OREO Audit

Posted By: hawksfan

OREO Audit - 04/23/09 06:56 PM

I wish I were talking about cookies because that would be way more FUN!

Does anyone have an audit plan covering the testing of Other Real Estate Owned that they'd be willing to share? We've done these audits in the past but there wasn't much to look at or audit in the past. Times have changed!

Any help is appreciated. Thanks!
Posted By: DerrickAuditor

Re: OREO Audit - 04/24/09 01:07 PM

Cookies are more fun to discuss.

A few steps to consider:
a) Accounting: ensure OREO properties are recorded at market (appraised value less the cost to sell (e.g. broker commissions, legal and title fees, and closing costs)) at acquisition of the OREO property. This becomes the new cost basis. Any loss on the loan must be charged to the allowance at acquisition. After acquisition of the OREO property, it must be recorded at the lower of cost or market (appraised value less the cost to sell). This must be evaluated on an asset by asset basis at least quarterly rather than in total of all OREO properties. Any expense incurred must be recognized immediately in non-interest expense.

b) A new appraisal should be obtained when OREO is acquired and at least annually thereafter to determine fair value to ensure that material changes in market conditions or the physical aspects of the property are recognized.

b) There should be defined roles and segregation of duties between the person managing the OREO properties, accounting, and loan operations.

c) Review to ensure efforts are made to maintain the OREO properties in a marketable condition. This is important not only to improve the ability to obtain the best price for the property, but also minimize liability and reputation risk for breaking local property and fire codes.

d) Confirm the property is insured - this may fall under the bank's general umbrella policy or each property may need its own insurance policy.

e) Confirm property taxes are paid and current.

f) Review "other expenses" and ensure they are supported with documentation and are reasonable and appropriate (e.g. utility bills).
Posted By: hawksfan

Re: OREO Audit - 04/27/09 11:59 AM

Thank you for your input. I had most of this in the audit already. Thank goodness I'm on the right track. I do appreciate your help!
Posted By: Andy_Z

Re: OREO Audit - 04/27/09 03:22 PM

As I recall we also had issues many years ago with properties generating rental income. I believe the issue was that we applied the income against the property and that was incorrect. It was to be income since the property was already valued appropriately and would clear itself in a sale. (I wasn't directly involved in the management of these accounts, so correct me if I am wrong.) My point is, properly account for the income as well.
Posted By: hawksfan

Re: OREO Audit - 04/27/09 04:03 PM

Great point. I never thought about that before. We haven't had any income properties yet but I will keep my eyes open for that. Thanks!
Posted By: Cornfed Turtle

Re: OREO Audit - 05/13/09 04:03 PM

Our audit is a-changin' too. Great point about the income. We started renting one....income recognized correctly but I'm glad our staff looked. I'm also looking at financed OREO that sold.

What about increases or decreases (more likely) in value? I'm looking at how the decrease is valued and whether the decline was BOD approved. I'm heading to the exam manual next, but I'd love your thoughts. We've put the decrease in two different places....I'm betting one of them is wrong.
Posted By: BlueEyedGirl

Re: OREO Audit - 05/13/09 08:20 PM

I'm reviewing OREO right now. Our Accouting Department issued a policy that states if a property has been held for 12 months without sale, a new appraisal or certification letter from an independent appraiser must be obtained annually thereafter. If the new appraisal reflects a permanent impairment of the property's value, the bank may record the decline by a charge against current earnings. However, if a decline is not judged to be permanent, the bank must establish a valuation reserve.

If the property value has increased, the difference can be posted to the reserve (previously established), but the reserve balance cannot be lower than zero.

Now I have to test to see if they are following what they issued!