Fraud-Bond: Fraudulent Loan Collateral

There is no coverage in a financial institution fraud-bond for a fraud loss where the fraud is in the determination of the value of the collateral. You take a loan secured by inventory, and it turns out there is no inventory. No coverage.

Example: ABC Bank and Trust loans money to an electrical parts supplier. They take inventory in a warehouse as collateral. The loan goes into default and it is found that the boxes in the warehouse are empty. The bank learns, after the fact, that there never was any inventory in that warehouse. Further, the business intended on defrauding the bank from the very start. No coverage under the fraud-bond.

Insurers are unwilling to be the fall-back position in the bank’s valuation of the security in a loan. Bankers must take due care when securing a loan that is not collateralized by real property.

There is limited coverage for fraudulent mortgages when a loan proves to be defective by reason of the signature being obtained through trick or fraud, or the signature on the recorded deed being obtained by fraud. This is for fraudulent mortgages only. A chattel loan does not have such coverage.