What exactly is the advantage of a shadow loan?

What is a shadow loan?

I think you are referring to a shadow file, not loan.

We discourage shadow files. Lenders, or others for that matter, tend to keep things in the shadow files that should not be there, and if an examiner got hold of one you could be in for a bumpy ride.

The only advantage is the person keeping the shadow file doesn't have to request the file to get the information they may be looking for. A shadow file (IMO) is a customer file and the regulators will want to look at any file pertaining to the customer. I advise against shadow files.

Not sure if it's the same thing, but many of our lenders voluntarily keep "shadow files" (copies of loan documentation) at their desks because things tend to get lost/misplaced enroute to our file rooms. The shadow files help a lot during a Consumer Loan Review when I open the file to find GFEs or other necessary disclosures are missing. Many lenders save themselves from being cited for violations by producing copies from their shadow files. Now, if I could only figure out which black hole the missing documents end up in !

We called them "desk files" and I kept them when I was on a loan desk. Data was handier than requesting a file be sent to me, duplicate items were helpful if an original was lost between my sending it and it's being filed, I could react to a customer's request much faster, etc.

But that was then. Safeguarding Customer Information and security were less of an issue then. I believe that if kept in today's environment, they need to be secured and with restricted access.

There are pluses and minuses to shadow files, but if you allow shadow files (or know they exist), you should be reviewing them for content. They would be considered official records of the bank and could be held against you in either court (thru subpoena) or a fair lending review. You need to know what is in them. Some "unofficial" written officer comments, etc, could sink the ship!

In reply to:

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Safeguarding Customer Information and security were less of an issue then. I believe that if kept in today's environment, they need to be secured and with restricted access.

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This is a very true statement and, with all the hoopla on safeguarding information, a suggestion that would be well to follow.

I still advise against shadow (desk) files, primarily due to a previous employer getting into a lot of fair lending and other regulatory violations due to the information being kept in the file.

If you do use them, then please take Andy's advice on security and also routinely audit them just like you would the shelf file. You may be surprised at what you will find in them.

This is perfect timing. We have a fairly new lender and in reviewing his note and credit files it seems as he's keeping the financial information and credit bureau reports in his office without forwarding copies to the central area. Any opinions on this?

I would recommend that a bank have specific policies/procedures that govern the retention of customer information - regardless of whether you have a centralized or decentralized environment. If a LO is not following policy - action should be taken. This should not be an optional compliance situation. There are too many risk areas as everyone has pointed out, customer information security, lawsuits, fair lending, etc.

I would not allow it. How does your internal and external auditors audit the file if that information is not in the "customer's" file, but only in the shadow file? You also have the customer information security issue to deal with that Andy mentioned.

Again, I'm totally against shadow files.

Randy, your 1 or 2 minutes ahead of me today.

If you haven't quessed, I have a passion for shadow files about as strong as you do for overdraft proctection accounts.

As a loan ops manager - my approach to that one was to impress on the lenders that the files did not belong to them. They were the property of the bank. As such, anything in them needed to be accurate to the best of our knowledge and according to our policies.

It just occurred to me that the poster may be asking about a shadow bank rather than file. You know - your system that keeps track of non-accural and charged off loans, and provides statements, bills, etc. to borrowers.

Great information - but - I did really mean "shadow loans". They represent a charged-off loan, in which the customer makes payments that are reflected on the "shadow" loan, but not on the charged off note as recoveries. The bookkeeping may even be kept on a spreadsheet separate from the main system. In the case of which I speak, the lending dept is requesting a separate class code to set these up in. I see only bad karma here.

Lestie, that's a good point, and I may have gotten the thread off on the wrong subject by assuming Mordac was talking about a "shadow file". If so, I'm sorry.

We'll have to see if Mordac clarifies the question.

The loan when charged off did not wipe out the legal liabilty of the borrower to pay unless, of course, the loan was charged off because of bankruptcy. So your loan docs are still enforceable. If the customer still makes payments, then those payments ought to be accounted for in a 'shadow' loan. The customer does not need to know their loan was charged off. Now, how the payments are treated on the books of the bank is another matter. Maybe someone can speak to this, but I believe at least the pricipal is a credit to the loan loss reserve. I could be wrong. Bottom-line, there's nothing wrong with shadow loans. They were used frequently in the 80's when we all did a lot of loan collections.

If you are not posting recoveries to the actual charge off loan, how does that affect FCRA?

How do you verify payments are posted and not pocketed?

If you have an automated way to track recoveries made to charge off loans - I would take full advantage of it. A manual system for tracking recoveries is the surest way to open yourself up to collector fraud and embezzlement. This is a common practice and can be accomplished through separate class codes or through a shadow bank. I don't think that once you report a loan as charged-off to a credit bureau, you have any obligation to update the record, unless the charged-off loan is settled in full or settled through some other agreement (reduced pay-off in exchange for settlement in full).

Re "shadow accounting" for charged off loans, before you create anything, check your loan system.....if it is a good one it may very well have the built in capability to do this accounting. It should keep a "book balance" and a customer balance...with bills generating on the customer balance. It would accurately track the amount charged off, manage interest payments that must be applied to principal on charged off portions, etc. If your system will manage this for you, it is much much better than trying to do this accounting manually.

We do not have a shadow bank and our loan software program is ITI.

I'm still concerned that the customer could dispute the credit bureau information if it does not accurately reflect the situation.

Gaaaa!!!! I'm speaking in rhymes.

I think you are worrying needlessly about the credit bureau information. It's kind of like asking how dead is he? Dead is dead - charged-off is charged-off unless settled.

We have ITI - and the "charged-off" loans are booked to a special department that is set up. Most of these loans are on non-accrual, and it makes it easier to house all of these strays in one area. The handy part is, I know that none of the loans in that particular department get reported for CRA!!!!

I am fairly certain that ITI has the dual bookkeeping capability. You should discuss this with your vendor contact. Discuss how it handles bureau reporting. But remember that a charge off is not a release from legal liability for the customer. It is an accounting treatment on the bank's books that relates to proper recognition of interest accruals and asset quality.

Back in another time and another bank, we converted to a system that had shadow loans. Charged off loans were booked to a separate branch (one for central admin) and recovery payments were applied to the shadow loan. I believe there is a difference in the crediting of payments received on charged off loans, for general ledger purposes, and this allowed the interface to be set up accordingly and not interfere with the normal loans.

Now this was in the day before and after pc and the loan clerk kept all the charged off loans on ledger cards and tracked payments on these ledger cards and in a steno notebook.