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#371364 - 06/09/05 07:02 PM loan disbursement
beegee Offline
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Joined: Feb 2004
Posts: 1,087
We are trying to implement some internal controls on loan disbursements to detect if a loan officer is committing fraud by creating a phantom borrower or other ways to manipulate the loan disbursement process.

Does anyone have any ideas on this matter?


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#371365 - 06/10/05 06:27 PM Re: loan disbursement
LoisLane Offline
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Joined: Oct 2001
Posts: 1,570
Wisteria Lane..
Get a report generated that groups all like-addresses. When a phantom borrower is created, the loan officer may use his/her home address or may use one PO box (opened especially for this purpose) for all the bogus loans.
And where is Superman when I need him?

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#371366 - 06/10/05 09:13 PM Re: loan disbursement

Ensure there is segregation between the loan officer, disbusement and/or booking onto the system. There should be someone other than the LO seeing the completed loan package.

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#371367 - 06/13/05 02:25 PM Re: loan disbursement
beegee Offline
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Joined: Feb 2004
Posts: 1,087
The system we have in place now is the loan officer has the ability to disburse funds. The auditors recommended we change our process and take this away from the loan officer, but management and the board wants to keep the process the way it is so as not to slow down the process and hurt customer service. I am trying to come up with some good detective audit steps to help mitigate some the risk.

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#371368 - 06/13/05 11:04 PM Re: loan disbursement
rlcarey Offline
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Joined: Jul 2001
Posts: 77,239
Galveston, TX
Good luck - standard separation of duties requires these be separated. Here is a quote from the FDCI Exam Manual and I'm sure you will find like references in the other regulator's manuals also. What makes your bank so special to require otherwise??

Segregation of Duties
The participation of two or more persons or departments in
a transaction causes the work of one to serve as proof for
the accuracy of another. Additionally, when two or more
persons are involved in a transaction, the possibility of
fraud diminishes considerably. Ideally, duties should be
arranged so that no one person dominates any transaction
from inception to termination. For example, a loan officer
should not be allowed to disburse loan proceeds..........
The opinions expressed here should not be construed to be those of my employer:

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#371369 - 06/14/05 01:04 PM Re: loan disbursement
Risk Officer Offline
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Joined: Apr 2001
Posts: 205

to detect if a loan officer is committing fraud

Key word - detect. Segregation of duties is a preventative control, and is definitely one of the best controls in the loan disbursement process. Of course, it is also strongly recommended/required by the regulators.

However, here are some other compensating (detective) controls that you might consider:
- I agree with the address matching exercise, as mentioned above;
- consider requiring a second signature on disbursement checks/deposit tickets.
- have a variety of persons (loan officers, loan committee, Board) review new loan listings.
- train employees in the note department (or those that book the loan on the system) about fraud indicators.
- checking account reviews (to catch disbursements made into the loan officers account (unlikely)).

One key part of internal control, often ignored, is the control environment. Make sure management at all levels sets a strong tone at the top. Train all employees in ethics, fraud indiactors, etc. Make it clear that fraud will not be tolerated and all suspected improper activities should be reported.
My opinions are just opinions.

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#371370 - 06/14/05 02:58 PM Re: loan disbursement
Andy_Z Offline
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Joined: Oct 2000
Posts: 27,353
On the Net
I would have to look at the entire process. If by "disburse" you mean close the loan and hand out checks, I believe risks can be mitigated by others preparing the loan documents and checks. A good monitoring program of closed loan can also support this. But the process and controls would need to be reviewed.
My opinions are not necessarily my employers.
Rules and Regs minus Relationships equals Resentment and Rebellion. John Maxwell

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