Macatawa Continues Fraud Investigation
HOLLAND — Macatawa Bank Corp. continues its investigation into the borrower who management believes intentionally tried to defraud the bank. But bank officials remain mum about the particulars of the case because of client privacy regulations and the potential for law enforcement action against the borrower.
As previously reported on the Business Journal Web site, on March 15 Macatawa Bank Corp. issued revised results for the fourth quarter and fiscal year 2006 to reflect an additional loan loss provision of $4.7 million stemming from $5.2 million in outstanding commercial loans issued to one borrower. The loans had been on the books for a couple of years and had become impaired.
The impairment was discovered two weeks ago through internal investigations relating to the borrower’s loan collateral and its financial condition. With any loan, there’s a lot of credit administration activities that go on, said Macatawa CFO Jon Swets, and in the course of some of those activities, some anomalies surfaced in relation to the loan in question — “some stuff that raised our eyebrows,” he said.
Over the two weeks in which everything unfolded, Macatawa officials started to realize there was some true misrepresentation regarding the borrower’s collateral, financial information and financial condition. Swets declined to elaborate on any of the specifics of the investigation.
Asked how those anomalies survived the due diligence process, Swets responded: “This truly was fraud, and when someone is trying to take advantage of you in that way — especially if they’re smart people, they find their ways. When someone is trying to defraud you, it’s very hard to detect. The best of lenders and the best of banks can be fooled.”
Swets said the loan was not a participation loan, which is a loan shared by a group of banks because it’s too big for any one of them to take on alone.
Regulation allows financial institutions to share information with other institutions as part of an investigation, Swets pointed out, and through the course of the investigation, Macatawa discovered that other banks had dealings with the same borrower and were likely exposed to the same misrepresentations as was Macatawa. Swets said he was not allowed to reveal the names of the other banks.
“Everyone is real guarded about what they’ll say about this,” he added.
Swets said Macatawa management believes there was criminal intent on the part of the borrower to defraud the bank, but said he was not allowed to say whether the case had been referred to law enforcement.
Swets said that Macatawa had embarked on “some pretty heavy self-examination” of its credit administration process even before the problem loan came to light, and that the bank is already finding ways to tighten policies and procedures a bit.
“This incidence just solidifies the way we need to look at those kinds of things and make sure we’re doing what we should be doing,” he said.
Though Macatawa added the loan loss provision on the $5.2 million and restated its fourth quarter and fiscal 2006 earnings, the borrower still cannot be named because of strict privacy laws that prohibit banks from disclosing customer identities.
What Swets could confirm is that the borrower is not based in Holland and that the loan did not involve any kind of real estate transaction.
The Macatawa lender who approved the loan has not been fired, Swets said, and the bank has no intention of “being quick and hasty” in its decision about the lender involved.
“First we need to make sure we understand exactly how everything unfolded,” Swets remarked.