MADISON, Wis. (11/18/14)--At least one credit union is among financial institutions that have suffered possible investment losses related to U.S. Department of Agriculture (USDA) loans.
Pennant Management Inc. discovered that loans it purchased from a single counterparty may be fraudulent.
The 26 loans in question, totaling roughly $179 million, were purchased pursuant to a repurchase arrangement Pennant maintained with a USDA-approved lender.
Upon suspecting the fraud, Pennant said it acted promptly to identify the issues, involved legal counsel and notified the appropriate regulatory agencies, including the USDA and law enforcement agencies, all in an effort to protect the interests of its clients.
Pennant has said it has begun to work on behalf of its clients to secure the government guarantee that it and its clients have relied upon, in addition to pursuing civil remedies against the counterparty. The company also said it will work with the USDA to create new protocols for vetting non-bank lenders to ensure this situation is not repeated.
Nikesh Patel, a USDA-approved loan originator based in Orlando, Fla., was arrested Sept. 30 for allegedly selling up to $179 million in sham government-insured loans (American Banker Oct. 14).
Unlike other secondary markets for government-backed loans, there is no central transfer agent for the loans Patel claimed to be selling, American Banker reported. Buyers and sellers work directly with each other in the secondary market for USDA loans. As a result, buyers must perform the due diligence on the loans themselves.
Patel allegedly fabricated the names of borrowers, prepared fake loan documents with forged signatures of USDA officials and forwarded the documents to U.S. Bank, Pennant's custodian, according the lawsuit. Pennant then wired the money.
Patel paid his clients the monthly interest and principal, creating the illusion the phony loans were performing. Meanwhile he allegedly invested loan proceeds in a $4 million house and a chain of Bennigan's restaurants he planned to open in India.