Since this laundry list of “red flags” was published and highlighted as “Post of the Day” all weekend, I wanted to review what was written, analyzing which of these line items is true, false, misleading, or perhaps irrelevant. I’ll try to review them one by one when I have the time. If you’re uninterested in BofI or tired of these posts, please click Ignore Thread or skip this post.
The first red flag concerns insider loans.
SaulR80683 writes: 1. Okay, so they are giving insiders huge loans at preferential rates…
Quoting from FDIC PART 215—LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND PRINCIPAL SHAREHOLDERS OF MEMBER BANKS (REGULATION O); § 215.5 Additional restrictions on loans to executive officers of member banks [all added emphasis, mine].
(c) A member bank is authorized to extend credit to any executive officer of the bank:
(1) In any amount to finance the education of the executive officer’s children;
(2) In any amount to finance or refinance the purchase, construction, maintenance, or improvement of a residence of the executive officer, provided:
(i) The extension of credit is secured by a first lien on the residence and the residence is owned (or expected to be owned after the extension of credit) by the executive officer; and
(ii) In the case of a refinancing, that only the amount thereof used to repay the original extension of credit, together with the closing costs of the refinancing, and any additional amount thereof used for any of the purposes enumerated in this paragraph (c)(2), are included within this category of credit;
To repeat… any executive officer in any amount.
Now, as far as the allegation that the executives are getting “preferential rates” is concerned:
FDIC PART 215—LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND PRINCIPAL SHAREHOLDERS OF MEMBER BANKS (REGULATION O); § 215.4 General prohibitions.
(a) Terms and creditworthiness.–(1) In general. No member bank may extend credit to any insider of the bank or insider of its affiliates unless the extension of credit:
(i) Is made on substantially the same terms (including interest rates and collateral) as, and following credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions by the bank with other persons that are not covered by this part and who are not employed by the bank;
Now you may argue that the rates to employees are more than “substantially” below prevailing rates. Fair enough; but every loan that Aurelius at Seeking Alpha highlights is a balloon loan (with a couple of commercial loans mixed in) and balloon loans have a lower upfront interest rate.
More importantly, Aurelius at Seeking Alpha writes that:
Unfortunately, the public loan documents I reviewed do not have individual borrower rates attached, so my analysis relies on the interest rate disclosed across the entire program (the 1% I calculated above). In other words, I cannot make any claims around the rates on individual loans.
To repeat: Aurelius at Seeking Alpha cannot make any claims around the rates on individual loans.
In short, he making a wild guess and suggesting his guess is a fact!
He goes on to the tax consequences of these loans, insisting taxes are not being paid because he cannot not figure out how they were accounted for on the BOFI balance sheet.
Well, here’s one easy explanation (quoting the US Department of the Treasury on Employer-Assisted Mortgage Programs for banks): “In addition, if the employer provides its employees with interest free or reduced interest loans in excess of $10,000, the IRS will impute interest income to the employees based on the applicable federal rate.”
In short, tax consequences often are passed on to the employee who declares them on a federal income tax return.
Bottom line time: the loans are completely legal and many banks offer them to their employees. Aurelius at Seeking Alpha admits that he cannot make any claims around the rates on individual loans. And his allegations concerning the tax consequences lack full knowledge of how the loans were structured and are little more than wild, unsubstantiated guesses.