€29.3m loan broke Irish Nationwide’s own rules

Irish Nationwide gave a loan of €29.3 million to buy a site in Dublin, in 2007, without first getting board and credit committee approval, and without carrying out other necessary steps as set out in its commercial lending policy.

The loan is expected to form part of a civil case being taken by Irish Nationwide's liquidator against its ex-managing director Michael Fingleton. This case is seeking damages from Mr Fingleton in relation to his stewardship of the building society, whose collapse cost the taxpayer €5.4 billion.

The loan being examined as part of this action was given to Devondale, a company controlled by builder Anthony Durkan, on March 20th, 2007, to allow his company buy a site in Clonskeagh, Co Dublin. There is no suggestion of any wrongdoing by Devondale or its directors.

Retrospectively approved
The loan is of interest to KPMG, the liquidator of the society, because of the way it was granted relative to the society's own rules and policies.

Irish Nationwide’s lending policies state that all significant loans must first be approved by its board and credit committee.

This did not happen in this instance because the loan was already paid out before it was retrospectively approved by Irish Nationwide’s board and credit committee, about seven days later. The loan also failed to meet the criteria of a new commercial lending policy the society’s board had approved the previous month, at its meeting on February 28th, 2007.

Criteria
This policy stated that "normally" six different criteria had to be filled before the society was allowed grant a commercial loan. These included personal guarantees from the principals/directors of the company borrowing money; three years' audited accounts; a business plan; statements of net worth by directors; forecast cash-flows and professional valuations. These criteria were not met by the society in the case of this loan.

The society also had no records of carrying out its own analysis of the proposed development, no records of any risk assessment and no records of the society either valuing the site or checking the credit-worthiness of its borrower.

The society had a profit share arrangement with Devondale on the deal but no mention of this was made in board or credit committee records. This should have been a relevant factor to their considerations.

One of the few documents relating to the loan shows that Mr Durkan, managing director of Devondale, wrote to Irish Nationwide on February 22nd, 2007, confirming the price he had agreed for the site and that a 10 per cent deposit had been paid.

Hand-written note
On this letter, Mr Fingleton has written a note, stating: "Please open file and liaise with Stan for this purchase and get offer and terms formalize."

"Stan" is a reference to Irish Nationwide's finance director Stan Purcell. This hand-written note links Mr Fingleton directly to a loan which appears to be in breach of the society's rules and policies. This is relatively unusual because Mr Fingleton did not use a computer and often gave his instructions verbally, making it difficult to construct a case against him.

The potential loss to the society quickly became apparent once Ireland’s property bubble collapsed. KPMG reviewed the deal in March 2009, and it recommended a provision of €17.2 million against the loan, which by that stage had reached €33 million because of roll-up interest of €4 million. DTZ Sherry FitzGerald valued the site at €6 million, in November 2009, suggesting the society could be facing a loss of €27 million on the deal.