Audit of Bulk Sale Activities of Consolidated Asset Recovery Corporation

(Audit Report No. 98-009, January 14, 1998)

Summary

The FDIC Office of Inspector General (OIG) has completed an audit of the bulk sale activities of Consolidated Asset Recovery Corporation. The audit was requested by DRR management. The objectives of the audit were to determine whether CARC bulk sales activities were: adequately supervised and approved by CARC management and FDIC oversight personnel; documented to evidence fair and equitable treatment of all investors; and implemented in a manner which maximized liquidation proceeds for the FDIC in accordance with the provisions of the Service Agreement.

We found the following conditions:

* CARC selected for award certain volume bids (bids on the entire sale offering or bids on a number of loan pools specified by investors) rather than other, higher, individual pool bids in transacting four bulk sales of loans during 1992 and 1993. In doing so, CARC realized sale proceeds of only $67.9 million for bulk sales of 79 loan pools, which was $5.9 million less than could have been obtained by selection of the higher individual bids for those pools, and $10.82 million less than what may have been received from other disposition alternatives.

* CARC waived the forfeiture of earnest money deposits and reallocated these proceeds to other pools being purchased by the defaulting bidder, repurchased loans that did not meet repurchase criteria, transferred an asset to a bidder without ever receiving a portion of the proceeds due, awarded the sale of pools to other than the high bidder for the pool, without justification, and provided unauthorized and unsupported tax rebates and other purchase price reductions. These transactions resulted in a loss of proceeds totaling $816,357.

* CARC recorded certain bulk sales proceeds (late fees) as negative expense, contrary to the provisions of the Service Agreement, and failed to deposit these funds into the pool collections bank account. These actions resulted in unremitted collections of $284,683 and caused the incentive fee billed to the FDIC to be overstated by $31,315. Late closings by certain investors resulted in lost interest earnings of more than $100,000 due to delays in wiring funds to the FDIC; however, none of the $284,683 in late fees collected by CARC were used to compensate the FDIC for these lost collections.

* CARC records do not support that CARC calculated the reserve prices used in the evaluation of bids for several loan sale transactions in bulk sales 92-13, 93-01, 93-10, 94- 05 and 94-10 in accordance with the pricing methodology approved by the Oversight Committee. CARC evaluated bids using reserve prices which were either not reflected in the approved market and sale case or were less than the reserve prices per the approved case. CARC records do not adequately explain or support these variances. These discrepancies resulted in sales of loan pools for a total of $4,184,770 less than the reserve prices documented in the approved case. Because CARC did not obtain Oversight Committee authority to sell the loans in question for less than approved reserve prices, the $4,184,770 is considered a loss to the FDIC.

* CARC did not maintain adequate controls over bulk sale cash received, nor did it maintain complete accounting records to support that more than $227 million in bulk sale proceeds were received, properly processed, and wired to the FDIC on the day of receipt. In addition, CARC made unsupported disbursements from the bulk sales Other Escrow account totaling $1.07 million. CARC improperly retained bulk sale earnest money deposits in the Other Escrow account which resulted in lost interest earnings of $70,000. The Oversight Committee approved a policy which permitted CARC to delay wiring sale proceeds to the FDIC up to five business days subsequent to the closing date without penalty, which resulted in additional lost interest earnings of $50,000 to the FDIC. This policy was contrary to the provisions of the Service Agreement.

* CARC did not maintain appropriate documentation which would substantiate it had properly managed the bulk sale process from selection of loans for sale through bid evaluation and award of the sale. In addition, CARC did not pursue $7.95 million of liquidated damages from investors who defaulted on sale awards. CARC records do not adequately support the rationale for this inaction.

* CARC did not adequately allocate bulk sale related advertising expenses between receiverships. CARC incorrectly charged all such expenses, including $163,000 of advertising expenses related to the marketing of Mechanics & Farmers Bank receivership assets, to the Citytrust Bank receivership.

Recommendations

We recommended that DRR modify the current Asset Marketing Guidelines to provide specific guidance for evaluating bids received in a sale, especially volume bids. The guidelines for evaluating volume bids should require that the volume bid be compared, at a minimum, to all viable individual high bids received for the pools covered by the volume bid. In addition, FDIC personnel should also compare the volume bid to the maximum economic value of the loans should the volume bid not be accepted, as represented by the greater of the viable individual high bids or the realistic reserve price for each pool.

We recommended that, for future servicing contracts, DRR require contract monitoring personnel to participate more actively in servicer bulk sale activities. At a minimum, a servicerís bid evaluation methodology should be reviewed and tested as part of the periodic site visitation process.

We also recommended that DRR enhance policies and procedures to ensure that servicers maintain adequate documentation and records to substantiate that the bulk sale process is implemented in the manner authorized, and to ensure that servicer bulk sale activities are monitored to verify adherence with authorized sale cases.

In addition, we recommended that DRR verify the accuracy of CARCís estimate of the amount of advertising expense and incentive fees that were improperly recorded and reallocate those expenses between the Mechanics & Farmers and Citytrust receiverships. Finally, we recommended that DRR determine the impact of any expense reallocations on past payments of dividends to receivership creditors and, if possible, adjust future dividend payments to offset errors which might have occurred in past payments.

Management Response

On October 10, 1997, the OIG received a written response from the Chief, Operations Support Section through the Associate Director, Division of Finance, to the OIGís September 16, 1997, draft of this report. The written response provided the requisites for management decisions for recommendations 1 and 3. Subsequently, the audit liaison provided more specific information concerning recommendation 2 that provided the requisites for a management decision.

The results of the audit were used by the U.S. General Accounting Office during its review of FDICís 1996 financial statements.

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