Determine whether the board of directors, consistent with its duties and responsibilities, has adopted written floor plan lending policies that:

• Establish procedures for reviewing floor plan applications?

• Define qualified borrowers?

• Establish minimum standards for documentation?

• Establish curtailment guidelines, including providing proper incentives to the dealer to turn over inventory on a timely basis?

Determine whether floor plan lending policies are reviewed at least annually to determine if they are compatible with changing market conditions.

Determine the adequacy of floor plan loan administration practices.

Floor Plan Agreements

• Are floor plan agreements required for all dealers?

• Must agreements be accompanied by borrowing resolutions?

• Is a written agreement between the manufacturer and the bank required on any flooring line that includes drafting arrangements with the manufacturer?

• Do such agreements with the manufacturer stipulate under what conditions the bank will accept items to be floored?

Financial Information

• Are dealers required to submit financial and operating statements on a continuing basis?

• Are all dealers who prepare internal financial and operating statements more frequently than annually required to submit copies of those statements to the bank?

• Are all financial statements received from dealers reviewed promptly?

• Do financial statement reviews include a determination that floor plan loans, deposit accounts, and other information agrees to the bank’s records?

Floor Plan Line Limits

• Are all floor plan loans granted under an established line?

• Are line approvals structured to permit the bank to cancel or suspend shipments of unwanted merchandise?

• Are dealer floor plan line limits strictly adhered to?

Disbursement of Funds

• Are disbursements for floor plan loans on new units made only against the original copy of the manufacturer’s invoices?

• Are the original invoices retained in the bank’s files?

• Are loan proceeds on new units paid directly to the manufacturer rather than to the dealer?

• Are accounting records established so that the bank has records of all floored items with adequate individual identification?

• Are limits on loan advance versus invoice price (current wholesale value, if used) clearly established?

• Are wholesale values determined independently of dealer appraisals?

• Are wholesale values that are assigned by floor plan department personnel periodically reviewed by someone independent of the department?

• Is amount of loan advance prohibited from exceeding 100 percent of the invoice price of a new item or of the wholesale value of a used item?

Payments

• Are floor plan interest charges systematically computed and regularly billed?

• Are notices of past-due interest payments sent promptly?

• Are all interest, curtailment, and unit pay-off payments from dealers posted promptly?

Curtailment

• Is the loan written so that the floored items never depreciate faster than the loan balance is reduced?

• If the manufacturers of the floored items have entered into a repurchase agreement, are curtailments structured to keep the loan balance in line with any declining repurchase amount?

• Are records maintained on curtailment billings so that delinquency is easily determinable?

• Are notices of past-due curtailment payments sent promptly?

• If assignment of rebates has been made, have procedures been established to insure that factory rebate checks payable at the end of the model year are promptly forwarded to the bank?

• If demonstrators are floored, are they subject to separate curtailment requirements that keep the loan balance in line with their liquidating value?

Miscellaneous

• Is a trial balance of each dealer’s trust receipts/security agreements prepared at least monthly?

• Are dealer trial balances reconciled to department and general ledger controls?

• Are periodic reviews made of deposit accounts, to detect any possible out of trust sales?

• Are periodic reviews made of the retail paper being generated to determine if the bank is receiving an adequate portion?

Assess the adequacy of the collateral administration practices.

Inspections

• Are floor plan checks, physical inventories, conducted at least monthly and on a random surprise basis?

• Are more frequent floor plan checks required if the dealer is experiencing financial difficulties?

• Are individuals performing floor plan checks rotated?

• Are floor plan inspector(s) required to determine or verify the following and indicate their findings on the floor plan check sheet:

  • Serial number of item?

  • Odometer reading of vehicles?

  • Condition of item?

  • Location of item, if other than normal place of business?

  • Existence of any fire or theft hazards?

• Does the floor plan inspector include on the check sheet:

  • Date inspection was performed?

  • Date any item located elsewhere was checked?

  • His or her signature?

  • Summary of his or her report, if appropriate?

• Are all demonstrators checked?

• Are floor plan reports reviewed by an officer?

• Are follow-up inspections made of items not seen during the regular inspection?

• Are items reported by the dealer as being sold, required to be paid off immediately?

• Does the floor plan inspector determine the date that item(s) reported as sold were sold from that on the dealer’s copy of the sales agreement?

• Are dealer sales patterns reviewed to determine that the number of units reported sold at the time of floor plan inspection is not excessive and does not indicate a float?

• Are payments in process reported by the dealer during floor plan inspection verified by bank personnel?

Trust Receipts

• When a dealer trade or “swap” occurs, does the bank:

  • Obtain the manufacturer’s invoice from the selling dealer on the new unit acquired?

  • Obtain the invoice from the borrowing dealer for the new unit?

  • Have a trust receipt executed on the new unit?

• Does the bank have a procedure to check all indirect paper received from a dealer against the trust receipts of items floored for that dealer to determine that there is no duplication of loans against the same security?

• Are all trust receipts required to be supported by invoices or other evidence that title to the security is vested in the bank?

• Are trust receipts required to include:

  • Description of each item?

  • Serial number of each item?

  • Loan amount for each item?

  • Interest rate?

  • Date?

  • Authorized signature of dealer or person holding power-of-attorney to execute the trust receipt?

• If the bank and dealer permit a bank employee to execute trust receipts using the dealer’s power-of-attorney:

  • Are proper documents on file granting the power-of-attorney?

  • Does the bank maintain a numbered register for trust receipt notes?

  • Are trust receipt notes under dual control?

  • Are checks made periodically to determine that only those individuals granted power-of-attorney are signing the trust receipts?

Insurance

• Does the bank have floor plan property damage insurance or require that the dealer maintain such coverage with the bank named as loss payee?

• Is the insurance coverage periodically reviewed for adequacy?

Assess the adequacy of internal control processes regarding floor plan lending.

Floor Plan Loan Records

• Is the preparation and posting of subsidiary floor plan loan records performed or reviewed by persons who do not also:

  • Issue official checks or drafts singly?

  • Handle cash?

• Are the subsidiary floor plan loan records reconciled daily with the appropriate general ledger accounts, and are reconciling items investigated by persons who do not also handle cash?

• Are delinquent account collection requests and past-due notices checked to the trial balances used in reconciling floor plan subsidiary records with general ledger accounts, and are they handled only by persons who do not also handle cash?

• Are inquiries about loan balances received and investigated by persons who do not also handle cash?

• Are documents supporting recorded credit adjustments checked or tested subsequently by persons who do not also handle cash (if so, explain briefly)?

• Is a daily record maintained summarizing note transaction details, i.e., loans made, payments received, and interest collected, to support applicable general ledger account entries?

• Are frequent note and liability ledger trial balances prepared and reconciled with controlling accounts by employees who do not process or record loan transactions?

• Is an overdue account report generated frequently (if so, state frequency )?

Loan Interest

• Is the preparation and posting of interest records performed or reviewed by persons who do not also:

  • Issue official checks or drafts singly?

  • Handle cash?

• Are any independent interest computations made and compared or adequately tested to initial interest record by persons who do not also:

• Issue official checks or drafts singly?

• Handle cash?

1. Assess bank managers/personnel knowledge and technical skills related to floor plan lending based on conclusions developed while performing these procedures.

1. Determine the scope and adequacy of the internal and external audit function. Consider:

• Scope of review.

• Frequency of reviews.

• Qualifications of audit personnel.

Obtain a listing of audit deficiencies noted in the latest review performed by internal and external auditors from the examiner assigned “Internal and External Audits.” Determine if management has appropriately addressed noted deficiencies.

Determine the adequacy of the loan review function. Consider:

• Scope of review.

• Frequency of reviews.

• Qualifications of loan review personnel.

• Results of activities in the Quantity of Risk section of these examination procedures.

Obtain the most recent loan review report on floor plan lending. Determine if management has appropriately addressed noted concerns.

Determine the adequacy of management information systems (MIS). All evaluations of MIS should assess timeliness, accuracy, level of detail, clarity of report format, and distribution channels. Consider:

• Past due and nonaccrual status.

• Risk ratings.

• Loan yield and profitability data.

• Trend analysis.

• Commitments, industry type, amount and level of expected usage, and highest usage on record.

• Maturity categories.

• Exceptions to policy, underwriting, and documentation standards.

Has the board or senior management established adequate procedures for ensuring compliance with applicable laws, rulings and regulations?

• For compliance with the bank’s legal lending limit, the examiner should combine total outstanding floor plan indebtedness with all other indebtedness, including the dealer instalment paper, with recourse, the borrower has sold to the bank.

• Are internal controls for the floor plan lending department appropriate for the level of risk in the portfolio?

• Determine the adequacy of any other control systems employed by management to supervise floor plan lending.