At least 19 banks loaned money to former Arvest Bank executive H. Dennis Smiley Jr. based on the same collateral, according to a lawsuit. There’s a safety net designed to prevent that from happening, but the banks apparently didn’t take advantage of it, sources said.
Smiley, the former chief executive officer of Arvest Bank of Benton County, resigned from the position last month. According to a lawsuit filed by Arvest Bank Group Inc., Smiley used his stock in Arvest as collateral to borrow money from the banks.
Taking out multiple loans on the same collateral is a common form of loan fraud, said Tim Yeager, associate professor of finance at the University of Arkansas in Fayetteville. Yeager worked at the Federal Reserve Bank in St. Louis in the bank supervision division before teaching at the university.
“Overcollateralizing something happens more frequently than other types of fraud,” said Yeager, who said loan fraud itself is not common.
There is a way to check if collateral is clean and hasn’t been pledged elsewhere, Yeager said.
Banks generally use the Uniform Commercial Codesystem through the Arkansas Secretary of State’s office to register their liens on a particular collateral, said a banking expert who asked not to be identified.
By checking the Uniform Commercial Code database, loan officers should notice other loans that may have been made on the same collateral, the expert said.
“It’s always wise to check all your available credit resources,” the expert said.
The banks loaned money to Smiley, with each loan apparently secured with the same collateral, according to the lawsuit Arvest Bank Group filed April 2 against Smiley and 19 banks.
In the lawsuit, Arvest said it issued a check payable to Smiley for $427,991 for the repurchase of Smiley’s stock in Arvest Bank Group. Arvest also issued a check to Smiley for $123,763, representing the options Smiley had to purchase other shares in Arvest Bank Group. But rather than hand them to Smiley, both checks were deposited with the Benton County Circuit Court. Arvest said in the lawsuit that Smiley was not allowed to use his stock as collateral.
Based on lawsuits filed by five of the banks, Smiley owes them at least $1,384,000. The 2013 personal financial statement by Smiley and his wife, Cynthia, claimed they had $1.08 million in liabilities and $3.26 million in assets, according to the lawsuits.
For large loans, many times the lender will require the borrower to have his attorney provide a legal opinion that the loan is a binding obligation, a second banking expert said. Someone would check the Uniform Commercial Code database to look for liens against the collateral.
“The system is designed to protect lenders and give them notice that there is already a lien on the collateral that you’re taking,” the expert said.
Theoretically, the first bank that loaned money to Smiley should be OK, the expert said.
“But [the subsequent banks that loaned him money] are not,” he said.
Typically, a bank’s loan application includes a statement by the borrower that “the foregoing is true and correct to the best of my knowledge and belief,” the expert said.
“So if a person filed a financial statement with a bank and the individual had a liability to another institution, that liability would show up and would decrease his net worth,” the expert said. “But in all honesty, many loan relationships are between the bank and a borrower the bank has known for years. The person may have a position in the community and his credibility may be very strong. Although they maybe should have checked [with the Uniform Commercial Code], the lender probably would not think the borrower would defraud them.”
The 19 banks named in the Arvest suit as having claims on Smiley’s stock holdings are BOKF of Tulsa, Bank of Fayetteville, Bank of the Ozarks of Little Rock, Benefit Bank of Fort Smith, Chambers Bank of Danville, Centennial Bank of Conway, Delta Trust & Bank of Little Rock, First Bank of Hampton, First Federal Bank of Harrison, First National Bank of Fort Smith, Integrity First Bank of Mountain Home, First Security Bank of Searcy, First State Bank of Lonoke, First State Bank of De Queen, First State Bank of Northwest Arkansas of Huntsville, First State Bank of Russellville, First Western Bank of Booneville, Legacy National Bank of Springdale and Summit Bank of Arkadelphia.
Business, Pages 22 on 04/22/2014