fraud
Scheme
On July 28, 2021, a Texas man was sentenced to more than 11 years in
prison for wire-fraud and money-laundering offenses in connection with
his fraudulent scheme to obtain approximately $24.8 million in forgivable
PPP loans.
Dinesh Sah, 55, of Coppell, pleaded guilty on March 24, 2021. According
to court documents, Sah submitted 15 fraudulent applications, filed under
the names of various purported businesses that he owned or controlled,
to eight different lenders seeking approximately $24.8 million in PPP
loans. Sah claimed that these businesses had numerous employees and
hundreds of thousands of dollars in payroll expenses when, in fact, no
business had employees or paid wages consistent with the amounts
claimed in the PPP applications. Sah further submitted fraudulent
documentation in support of his applications, including fabricated federal
tax filings and bank statements for the purported businesses, and falsely
listed other persons as the authorized representatives of certain of these
businesses without the authority to use their identifying information on the
applications.
Based upon his false statements and fabricated documents, Sah received
over $17 million in PPP loan funds and diverted the proceeds for his
personal benefit, using them to purchase multiple homes in Texas, pay
off the mortgages on other homes in California and buy a fleet of luxury
cars, including a Bentley convertible, Corvette Stingray and Porsche
Macan. Sah also sent millions of dollars in PPP proceeds in international
money transfers. As part of his guilty plea, Sah agreed to forfeit, among
$24,800,000
Appendix 5
Fraud Investigations – Paycheck Protection Program
(PPP)
May 2023
EVAL-23-001
72
other property, eight homes, six luxury vehicles and more than $9 million
in fraudulent proceeds that the government has seized to date.
In addition to the prison sentence, Sah was ordered to pay
$17,284,649.79 in restitution.
California Man
Sentenced to
Over 11 Years
for $27 Million
PPP Fraud
Scheme.
A Southern California man was sentenced to 135 months, the equivalent
of 11 years and three months, in prison for submitting fraudulent
applications seeking money from the PPP, submitting false statements to
a financial institution, and money laundering.
Robert Benlevi, 53, of Encino, was convicted by a Federal jury of bank
fraud, making false statements to a financial institution, and money
laundering. According to court documents, and evidence presented at
trial, Benlevi submitted 27 PPP loan applications to four banks between
April and June 2020 on behalf of eight companies solely owned by
Benlevi. In the applications, Benlevi sought a total of $27 million in
forgivable PPP loans. In his fraudulent applications, Benlevi represented
that each of his companies had 100 employees and average monthly
payroll of $400,000, even though he knew that the companies did not
have any employees or payroll expenses.
The evidence further showed that Benlevi also submitted fabricated IRS
documents falsely stating that each of the companies had an annual
payroll of $4.8 million. Based on Benlevi’s fraudulent loan applications,
three of Benlevi’s companies obtained $3 million in PPP funds. Although
Benlevi falsely represented that the funds sought through the PPP loan
applications would be used for payroll and certain other business
expenses, the evidence showed that he instead used them for personal
expenses, including cash withdrawals, payments on his personal credit
cards, transfers to other personal and business accounts he controlled,
and renting an oceanfront apartment in Santa Monica.
$27,000,000
Department of
Justice Press
Release Not
Available - See
Article for
Information
Three individuals were indicted for their roles in a scheme to defraud the
government of over $200,000 in COVID-19 relief money and
unemployment benefits. Records on file with the U.S. District Court
Clerk’s Office in Abingdon claim Pamela R. Ziglar, her husband, Kenneth
D. Ziglar, and their daughter, Melody Z. Weese, “developed a scheme” to
“file fraudulent claims for funds authorized by various programs under the
CARES Act.”
According to the indictment, the Ziglars and their daughter “conspired to
file fraudulent applications, by means of false and fraudulent
representations,” for PPP, unemployment funds, and Economic Injury and
Disaster Loan (EIDL) grants. The couple allegedly made material
misrepresentations about their business, the number of employees at
their business, as well as their employment status as part of these
applications. The federal indictment contends they used the PPP and
EIDL money to “fund lifestyle expenses including groceries, fuel, general
shopping, fast food purchases, and two separate family vacations.” The
third individual, their daughter, was employed at the bank where a
$200,000
Appendix 5
Fraud Investigations – Paycheck Protection Program
(PPP)
May 2023
EVAL-23-001
73
checking account was opened and used to deposit funds received from
these programs.
Two Former
Employees at
New York
Branch Of
Major Bank And
An Accountant
Charged With
Cares Act Loan
Fraud
A criminal complaint was unsealed and two criminal informations were
filed charging Anuli Okeke, Charlene Wint, and Hashim Campbell,
respectively, for their participation in a conspiracy to commit bank and
wire fraud in connection with a scheme to fraudulently obtain more than
$3 million from the PPP and EIDL program, both of which were created
by Congress as part of the CARES Act. The defendants in this case –
two bank officials at a major financial institution and an accountant – are
charged with misusing the bank’s operations for their personal benefit, in
order to fraudulently obtain Government-guaranteed loans which were
intended to help small businesses during the current pandemic.
As alleged in the charging documents, Okeke, a branch manager at a
large financial institution, Wint, a supervisor at the same branch, and
Campbell, a tax preparer, along with their co-conspirators, provided false
tax documents and helped borrowers to complete and submit PPP
applications that contained fraudulent information. Despite knowing that
the PPP applications contained false statements, the branch manager
signed each PPP loan application on behalf of the bank and submitted
them for approval. Once the loan proceeds were disbursed to the
borrowers, defendants and their co-conspirators received kickbacks from
the loan proceeds. Moreover, Okeke, Wint, Campbell, and their co-
conspirators were involved in preparing fraudulent EIDL applications that
fabricated borrower’s financials, and at times sought loans for individuals
who were not legitimate business owners.
$3,000,000
Three South
Florida Men
Sentenced for
Conspiring to
Launder
Fraudulently
Obtained Covid-
19 Relief Money
and Proceeds
from Business
Email
Compromise
Schemes
A South Florida federal district judge sentenced three Broward County
residents to prison terms in December 2021 for conspiring with each
other to launder proceeds obtained from business email compromise
schemes172 and fraudulently obtained Covid-19 relief loans.
When the coronavirus pandemic hit the United States in 2020, the
defendants allegedly initiated a new fraud scheme using existing shell
companies from a previous email compromise scheme beginning in 2017,
as well as newly created and reactivated shell companies. Defendants
allegedly submitted false and fraudulent loan applications under the PPP
and EIDL Program. In June and July 2020, through false submissions in
the names of their shell companies, the defendants fraudulently applied
for and received close to $2 million in PPP and EIDL funds, which was
laundered amongst the co-conspirators.
$2,000,000
172 According to the U.S. Department of Justice Press Release, a business email compromise scheme is a type of computer
intrusion that occurs when an employee of a company is fooled into interacting with an email message that appears to be, but is not,
legitimate. When an unwitting user clicks on either the link or the attachment, it releases some form of malware (i.e., a virus,
spyware, or other program application) that subsequently infects the employee’s email and/or computer. The malware may affect
Appendix 5
Fraud Investigations – Paycheck Protection Program
(PPP)
May 2023
EVAL-23-001
74
South Florida
U.S. Attorney’s
Office to Lead
COVID-19
Fraud Strike
Force Team
Against
Pandemic
Relief Fraud
The Southern District of Florida charged Daniel Hernandez, 50, a Market
Manager for a top national bank, with orchestrating a $30 million COVID-
19 relief fraud scheme. According to the criminal complaint affidavit,
Hernandez – who oversaw 80 bank employees and more than 20
branches throughout South Florida – recruited bank customers and at
least one former bank employee to submit over 90 fraudulent PPP loan
applications. It is alleged that Hernandez advised the recruits on how to
file the applications and what to include in them, then used his position at
the bank to ensure the fraudulent loans were reviewed and, when
possible, approved. The applications sought over $30 million in fraud
proceeds. The investigation to date has identified over $15 million in
fraudulent loans issued.
In addition to Hernandez, the Southern District has charged others with
participating in the fraud. Willian Alexander Posada Sandrea pled guilty
and is scheduled to be sentenced on October 24, 2022.
Armando De Leon, who worked at the bank with Hernandez, was
charged with conspiracy to commit wire fraud. Javier Alfonso Barata, and
Alvaro Enrique Castillo along with Douglas David Melean Socorro have
also been charged.
$30,000,000
Federal
Complaint Filed
Against Austin
Man for Multi-
Million Dollar
Fraud Scheme
Related to the
SBA Paycheck
Protection
Program During
COVID-19
Pandemic
Michael McQuarn was arrested for allegedly defrauding the SBA PPP of
more than $2 million. A criminal complaint charges McQuarn with wire
fraud and making false statements to the SBA. The complaint alleges
that he implemented a scheme whereby he submitted fraudulent
applications and supporting paperwork of two fictitious companies he
created to secure SBA-backed PPP loans. McQuarn claimed the funds
were for legitimate business purposes when, in fact, the money was used
for his own personal use, including purchasing a 26’ Pavati Wake Boat
and a Rolls Royce.
$2,000,000
an employee’s individual account or spread throughout the computer network. The malware, once executed, can harvest
information including but not limited to credentials and passwords, thereby giving the intruder access to sensitive company
information.
Appendix 6
Bank Name Reference
May 2023
EVAL-23-001
75
Privileged and Sensitive Information - For Official Use Only
This table presents the bank names associated to the unique bank identifiers used throughout
this report.
Bank Reference
in Report
Bank 1
Bank 2
Bank 3
Bank 4
Bank 5
Bank 6
Used
Bank Name
(b) (8)
(b) (8)
(b) (8)
(b) (8)
(b) (8)
FDIC Certificate
Number
Region
Bank 7
Bank 8
Bank 9
Bank 10
(b) (8)
(b) (8)
(b) (8)
(b) (8)
(b) (8)
Source: FDIC OIG created unique identifiers based on information identified in FDIC supervisory workpapers
Appendix 7
FDIC Comments
May 2023
EVAL-23-001
76
Appendix 7
FDIC Comments
May 2023
EVAL-23-001
77
Appendix 7
FDIC Comments
May 2023
EVAL-23-001
78
Appendix 7
FDIC Comments
May 2023
EVAL-23-001
79
Appendix 7
FDIC Comments
May 2023
EVAL-23-001
80
Appendix 7
FDIC Comments
May 2023
EVAL-23-001
81
Appendix 7
FDIC Comments
May 2023
EVAL-23-001
82
Appendix 7
FDIC Comments
May 2023
EVAL-23-001
83
Appendix 7
FDIC Comments
May 2023
EVAL-23-001
84
Appendix 7
FDIC Comments
May 2023
EVAL-23-001
85
Appendix 7
FDIC Comments
May 2023
EVAL-23-001
86
Appendix 7
FDIC Comments
May 2023
EVAL-23-001
87
Appendix 7
FDIC Comments
May 2023
EVAL-23-001
88
Appendix 7
FDIC Comments
May 2023
EVAL-23-001
89
Appendix 7
FDIC Comments
May 2023
EVAL-23-001
90
Appendix 7
FDIC Comments
May 2023
EVAL-23-001
91
Appendix 7
FDIC Comments
May 2023
EVAL-23-001
92
Appendix 7
FDIC Comments
May 2023
EVAL-23-001
93
Appendix 7
FDIC Comments
May 2023
EVAL-23-001
94
Appendix 8
Summary of FDIC Corrective Actions
May 2023
EVAL-23-001
95
This table presents management’s response to the recommendations in the report and the
status of the recommendations as of the date of report issuance.
Rec.
No.
Corrective Action: Taken or
Planned
Expected
Completion Date
Monetary
Benefits
Resolved:a
Yes or No
Open or
Closedb
1
RMS will update the RMS Manual to
ensure that examination guidance on
Government-guaranteed loan risks
and activities, including the
assessment of loan classifications,
concentrations, and off-balance
sheet risk is comprehensive and
centralized for better access.
January 31, 2024
$0
Yes
Open
2
RMS will update the RMS Manual to
ensure that examination guidance on
Government-guaranteed loan risks
and activities, including the
assessment of loan classifications,
concentrations, and off-balance
sheet risk is comprehensive and
centralized for better access.
January 31, 2024
$0
Yes
Open
3
RMS will update the Examination
Profile Script List to include additional
questions to identify bank
participation in Government-
guaranteed loans.
September 30, 2023
$0
Yes
Open
4
Consistent with its risk-focused
approach, the FDIC will instruct
examiners-in-charge to include on
Safety and Soundness Request
Lists, a request that bank
management identify Government-
guaranteed loans and provide
relevant risk and risk management
related information, as appropriate.
September 30, 2023
$0
Yes
Open
5
The RMS Director will issue an RD
Memorandum with an operating
procedure that requires Washington
Office policy staff to develop a risk
assessment on future Government-
guaranteed loan programs involving
FDIC-insured and FDIC-supervised
institutions that will include an
assessment of applicable risks,
including fraud risk.
January 31, 2024
$0
Yes
Open
6
The RD Memorandum described in
recommendation 5 will require that
future guidance include all risks
associated with future Government-
guaranteed loan programs and have
instructions to allow for consistency
in supervisory activities.
January 31, 2024
$0
Yes
Open
Appendix 8
Summary of FDIC Corrective Actions
May 2023
EVAL-23-001
96
7
RMS will update its June 2020 RD
Memorandum to describe existing
procedures for heightened monitoring
for banks with remaining exposures.
The Memorandum will refer to
existing communications protocols
and discussions with regulators to
communicate observed weaknesses
and will emphasize the importance of
expanding reviews when existing
AML/CFT controls display
weaknesses.
May 31, 2023
$0
Yes
Open
8
RMS will coordinate with the other
Federal bank regulators and
determine whether revisions are
needed to FDIC guidance and
practices for assessing
concentrations and loan classification
to ensure uniform application of
supervisory approaches with the
other Federal regulators.
January 31, 2024
$0
Yes
Open
9
RMS will discuss supervisory
approaches to banks regarding
concentrations and loan classification
with the other Federal bank
regulators.
January 31, 2024
$0
Yes
Open
10
RMS will develop and provide
training consistent with the planned
updates to the RMS Manual,
Examination Profile Script, and
Examiner Request List.
March 31, 2024
$0
Yes
Open
11
RMS will develop and distribute a list
of employees that have specialized
experience in Government-
guaranteed loan programs.
September 30, 2023
$0
Yes
Open
12
RMS will provide a link on its internal
webpage to
, which contains portfolio
information for its various
Government-guaranteed loan
programs. RMS will also work with
the Division of Insurance and
Research to identify other reports
that may be helpful to examiners.
June 30, 2023
$0
Yes
Open
13
RMS will initiate discussions with
o determine whether loan
portfolio information as described in
the recommendation is available for
and whether
is willing and able to share such
information.
July 30, 2023
$0
Yes
Open
14
The FDIC will contact the other
agencies mentioned in the OIG’s
report to discuss the ability and
willingness of these agencies to
July 30, 2023
$0
Yes
Open
(b) (8)
Appendix 8
Summary of FDIC Corrective Actions
May 2023
EVAL-23-001
97
establish arrangements to facilitate
information sharing.
15
RMS will issue an RD Memorandum
describing procedures for processing
requests for confidential information
by, and requesting confidential
supervisory information from, Federal
agencies that administer
Government-guaranteed loan
programs. The RD Memorandum will
also describe procedures for
documenting information sent or
received in the FDIC’s system of
record.
January 31, 2024
$0
Yes
Open
16
The RD Memorandum described in
recommendation 15 will set forth
procedures for when it may be
appropriate to communicate about
emerging risks with Federal agencies
that administer Government-
guaranteed loan programs.
January 31, 2024
$0
Yes
Open
17
The FDIC will contact other Federal
Agencies that administer
Government-guaranteed loan
programs to determine whether such
lists are available and whether those
agencies would be willing to share
those lists. In such cases, protocols
will be established for sharing the
lists.
July 30, 2023
$0
Yes
Open
18
RMS will add procedures to the RD
Memorandum referenced in
recommendation 15 to memorialize
existing internal sharing procedures.
January 31, 2024
$0
Yes
Open
19
RMS will develop and implement
updated guidance on the retention of
workpapers, including establishing a
timeframe for uploading supervisory
records to its system of record.
December 31, 2023
$0
Yes
Open
a Recommendations are resolved when —
1.
Management concurs with the recommendation, and the OIG agrees the planned corrective action is
consistent with the recommendation.
2.
Management does not concur or partially concurs with the recommendation, but the OIG agrees that the
proposed corrective action meets the intent of the recommendation.
3.
For recommendations that include monetary benefits, management agrees to the full amount of OIG
monetary benefits or provides an alternative amount and the OIG agrees with that amount.
b Recommendations will be closed when the OIG confirms that corrective actions have been completed and are
responsive.
Federal Deposit Insurance Corporation
Office of Inspector General
3501 Fairfax Drive
Room VS-E-9068
Arlington, VA 22226
(703) 562-2035
The OIG’s mission is to prevent, deter, and detect waste, fraud,
abuse, and misconduct in FDIC programs and operations; and to
promote economy, efficiency, and effectiveness at the agency.
To report allegations of waste, fraud, abuse, or misconduct
regarding FDIC programs, employees, contractors, or contracts,
please contact us via our Hotline or call 1-800-964-FDIC.
FDIC OIG website
www.fdicoig.gov
Twitter
@FDIC_OIG
www.oversight.gov/