Exhibit 7.9 Sample Loan Operations Risk Based Audit Program

Transcription

1 Sample Loan Operations Risk Based Program Inquire about and review written procedures followed during the process of opening and setting up new loans on the system, and procedures on loan approval and reconciliation of accounts. Review several months of loan general ledger accounts (loans in process, loan control, loan interface, and loan payments in process) to ensure: No stale items are present and reconciling clear in a timely manner. Sample Loan Operations No individual or employee has items appearing frequently on reconciliations. Reconciliations are being performed and reviewed accurately and in a timely manner. Confirm a sample of loans (all loan types) directly with the borrowers using positive confirmation forms. The sample should include past due and problem loans. Mail second requests and perform alternate procedures to verify that the loan balances were proper for confirmations for which no reply was received. Through inquiry and observation, determine whether controls are in place regarding the following: Loan officers are prevented from making loans to themselves or family members. Loans are not disbursed before proper supporting documentation is on file. Waivers of loan fees are appropriate and approved by management. Loan collections are handled by individuals without ending authority. High 7-9 Moderate 4-6 Low 1-3

2 Sample Loan Operations Risk Based Program (cont.) Loans at 0 percent or excessively low interest rates are not permitted. Loans with unusually long first payment due date are not permitted. Obtain copies of loan and allowance reports provided to the Board of Directors and the supporting documentation for the same period and compare the reports to verify their accuracy (all types of loans and the allowance information). Review system-generated loan reports received by management and inquire if management uses the reports. Review the prior internal audit report to ensure all significant findings have been resolved. Review related loan review reports for any control weaknesses noted that might influence the audit testing. Negotiable Collateral Inquire about and review procedures followed to ensure adequate loan documentation is obtained, including documentation on the tickler file system. Select a sample of loans granted since the last examination and perform the following actions: Verify, by reference to the note, that the customer name, original loan amount, loan date, term, payment schedule, and interest rate are properly reflected on the loan system. Ensure notes are complete and all note changes were initialed by the borrowers. Ensure loan was within lending officer s authority or was otherwise properly approved.

3 Sample Loan Operations Risk Based Program (cont.) Review for evidence of credit analysis, collateral value and existence, and disbursement of proceeds. Verify that the collateral value and loan-tocollateral value were adequately documented and the amortization schedule was within prescribed policy guidelines. Verify that insurance is in force, has a loss payable clause naming the financial institution as payee, and is of an adequate amount to protect the institution s interest in the property. Verify that all commercial real estate loan appraisals were performed by an appraiser from the approved list of real estate appraisers. Determine that any documentation exceptions were recorded by internal loan review and, if not cleared in a timely manner, reported to management. Determine that the approved list of real estate appraisers is reviewed by senior management semi-annually. Review tickler files and/or control reports to ensure documentation exceptions are resolved in a timely manner. Inquire about and review procedures for handling the receipt and control of negotiable collateral. Utilizing a report listing loans with negotiable collateral, select a sample and trace to the collateral register. Verify that the collateral was held under dual control and was as described. Verify that the proper documentation was present to ensure collateral could be negotiated if necessary.

4 Sample Loan Operations Risk Based Program (cont.) Obtain and review procedures for handling the receipt of, and general ledger and subsidiary posting of, loan payments, including subsidiary and general ledger reconciliation procedures. Select a sample of loan payments and perform the following actions: Trace the loan payment tickets to proper posting on the customer s account and verify the name and address to the system if available on ticket. Verify that each payment ticket indicates who accepted the payment. Note that employees receiving payments do not perform duties incompatible with the receipt function. Delinquent Loans Inquire about and review procedures followed in the preparation and review of delinquent loan reports. Obtain the most recent delinquent loan report and: Trace a sample of delinquent loans from system-generated delinquent loan reports to the management reports to verify completeness. Verify information (loan balances, number of days past due, etc.) on the delinquent loan reports in this sample was accurate. Verify that income recognition was discontinued on a sample of loans past due 90 or more days and the loans were listed as nonaccrual loans in board reports. For loans not on non-accrual, determine that documentation was on file denoting the reason the loan was still accruing interest.

5 Sample Loan Operations Risk Based Program (cont.) Determine how the system handles dual or shadow posting of payments received on nonaccrual loans to ensure accuracy of account balances for collectibility as well as for financial reporting purposes. Ensure that interest shown on the system through shadow posting is not included in daily accrued interest totals. Inquire about and review procedures governing computation, recording, and collection of late charges. Select a sample of payments made on delinquent loans and review for the following: Proper computation and recording of late charges. Collection of late charges. Proper approval when waiving late charges. Review a report on loan delinquencies categorized as direct or indirect to detect any significant differences in delinquency ratios. Obtain and review procedures for charging off loans. Review procedures for monitoring and collecting loans that have been charged off. Interest Income and Accrued Interest Receivable Accounts Obtain and review procedures followed in the recognition of loan income, including interest, commitment fees, prepayment penalties, application fees, and late charges. Review the procedures over reconciliation of the accrued interest receivable balances.

6 Sample Loan Operations Risk Based Program (cont.) Review a spreadsheet that recalculates accrued interest receivable balances on a sample of individual loans and agree to the system calculation. Trace the daily interest earned from the general ledger to the subsidiary ledger. Trace the daily income accrual entries from the general ledger accrued receivable account debits to the interest income account credits. Request a report capturing any conflicting management class account coding to determine whether all accounts were properly coded on the subsidiary ledger. For the audit period, test the overall reasonableness of interest income by calculating the yield percentage of loan income accrued to average outstanding loans per the general ledger. Review monthly interest income yields and verify that fluctuations above management s scope are reported to the Board of Directors. Request and review a report listing loans with interest rates equal to or less than 5 percent. Trace the interest rate on the system to the note to determine the reason for the below market rate. Obtain and review procedures followed in establishing and monitoring employee accounts to ensure that employee loans are specially coded or segregated from other loans, properly approved, and periodically reviewed by management for unusual activity. Determine whether employee and officer loan accounts are reviewed for unusual activity on a regular basis.

7 Sample Loan Operations Risk Based Program (cont.) Determine whether employee and officer loans and deposit accounts are specially coded on the computer system. Using a complete listing of employee loans, trace a sample of loans to proper approval. Review activity in employee loan accounts for unusual items. Obtain and review monthly computer-generated employee loan reports. Construction Loans Obtain and review procedures followed in establishing and monitoring construction loans. Review a sample of construction loan files and perform the following actions: Verify that the balance on the subsidiary did not exceed the approved loan amount. Vouch fund disbursements to properly signed and endorsed checks. Ascertain that before disbursement the loan officer has acquired inspection reports, a verbal title policy update, and partial lien waivers from contractors or suppliers. Verify that principal and interest payments are being made in accordance with the agreement. Ensure spec house construction loans meet the requirements outlined in the loan policy. Verify that adequate hazard insurance is maintained as needed. Obtain and review procedures followed during the process of foreclosure and repossession of real estate and other assets, including the recording of transactions.

8 Sample Loan Operations Risk Based Program (cont.) Review the balance of the general ledger Real Estate Owned account, compare to a detailed listing of all assets comprising the balance of the account, and research any discrepancies. Review a sample of loan files for loans in foreclosure and determine that: The institution had the proper documents on hand to assure its lien on the property involved. Insurance coverage on the property was current and adequate. Tax payments were made on the property. The asset balances in the Real Estate Owned account do not exceed the appraised values. Review credits to the Real Estate Owned account for property sold and for miscellaneous items. Trace charge-offs to the reserve for loan losses general ledger account and to approval for charge-off in the Board of Directors meeting minutes. Review rental agreements and test the general ledger rental income account entries to ensure proper rental payments were received. Participation Loans and Agreements Obtain and review procedures followed for establishing and monitoring participation loans. Select a sample of files on participation loans to ensure that participation agreements and other documentation supporting loan balances are complete.

9 Sample Loan Operations Risk Based Program (cont.) Test participation certificates and records and determine that the parties share in the risks and contractual payments on a pro rata basis in accordance with the participation agreements. Review reconciliations of loan balances for participations purchased to the latest remittance reports from the lead institution, and confirm the balance directly with the lead institution. For participations sold, confirm the participating institutions outstanding balances directly with the participating institutions. Real Estate Appraisals and Evaluations Review the board-approved loan policy to determine whether it establishes an effective real estate appraisal and evaluation program. Using a sample of loans granted since the last examination, perform the following actions: Review loans sampled that required certified or licensed appraisers and determine that the appraisals meet the minimum appraisal standards. Review loans to ensure that evaluations are performed for all real estate loans that do not require a certified appraisal. Determine that the person who performed the appraisal meets the requirements of appraiser independence. Obtain and review training materials and training activities related to appraisal/ evaluation requirements for adequacy. Letters of Credit Inquire about and review procedures followed during the establishment and approval of letters of credit.

10 Sample Loan Operations Risk Based Program (cont.) Review the reconciliation of the subsidiary ledger of letters of credit to the manual listing prepared by the loan department for accuracy. Select a sample of letters of credit to determine that they were charged fees according to policy and complied with escrow agreements, if applicable. Obtain and review procedures governing floor plan lending. Review documentation of periodic floor plan audits conducted by management. Ensure discrepancies were resolved, audits were conducted, and responsibility for audits was rotated among employees. Observe three floor plan audits performed and assess the controls over this process. Credit Life/Accident and Health Insurance Obtain and review procedures for handling credit life/accident and health insurance premiums and commissions. Review the most recent reconciliations of the credit life account balance and payable account to subsidiary information and ensure an adequate separation of duties. Verify that all debits in the account were for rebates or for premium remittances. Trace rebate amounts to the appropriate paid loan journals, and premium remittances to a properly endorsed check or to a demand deposit account. Verify that an officer approved the remittance. General Obtain and review the procedures governing loan extensions and renewals.

11 Sample Loan Operations Risk Based Program (cont.) Select a sample of payment extensions for proper approval and for the presence of signed extension agreements. Select a sample of renewed loans and ensure the loans were properly approved by a loan officer, the number of renewals shown on the note was correct, renewals did not exceed policy without proper approval from the loan committee, and interest due on the old loans was not added into the renewed loan balances. Inquire about and review documentation describing the procedures for ensuring the accuracy and proper authorization of master file changes and determining the adequacy of the controls. Test a sample of master file critical fields (rate, address, extension, due dates changes) to ensure they were properly authorized and reviewed. Credit Scoring Review the credit scoring system to ensure that: Blank fields do not score higher than if completed with adverse information. Critical blank fields are not accepted by the system. Review a sample of applications entered in the credit scoring system to ensure adequacy of input. Review the credit scoring card specifications for accuracy. Ensure the card was adequately safeguarded, and that authority to make changes to the card was restricted to the appropriate management level. Review an audit trail of changes to the credit scoring card for proper approval.

12 Sample Loan Operations Risk Based Program (cont.) Analyze loan rate differentials based on credit scoring to determine whether marginal scores generate a higher interest rate. Indirect Lending Origination, Set-Up, Balancing, and Payment Processing Obtain and review documentation describing the procedures for processing indirect loans. Inquire of management and review policies governing the handling of applications returned to dealers for insufficient information. Determine whether dealer accounts were input and set up on the system in a timely manner. Review a sample of loan payments for which interest was to be shared by the institution and dealers to ensure proper accounting treatment. Dealer Contracts and Reserves Inquire about and review documentation detailing the personnel and procedures involved in the establishment of dealer contracts and dealer reserves. Review files for approved dealers to determine if the following documentation was maintained: corporate resolution; corporate standing; loan committee approval; two years financial statements and an interim statement, or Dunn and Bradstreet reports; and a copy of the dealer contract. Review a copy of the standard dealer contract to ensure the contract specified acceptable interest rate markups as well as dealer reserve balance and reimbursement requirements. Review the procedures used in reporting dealer reserve account balances and activity to the dealers.

13 Sample Loan Operations Risk Based Program (cont.) Select a sample of dealer reserve accounts and perform the following: Recompute rebates and trace from paid loan journals or other documentation. Trace disbursement of reserve funds to dealers to endorsed checks or direct deposits, and note an officer s approval. Ensure an independent party reviewed account activity, and minimum balance requirements were met. Analyze overdrawn dealer accounts for propriety. Review the three most recent dealer reserve reconciliations and determine that outstanding items were adequately documented and resolved in a timely manner. Analyze loan rates to determine dealer interest rate markup to ensure rates complied with policies and dealer contracts. Denied and Marginal Applications Review the procedures governing the denial of loans, and the acceptance of marginal and below-standard loans. Review a sample of loans accepted with marginal scores to determine if proper approval was obtained. Review a sample of loans accepted with failing scores to ensure documentation of manager approval. Review loan scoring and delinquency trends to determine whether credit scoring guidelines should be adjusted. Confirmation Obtain and review documentation on the procedures for handling confirmations for loans.

14 Sample Loan Operations Risk Based Program (cont.) Review confirmation letters utilized by management to ensure accuracy of loan information to verify that: Letters contain sufficient information to verify the existence of the borrower and accuracy of loan information. Discrepancies were resolved promptly, including any confirmations stamped Returned to Sender by the post office. Review telephone logs and other documentation to ensure sufficient information was obtained to verify the existence of the borrower and accuracy of loan information. Credit Scoring Review the credit scoring system to ensure that: Blank fields do not score higher than if completed with adverse information. Critical blank fields are not accepted by the system. Review a sample of applications input to the credit scoring system to ensure adequacy. Review the credit scoring card specifications for accuracy. Ensure the card was adequately safeguarded, and that authority to make changes to the card was restricted to the appropriate management level. Review an audit trail of changes to the credit scoring card for proper approval. Analyze loan rate differentials based on credit scoring to determine whether marginal scores generate a higher interest rate.

15 Sample Loan Operations Risk Based Program (cont.) Allowances for Loan Losses Transactions Review delinquent loan reports to determine if all loans that meet the number of days delinquent criterion have been charged-off. Select a sample of charge-offs from the debits in the allowance for loan losses account and trace them to documentation of proper approval on charge-off request forms. Reconcile the charge-off subsidiary to the general ledger allowance for loan losses account. Select a sample of charged-off loans from the subsidiary and, using a positive confirmation form, confirm the uncollected balance with the borrower. Adequacy Analysis Prepare or update documentation on the personnel and procedures involved in management s evaluation of the adequacy of the allowance for loan losses. Obtain a copy of management s analysis of adequacy of allowance for loan losses. Consider testing mechanical accuracy of the computation by footing, recalculating, or vouching selected numbers used in the computation. Conduct the following: If historical charge-off factors are used, recompute the data to support the factor. If the review includes a procedure for rating loans for risk, review the rating criteria for adequacy. Test a sample of loans to determine if they were properly rated.

16 Sample Loan Operations Risk Based Program (cont.) Determine whether potential losses on real estate owned and repossessed assets have been considered in the evaluation. Perform analytical review of allowance account. Key ratios to consider for evaluation include: allowance for loan losses (ALL) to total loans, past due and non-performing loans to total loans, loan portfolio composition and growth trends, net charge-offs to average loans, charge-offs to prior year-end ALL, and recoveries to prior year charge-offs. Determine the completeness of watch loans on the problem loan report by tracing loans that meet classification criteria from the following sources: Delinquency reports Non-accrual loan report Loan review reports Examination reports Other at-risk loans Obtain a copy of the department s watch or problem loan list, which ties into allowance for loan losses analysis. Select a sample of loans from the watch list and perform an individual loan analysis to determine if management s specific loan classifications and specific reserve allocations are reasonable. Determine if procedures are in place to identify impaired loans under FAS 114. Inquire as to whether valuation techniques under FAS 114 have been properly employed, i.e., discounted cash flows of loan or fair value of collateral, and if applicable, whether estimated loss is reasonable.

17 Sample Loan Operations Risk Based Program (cont.) Obtain borrower and/or industry concentration reports or other such reports of potentially higher risk loans, and determine if the allowance for loan loss analysis appropriately considers these risks. Review a sample of loans with commercial appraisals on collateral and evaluate management s review of appraisal assumptions, including: Evaluate appraiser competence based on years of experience, professional certification, and familiarity with geographical area and type of property. Evaluate whether valuation method used (i.e., income, cost, or market approach) is appropriate for the type of property and whether assumptions used appear reasonable (e.g., cap rate or discount rate). Evaluate if assumptions used, such as occupancy, income, etc., are consistent with projections and repayment ability analysis. Compare the current list of problem or watch list loans to the prior year s list and determine if there have been any significant deletions. Discuss with management, and if necessary review other loan information, to determine the reasons for significant deletions. Generate special EDP reports to identify that loans with the following characteristics have been considered: Single maturity longer than one year Renewed more than three times Delinquent two times in fewer than 30 days

18 Sample Loan Operations Risk Based Program (cont.) First payment deferred more than three months Test rated high, but performed on a rotational basis