Reference no: EM133431789
Assignment:
The Curious Loan Approval
As a commercial loan officer-trainee at FarmwoodNational Bank, Erik's future looked very bright. He had recently completed a series of credit analysis exams, earning the highest score in his training group and capturing the attention of the bank's senior commercial loan officers. In the second phase of his training program, Erik was promoted to a financial analyst's position and assigned to work for Yvonne, one of the bank's most productive commercial loan officers. Like Erik, Yvonne had earned the highest score on the analysis exams among her training group five years ago, and she and Erik quickly became a team to be reckoned with inside the bank's corporate banking division. In the first few months of his new assignment, Erik quickly grew to admire his new boss.
In most cases, when he evaluated the creditworthiness of a new customer for Yvonne, she readily agreed with his analysis and praised his attention to detail. However, one recent loan application left Erik totally confused. Evaluating a request from Mitchell Foods, Inc., for a $5 million short-term loan to finance inventory expansion, Erik noted that the firm was dangerously overcredit. Mitchell Foods represented a retail grocery chain with 35 stores located in the greater metropolitan area served by Farmwood National, and the firm was financing its retail outlets with operating leases. Unlike financial leases, operating leases only appear in the notes accompanying the firm's financial statements, and Mitchell Foods' current balance sheet gave the appearance of far less leverage than the firm actually carried.
Erik promptly noted this fact in a memorandum of concern that he forwarded to Yvonne for inclusion in the Mitchell Foods credit file. Much to his surprise, Yvonne discounted the problem and told Erik to destroy the memo. After the bank's senior credit committee approved the Mitchell Foods loan request, Yvonne defended her position by telling Erik that the issue of operating lease leverage never surfaced during the credit committee meeting.
In spite of Yvonne's reassurances, Erik knew from his days in credit school that Mitchell Foods' operating lease liability was handled improperly. While pondering this problem over coffee in the employee cafeteria, Erik overheard Yvonne talking excitedly among a group of young commercial lenders. It seems she had just received word that her personal mortgage loan application at Bay Street Savings and Loan had been approved, and the terms of this loan were most attractive. The savings and loan willingly waived its normal down payment requirement and gave Yvonne 100%, fixed-rate financing of 25 years at 2% below the going rate of interest on fixed-rate mortgage loans.
Given his recent credit analysis, Erik recalled that the president of Mitchell Foods was also Chairman of the Board at Bay Street Savings. He began to wonder whether Yvonne's actions as a commercial loan officer had been compromised by her personal financial affairs, or whether he was simply thinking too much. After all, Yvonne was an outstanding commercial loan officer, and she was his mentor.
Given that situation, what should Erik do?