_________________________ BRANCH

Audit Cut-off Date ___________________

LOANS

Audit Objectives and Procedures

A. Audit Objective:

To establish the accuracy and propriety of recorded balances.

Documents Needed:

1. Per Totals
 Statement of Financial Condition (SOFC)
 Processing-recap
 Reconciliation Statement
 Source Documents of Reconciling Items
 Summary Report from EDP Audit (CAATs of CL System)

2. Per Borrower
 Schedule of Loans and Advances from EDP Audit (CAATs of CL System)
 Schedule of Loan Account Balances - $1 & Over (Onshore) [Dollar Denominated]
and P1 & Over [Peso Denominated]
 Confirmation Letter

Audit Procedures:
Done by:

TOTALS
1. Obtain the printout of Reconciliation Statement of Commercial Loans from
BRU and
compare Balance per EDP Systematics total against Processing Recap (outgoing). _________

2. Verify all reconciling items against source documents and investigate unusual
transaction included as reconciling items. Take note for long outstanding items in the
reconciliation statement. _________

3. Compare Adjusted Balance from Reconciliation Statement against SOFC and

Summary Report from EDP Audit. Investigate discrepancies, if any. _________

PER BORROWER
1. As your audit process goes on per borrower, compare Schedule of Loan and
advances from EDP Audit against Schedule of Loan Account Balances. Investigate
discrepancies, if any. _________
 2. Prepare confirmation letters at the branch. These should be signed by the Branch
Manager. Mail the confirmation letters as soon as the team gets back to Head
Office. __________

B. Audit Objective:

To ascertain whether transactions are properly authorized.

Coverage: Credit Approvals

Approvals of all types of credits granted must be evidenced on the approved transaction
media (ERCA, RES, IOL) by the stamp, signatures and/or initials of the officers
approving the loan.

Test Objective: Loans are booked only after receipt of written approvals.

1. Compare approval date on ERCA, RES, IOL and booking date per PN/Schedule of
Loans and Advances. The approved proposal/recommendation should have been
secured first prior to booking and release of the loan. __________

2. For loan confirmation to HO/AS, ERCA must be forwarded the following day after
loan was released. __________

3. For those with credit lines, test-check if any accommodations were granted after the
expiry dates. __________

Test Objective: Loans are approved by appropriate level of authority.

All credit accommodations shall be subject to authorities designated to the various levels.
Please refer to the Schedule of Limits of Approving Authorities.

1. Determine the level of authority required. Total credit facilities/transactions

outstanding plus the credit proposed shall be the basis for determining the level of
authority required for approval. DBPs/DAUDs, 1:1 loans and EBPs are excluded in
determining the total outstanding facilities as the approving officers have separate
delegated authority on these transactions. ____________

2. Determine proper classification of the account under review. All adversely classified
accounts require approval by the next higher level of authority than if not adversely
classified. ____________

Test Objective: Excess over credit facilities are properly approved.

1. Add the outstanding availments of a borrower as of the cut-off date and compare the
total with the total of the approved facilities/line(s). ____________
2. Verify if excesses were approved via ERCA/IOL. Should there be excess availments
of an existing approved line and with said excess, the authorized credit limit of the
original body shall be exceeded, the transaction shall be elevated to the next proper
approving authority. ____________

3. Verify whether the accounts granted temporary excess against an approved line are
not past due or adversely classified/watchlisted. ____________

Test Objective: Loans released prior to receipt of required documentation (e.g. REM
registration) are approved by appropriate level of authority.

1. If availments were allowed prior to receipt of required documentation, check whether

the approval media specifically state "Availments allowed prior to receipt/
registration, etc". ____________

2. Verify what types of documents were deferred/waived. ____________

3. Check if approvals were documented in the proposal medium. ____________

Test Objective: Loans granted to stockholders, officers, directors including loans granted
to companies to which they are affiliated (DOSRI) are in accordance with MOPP II.1121
and Manual of Regulations for Banks and other Financial Intermediaries.

1. Obtain a listing of DOSRI accounts certified by the Branch Manager/Account Officer. ____________

2. Check whether the loan was approved by the Bank's Board of Directors. The Board's
approval should be manifested on a resolution passed by the Board of Directors
during a regular or special meeting. ____________

3. Verify if a copy of the written approval of the Board of Directors was submitted to
BSP within 20 days from date of approval. ____________

4. Check if the individual ceiling was complied with. ____________

Test Objective: All continuing lines of credit and special transactions are reviewed at
least annually without regard to the expiry date originally set.

1. Verify if accounts are reviewed by the Account Officer three (3) mos. prior to line
expiry. Timely renewals are encouraged to release requests for case to case loans in
structure between line expiry and approval for line renewal. ____________

2. Check if availments after the expiry date of the credit line are approved by the
appropriate level of authority. ____________
 3. Verify if review has been made whenever there occurs a significant change in the
situation of the borrower (e.g. 3 consecutive default in payments, modification of
business organization, bankruptcy, insolvency proceeding, change in ownership,
perceived involvement in unlawful acts). ____________

C. Objective: To ensure that transactions were processed in accordance with established

policies and procedures.

Coverage: Control and Efficiency in Processing

Processing is performed in an efficient manner and provides control over disbursements,

maintenance of accounting records and collection of income.

Test Objective: Propriety of Disbursement Authorization

1. Verify whether the relative approval medium was stamped "Documents in Order" by
Law Division. Credit facilities/lines are not operative until the approval medium is
issued to operating units duly stamped "Documents in Order". [For Head Office only] ____________

2. Verify if the Promissory Note and other debt instruments, i.e., Disclosure Statement,
Credit Line Agreement are properly accomplished as to the terms and conditions (per
approved ERCA, IOL) and signature verified by the account officer/authorized officer. ___________

a. Check if the PN and other debt instruments/documents are signed by the

authorized signatories per Board Resolution. ____________

b. Check whether the PNs are:

- signed by the two witnesses;

- amount in figures and in words agree;
- value date, maturity date and amount agree with the dates and amount
indicated on the corresponding loan ledgers;
- alterations, if any, should be signed by clients and authenticated by an officer;
- affixed with documentary stamps in accordance with the BIR ruling.

3. Check whether the PN, DS, Loan Instruction Sheet (LIS), etc. have the approval of
the BOO/BH. ____________

Test Objective: Propriety of Disbursement Procedures

Based on the loan ledger and corresponding LIS, trace disposition of proceeds to
ensure that funds are received by the intended borrowers.

a. Check if LIS is duly validated. __________

 b. If paid thru Manager's Checks, determine who received the check. Refer to
endorsement on MC. __________

c. If to be credited to the account, trace proceeds to the borrower's account (Credit

Memo). __________

d. Check whether the loans were booked on the day of disbursement of proceeds. __________

Test Objective: Propriety of Acceptance and Booking of Payment

Based on schedule of outstanding accounts with installment payments.

1. Check if Payment Repricing Sheet is duly validated. __________

2. Trace source of payment, i.e., debit to accounts; paid by cash or check. __________

3. Check whether ORs were issued to the borrower. __________

4. Determine whether check payments received after clearing cut-off time are taken-up
the following day. __________

5. Verify if returned check payments are entirely reversed if returned/cancelled. __________

6. Verify if client's instructions to debit their accounts are made in writing. __________

7. Trace payments to subsidiary ledgers. __________

Test Objective: Accuracy of Interest Collected, Booking and Reversal

1. Check totals for Accrued Interest Receivable (AIR) and Unearned Interest Discount
(UID) from CL (CAATs) and prove results to the SOFC. Investigate any discrepancy
noted. Material discrepancy or discrepancy due to weakness in the underlying system
should be commented on. __________

2. Check if interest due from the borrowers are collected in accordance with the
instruction in the approved ERCA/IOL. Interest rate can be fixed or may vary, say,
on a daily basis. If the interest is fixed during the term of the loan, check the
accuracy of the computation of such interest as reflected on the loan ledger.
However, if the rate varies, say on a daily basis, compare interest rate used to the
lending rate contained in the quote sheet. __________

3. Trace interest accrued monthly to the account "Accrued Interest Receivable" with an
offsetting credit to the corresponding Interest (income) account in the SOFC. __________
4. Check whether interest deducted in advance from proceeds of discount loans is
credited to "Unearned Interest Discount". Interest actually earned during the month
will be debited monthly to this account with an offsetting credit to the appropriate
interest account. Rebates shall be allowed only if requested by the client in writing at
the time the obligation is prepaid in full. If payment of principal on a discounted loan
is made prior to maturity, check if rebate is properly computed and that the
proportionate amount of interest not yet earned is rebated to the borrower. __________

5. Review bookings and reversals

a. Accrued Interest Receivable/Unearned Interest Discount - Check if monthly

booking is supported by proofsheet ticket duly signed by the maker, checker and
approving officer. __________

b. Check if an independent run-up of ledgers is done each month-end and totals are
proved to the GL balance. Verify that run-up and proofing were properly
reviewed and approved. __________

c. Test-check interest calculation on loan ledgers/accrual records. __________

d. Trace bookings to the correct offsetting account, viz: __________

Debit: AIR XXX

Credit: Interest Income XXX

Debit: Bills Discounted XXX

Credit: Cash/MC/CA/SA XXX
Credit: Unearned Interest Discount XXX

Trace entries to the GL.

e. Check whether reversals are supported by tickets properly signed by the maker,
checker and approving officer. __________

f. Trace reversals to the correct offsetting account/amount, viz:

Debit: Cash/CA/SA XXX

Credit: AIR XXX

Debit: Unearned Interest Discount XXX

Credit: Interest Discount Earned XXX

g. Trace entries to GL. __________

h. Trace entries to the Official Receipt evidencing payment of interest/principal. __________

 i. Verify propriety of any adjustment, e.g., rebate of interest. Trace disposition of
rebate (i.e., credited to his account or thru issuance of MC). __________

j. Review imposition/collection of penalty and other charges. Check whether

penalty/other charges as stipulated on late payment of installment/interest are
imposed and collected. Verify if these are appropriately booked to income. __________

Test Objective: Propriety of Renewal/Extension of Loan

1. Check whether accrued interest, if any, have been paid before a loan was renewed or
extended. __________

2. For loans renewed, check if new Promissory Note was accomplished and
corresponding documentary stamps were affixed. Note: Loan extensions do not
require the preparation of new PNs. Extension of a loan subject to tax shall be
subject to a documentary stamp tax as provided for in Sec. 198 of the revised Tax
Code. __________

3. Ascertain whether availment did not exceed the borrower's credit line or that the line
is not expired. __________

4. Tally the information indicated in the LIS with the terms and conditions stipulated in
the existing approval media on file. __________

5. Check loan manifold and ticket for review and approval. __________

D. Objective: To ascertain physical existence of collateral, adequacy of documentation and

legal enforceability.

Coverage: Adequacy of Documentation

Test Objective: Establish identity of borrower.

1. Based on the Credit Application and other documents establish the identity of the
borrower. The borrower's identity is established as follows: __________

a. Natural Person

- Name, Citizenship, Age, Civil Status, Address

- Submission of ID, CTC, Individual's Passport (for non-resident alien), etc.
- Submission of latest AFS, ITR (borrower and co-maker)
- Submission of CLI or application for CLI
 b. Sole Proprietorship

- Registration of Certificate of Business Name

- Application of Business Name
- SPA executed by the owner if the person authorized to sign in behalf of the
single proprietorship is not the owner.
- Photocopy of Alien Certificate of Registration (if alien)
- Submission of latest AFS, ITR, CTC (borrower and co-maker)
- Submission of Application for CLI if the credit accommodation is
clean/unsecured including individual borrower.

c. Partnership

- Articles of Partnership
- SEC Certificate of Registration
- Certificate of Registration of Business Name with Bureau of Domestic Trade.
- Submission of latest AFS, ITR, CTC (borrower and co-maker)

d. Corporation

- Articles of Incorporation/Amendment
- SEC Certificate of Registration/Cert. of Incorporation
- Certificate of filing By-Laws/Amendment/By-Laws
- Certificate of Registration of Business Name with Bureau of Domestic Trade
- Current Certified List of Officers
- Check Articles of Incorporation & By-Laws to find out the scope of corporate
powers and authority of the officers.
- Submission of latest AFS, ITR, CTC (borrower and co-maker)

2. Determine the consent/acceptance of the borrower.

a. Individual - His signature will signify consent.

b. Partnership - The consent is determined in the Partnership's Resolution which is

contained in the Secretary's Certificate. It shows who is authorized to negotiate,
execute, and mortgage in behalf of the partnership.

c. Corporation - The consent is determined in the Board Resolution which is

contained in the Secretary's Certificate. It shows who is authorized to negotiate,
execute and mortgage in behalf of the corporation. It also shows the authorized
signatories.
Test Objective: Establish adequacy and Completeness of Collateral Documentation

Conduct an inventory of TCTs/MVRR/Stock Certificate, etc. and passbooks, certificate

of deposits, etc. safekept at HO-Securities Unit and in the Branch respectively. __________

a. Real Estate Mortgage (REM)

- Documents Required

- Upon Application

- Loan Application
- Acceptable identification papers
- Latest ITR/Audited FS – (to be updated yearly)
- Credit Life Insurance
- Customer Information Sheet (CIS)
- Credit Investigation Report (CIR)
- Inspection and Appraisal Report (IAR)
- ERCA/IOL

- Upon Approval

- REM Contract
- Duplicate copy of TCT together with photocopy of tax declaration;
real estate tax receipt and tax clearance
- Location plan/vicinity map duly authenticated by a licensed geodetic
engineer
- Register the REM
- Insurance policy covering mortgaged improvement/s endorsed in
bank's favor

- Upon Release

- Promissory Note
- Disclosure Statement
- Loan Instruction Sheet

a.1 Deed of Real Estate Mortgage. Check the following: __________

- Deed of REM should be in favor of the Bank and duly registered with the
Register of Deeds.

- The Deed of REM should be executed/registered PRIOR to release of loan

proceeds.
- The signatures of the mortgagors should have been verified by the Account
Officer/Branch Officers.

- The amount of the REM is sufficient to cover the loan.

- The Deed of REM should be affixed with the correct amount of documentary
stamps.

- In case the security accepted is owned by a party other than the borrower, the
Deed of Real Estate Mortgage should be signed by such third party. A
Special Power of Attorney in favor of the borrower is prepared and/or the
bank may require the owner to act as co-maker in addition to his/her liability
as a mortgagor to the REM contract.

- The REM should be notarized so that in case of conflict, we do not have to

prove the authenticity of the document.

- In case of individual borrowers, the husband and wife should consent unless
one spouse is incapacitated. This is based on the premise that sale or
mortgage without consent is void (unless the property is exclusive).

- An unregistered REM which secures a specific loan is coterminous with the

loan it secures.

- The property mortgaged is acquired under Patent and Homestead

Requirements:

- within five (5) years not acceptable as collateral except sales patent
covering lands, suitable for residence, commerce and industry. After five
(5) years-acceptable-provided:

Mortgagor is not the original patentee or his/her surviving spouse/legal

heirs.

a.2 Land. Check the following: __________

- The land title (TCT) must be in the name of the mortgagor and must be free
form encumbrance.

- The description in the land title should match the description in the approval
medium.

- The mortgage should be annotated at the back of the TCT. The amount and
the date should be the same as in the REM.
- There should be a vicinity map/location plan on file and property was properly
verified by the bank or its hired appraisers as to location and existence of
original title with the Register of Deeds.

- Current Real Estate Tax Receipts and Tax Declarations should be on file.

- Inherited Real Estate subject to Section 4, Rule 74 of the Rules of Court, title
certificates bears an annotation providing that such real estate shall remain
charged with a liability to creditors, heirs or other persons within a period of
two years form date of annotation. These properties may be accepted as
security even within this two-year period provided that such loan is further
covered by a surety bond equivalent tot he loan amount.

- If the property is untitled (not covered by OCT, TCT, CCT, or LTC)

Requirements:

- Muniments of title, such as deeds of sale, donation, exchange, etc.

- Tax declaration
- Real estate taxes for the present year & last 5 years or more
- Geodetic Survey Plan/Cadastral Survey Plan duly approved by the Bureau
of Land or Land Registration Commission
- Affidavit of the adjoining owners to the effect that they have no adverse
claim over the lot in question, if possible
- Settlement of permanent improvement, etc.

Unacceptable untitled properties are untitled real estate properties, free patent,
homestead patent, sales patent covering agricultural lands or titles derived
from such.

- Reconstituted Title may be accepted as security for a loan provided the tile is
validated as to authenticity and genuineness. A certification by the Land
Registration Authority (or by appropriate agency as the case may be) shall be
submitted to attest to the reconstitution of the title.

Although the original of a reconstituted title may have been lost or destroyed,
it is deemed without prejudice to any party with interests on th title. Amount
annotated on the transfer certificate of title shall be the total amount of the
credit line or of the loan.

a.3 Improvements covered by the REM. Check the following: __________

- Loanable Value (LV) or real estate properties offered as collateral shall be

generally assessed at 60% of appraised value with the exception of properties
situated in Basilan and Jolo.
- Tax declaration on the improvements should be on hand.

- The building and other improvements covered by the REM should be insured
against losses or damages by fire, typhoon, flood or other natural calamity
with an accredited insurance company.

- The insurance coverage shall be equivalent to the appraised value of the

improvement.

- The Official Receipt (OR) evidencing payment of premium should be on

hand.

- The description of insurance policy should match the mortgaged property.

compare the details of the improvements in the Appraisal Report against the
details in the insurance policy.

- The covering insurance policy (ies) shall be payable to/endorsed in favor of

MBTC.

- The property mortgaged is conveyed as Family Home

Requirements:

- Joint signature of husband and wife

- Written consent of a majority of the beneficiaries of legal age which
include the husband and wife or head of the family. (Affidavit of Consent
to Mortgage Family Home)

- Buildings where mortgagor does not own the lot on which the building is
erected

Requirements:

- contract of lease
- tax declaration
- real estate tax receipt for the current year
- consent of the owner of the lot to the mortgage of the building
- complete building plan (Isometric, Electrical, Mechanical, Plumbing,
Drainage, etc.)
- Others:
- Building Construction Permit
- Occupancy Permit
- Lease Contract, if any, including a list of occupants/tenants
- Official location plan for Land Representative Commission
b. Chattel Mortgage (CM). Check the following: __________

b.1 Deed of Chattel Mortgage.

- The Deed of Chattel Mortgage should be registered with the Register of Deeds
where the property is located and the place where the principal office of the
mortgagor is located or if individual, where the mortgagor resides.

- The Deed of Chattel Mortgage should be executed/registered PRIOR to

release of loans.

- The signature of the mortgagor is verified by the Account Officer/Branch

Manager.

- The Deed of Chattel Mortgage should be affixed with the correct amount of
documentary stamps.

b.2 CM over a motor vehicle. Check whether: __________

- Land Transportation Office (LTO) Certificate of Registration of motor vehicle

together with the latest official receipt showing registration thereof are on
hand.
- The mortgagor should be the registered owner of the vehicle. Otherwise, if
the mortgagor is not the registered owner, the former should have a Special
Power of Attorney to mortgage the vehicle.

- The registration certificate number together with the make, type, motor
number, serial number and plate number of the motor vehicle should appear in
the Deed of Chattel Mortgage.

- The vehicle was certified inspected by the bank

- The Deed of Chattel Mortgage is registered with the Registry of Deeds

b.3 CM over stock-in-trade or machinery. Check whether: __________

- There is a quarterly inventory checklist on file when contains descriptions of

properties mortgaged duly certified by the signatories to the Deed of Chattel
Mortgage and certified inspected by the bank.

- The properties covered by the CM is insured with an accredited insurance

company.

- The amount of insurance is equal to the appraised value of the mortgaged

property.
 - The amount of insurance is within the accreditation limit.

- The insurance policy is endorsed in favor of the bank.

- The Official Receipt (OR) evidencing the payment of premium should be on

file.

- Proof of Ownership duly notarized.

- Xerox copies of invoices.

- Inspection and Appraisal Report conducted by an accredited independent
appraisal company.

- The chattel mortgage is registered with the Registry of Deeds.

b.4 CM over Blue Chip Shares of Stock. Check whether: __________

- Loan value (LV) of stocks fully covers loan/line.

- LV shall be 50% of the market value (MV). MV is determined based on a 3-

month average or over a longer period depending on the volatility of stock
prices.

- In case the value of the stocks decline to a level whereby loan value cannot
cover loan or line amount, client must either be required to put up additional
shares of stock or other acceptable deficiency or liquidate the portion of loan
no longer covered by the value of the stocks.

- Stocks are classified as blue-chip based on basic criteria and specific

guidelines established by management. These stocks would include those
listed in the stock market as well as club shares of prominent organizations/
country clubs.

c. Assignment of Deposit.

- Types of Deposits Eligible as Collateral

- savings
- time deposits
- UNISA
- deposit substitutes (loans secured by placements shall be released only
upon receipt of Head Office approval and shall be treated as clean loan).
- Documents Required

- Application for credit accommodation

- Approval ERCA/IOL
- CIS
- CIR
- Latest ITR/Audited FS
- Non-negotiable PN
- Disclosure Statement
- Loan Instruction Sheet
- Deed of Assignment with Power of Attorney
- Passbook/Certificate of Deposits

Check the following: __________

- The Deed of Assignment and Promissory Note should be signed by both

spouses/borrowers inasmuch as deposits are presumed owned in common by
the spouses even if it is registered under the name of one spouse.

- The Deed of Assignment must be duly signed and notarized prior to release of
the loan proceeds.

- The Promissory Note and Deed of Assignment must be signature verified by

the Account Manager or Branch Manager.

- Loans granted against peso deposits (savings, time, UNISA) may be granted
at 100% of the deposit offered as collateral provided the minimum spread over
the break even rate is maintained.

- Loans against any acceptable foreign currency deposit (FCDU deposits) shall
be granted at 90% of the peso equivalent of the dollar deposit offered as
collateral but should not exceed the authority limits of the approving body.

- For loans secured by Time Deposits in which interest was paid in advance,
loanable amount shall be net of the advanced interest payment.

- Spread over the break even rate for peso deposits shall be determined and
disseminated by HO as warranted by prevailing market condition. Break even
point for lending rate shall be computed by Fund Management Division
(FMD).

- Rate of conversion for foreign currency deposits assigned to secure credit

accommodation shall be based on the minimum buying rate.
- All traditional deposits offered as collateral shall be maintained with the
proponent branch. However, deposits may be maintained with other branches,
provided that Branch Head of the depository branch signs a conforme for the
hold out of deposit.

- Deposits assigned shall be in the name of the borrower. Otherwise, if owned

by third (3rd) parties, they shall be required to act as co-maker and/or surety in
addition to their obligation as assignor to avoid legal complications. A Deed
of Assignment with Power of Attorney must be executed.

- Maximum term of the loan shall be 360 days and must not go beyond the
maturity date of the assigned deposit.

- The assigned deposit shall be applied to the outstanding loan balance plus past
due interest after a 30-day grace period from maturity date of the loan. Any
unpaid amount after application of the deposits shall be subject to past due
loan charges.

- Renewals/Extensions are allowed with or without partial payment.

- The Accounting Officer/Head of Accounting Unit(s) shall be responsible for

the monthly review of all one-to-one (1:1) peso/foreign currency deposit)
loans granted by the Head Office Unit or Branch.

- The maturity period of the deposits (peso and foreign currency, time deposits
and UNISA) shall be co-terminus with the loan/line/credit accommodations.
In case of existing deposits whose maturity is earlier than the term of the
loan/line/credit accommodation, a UNISA confirmation sheet form (for
UNISA) and certificate of time deposits (for peso and FCDU TD) shall be
executed for an automatic rollover. Maturity thereof must coincide with the
term of the loan/line/credit accommodation.

- For dollar deposits, interest shall be discounted at prevailing rate for the full
term of the loan/line/credit accommodation.

For loans vs. peso deposits, interest must be computed based on the spread
over break-even rate.

- The liability of the surety shall be co-terminus with the loan/line/credit

accommodation. Thus a new suretyship agreement shall be executed in case of
extension/renewal/increase or restructuring of the loan/line/credit
accommodation.
 All credit accommodations granted to a corporation must be supported by the
continuing surety of the principal stockholder(s).

If the borrower(s) or co-maker(s) or surety(ies) is/are married, the joint and

several signature (JSS) or continuing surety (CS) of the spouse(s) shall be
required.

- Credit Group shall be furnished a copy of all approval media and supporting
documents.

- The provision below shall be included on loan documented pertaining to loan

secured by hold-outs on/or assignments of certificate of time deposits.

"The Assignor hereby authorize the Assignee to disclose to the Central Bank
the assigned deposit(s) and to allow the Central Bank to examine said
deposit(s)."

- The deposits are tagged in the computer as “Hold”.

d. Guaranty/Suretyship. Check the following: __________

- Check if the Continuing Suretyship Agreement (CSA) is executed/notarized prior to the

release of loans.

- Check if the CSA is signature verified.

- Verify if the amount is the CSA is sufficient to cover the loan.

Test Objective: Clean Loans are properly classified as such.

Check/verify the following: __________

- Only commercial loans (both case to case and credit line) shall be qualified
under the herein granted. Personal consumption loans i.e., purchase of
appliances, payment of debt shall not be allowed.

- As a matter of policy, renewals/extensions shall be given if partial payments

(clean-ups) are made.

Renewal/Extension of Unsecured Loans with or without partial payment may

be allowed as long as it is within the prescribed authority limits provided:

a. First renewals may be granted by the body which originally approved the
loan.
b. On the second renewal, provided that partial payment of at least 10% on
principal is made, loan may be acted upon by the original approving body.
 Without the minimum 10% partial payment, full liquidation/payment of
the loan outstanding must be required.
c. Subsequent renewals will require a prior clean up to period of at least five
(5) working days.

- For case to case clean loans, renewal/extension period should not exceed the original term.
Furthermore, the cumulative term of the original loan and the extension/renewal period shall
not exceed 360 days. If it exceeds 360 days, the proposed renewal/extension shall be
endorsed to the next higher level.

- For credit line granted on clean basis, a body may approve the renewal/extension as long as
the amount is within the approving authority. This is provided, conditions stated in b. above
are strictly followed.

- A partially secured loan (i.e., collateral does not fully cover the loan amount) is considered a
clean loan. For loans vs. REM, for instance, a loan of P10MM is partially secured if AV is
P10MM and LV is P7MM. Even if the AV of P10MM was annotated on the REM, loan is
still considered partially secured.

- For proposals where collateral is reflected in a confidential side note (Ex. Unregistered
mortgage, loan vs. Metrofund placements and loan vs. FMIC placements), the loan is
considered a clean loan.

- Loans vs. chattel mortgage (on machinery/equipment, inventory and the like) are considered
clean loans except for chattel mortgage against blue chip shares of stocks as determined by
management.

- Packing credit loan against export LCs, purchase orders, etc. as well as loans against post-
dated checks are also considered as clean loans.

Unsecured Loans

a. Against post-dated checks (PDCs)

- Must be borrower’s customer’s post-dated checks

- Loan value is 70% of total amount of checks
- Maximum term is 90 days
- Minimum amount of loan is P10,000.00
- Minimum amount per check is P500.00
- Amount of check per drawer must not exceed 25% of the total amount of
loan
- Amount of check must not exceed 25% of the total amount of loan
- Credit Life Insurance (CLI) to be secured at accredited insurance company
(Phil. AXA Life)
 b. Rediscounting of post-dated checks

- On a Discounting Line Basis for one (1) year

- Maximum amount of DL is P1.0MM
- Maximum term of a check is 90 days
- Maturity date of the check must include the clearing period
- Must be borrower’s customers post-dated checks
- Minimum amount per check is P5,000.00
- Amount of check per drawer must not exceed 25% of the total amount of
loan
- Amount of check must not exceed 25% of the total amount of loan
- Based on prevailing interest rate
- Computation of interest is on a per check basis

Test Objective: Proper contracts were used.

Check the following: __________

a. REM Contract

- for real estate properties

- need to be registered with the Register of Deeds

b. Side Agreement

- for renewal of loan/line of the same amount against the same real estate
property
- details could be found in the REM contract previously executed

c. Amendment of REM Contract

- for renewal of loan/line at increased amount against the same real estate
property
- details could be found on the REM contract previously executed

d. Amendment of REM Contract with additional collateral

- for renewal of loan/line at an increased amount with additional collateral

- details could be found on the REM contract previously executed. In
addition, full description of the additional property should also be
specified.

e. Chattel Mortgage Contract

- for credit accommodations against machinery and equipment

- need to be registered with Register of Deeds
 f. Credit Line Agreement

- for discounting line facility

- all the terms and conditions in the ERCA should be fully stated in the
Credit Line Agreement

E. Objective: To ascertain if proper collection procedures are applied – Loans considered as

past due loans.

Test Objective: To verify if loan is properly classified.

Check the following: __________

a. Loans payable on demand

- if not paid on the date indicated on the demand letter or within 6 months from
date of grant whichever comes earlier

b. Bills Discounted/Time Loans

- if not paid on the respective maturity dates of the promissory note

c. Loans and receivables payable on installment basis where the total outstanding
arrearages are as follows:

Arrearages
Mode of Payment No. of Installments
------------------------ -------------------------
Monthly 3
Quarterly 1
Semestral 1
Annually 1

Or

If the total amount of arrearages reaches 20% of the total amount of the loan, the total
outstanding balance of the loan shall be considered as past due.

Technical Past Due Loans – refers to arrearages in amortization or installment

payments only. The loan as a whole is not yet due inasmuch as the number of
installments in arrears has not yet been met.

Determining total number of days past due

A. Single Payment Bills Discounted - From maturity or last effective payment date to
new effective payment date.
 B. Amortized Bills Discounted – From date of first default or last effective payment
date to new effective payment date.

C. Single Payment and Amortized Time Loan – From date the loan was granted or
last effective date to new effective payment date.

Test Objective: To verify if loan payment priority is applied.

Check the following: __________

Order of Payment Priority

1. Miscellaneous Advances

- REM Charges
- Documentary Stamp
- Accounts Receivable prior to loan release

2. Accounts Receivable

- Advances made during the term of the loan

3. Litigation/Assets Acquired Expenses

- Real Estate Tax

- Insurance Premium
- Registration Fee

4. Accrued Interest Receivables

5. Penalty Charge

- Unpaid discount
- Interest due
- Principal/Amortization

6. Past Due Interest

7. Amortization in Arrears

8. Amortization due

9. Discount due

10. Principal
F. Objective: To ensure that loans booked under Items in Litigation (ITL) are processed in
accordance with established policies and procedures.

ITL – Represents loans and discounts for which collection/foreclosure cases have been
field in court or sheriff’s office.

Check the following: __________

- The filing of a collection/foreclosure case in court shall be required before a past due
account is booked under ITL.

- Reclassification shall be done only once the notice is received that a collection or
foreclosure case was already filed by Law Division.

- The amount to be booked under the appropriate ITL account shall be the outstanding
principal balance only.

- All expenses incurred incidental to he litigation shall be charged to operations and

lodged under “Litigation/Assets Acquired Expenses” account. Corresponding
memorandum entries for the expenses shall be made on the individual subsidiary
ledger of the account concerned.

Reviewed by/Date : ____________

Team Leader
 _________________________ BRANCH

Audit Cut-off Date ___________________

ROPOA

Objective: To ensure that loans booked under Real and Other Properties Owned and
Acquired (ROPOA) are processed in accordance with established policies and procedures.

ROPOA – The process by which mortgaged property is proceeded agaisnt and sold at a
public auction to satisfy the obligation it secures.

Check the following: __________

- Redemption period is one (1) year from the date of annotation of the Sheriff’s
Certificate of Sale.

- Transfer of account from ITL to ROPOA is on the date of annotation of the sheriff’s
Certificate of Sale.

- One (1) year after the date of the annotation of the certificate of sale, if there has not
been a redemption, the property must be consolidated in the name of the bank within
30 days from the date of expiry of the redemption period.

- A consolidation notice shall be served by Law Division to branches, HO unit

concerned and GSG. For countryside branches, a consolidation notice shall be
prepared by the branch to be submitted to GSG copy furnish Law Division.

- Once consolidated has been effected, booking shall be centralized in GSG.

Reviewed by/Date : ____________

Team Leader
 _________________________ BRANCH

Audit Cut-off Date ___________________

BILLS PURCHASED

These represent undocumented/clean bills purchased which are either encashed or credited to client’s
regular current account.

Audit Objectives:

1. To establish the accuracy and propriety of recorded balances.

2. To ascertain whether transactions are properly authorized.
3. To determine the adequacy of documentation requirements.
4. To ensure that transactions are processed in accordance with established policies and
procedures.

Check the following: __________

- Acceptable Bills for purchase:

- Domestic

- Local drafts and/or negotiable instruments

- Local, regional and out-of-town checks covered by BP line
- Case-to-case purchase of checks of prime clients with expired lines
- Case-to-case accommodations to clients without lines

- Foreign/Dollar Checks

- Personal and commercial checks

- Manager’s checks, bank drafts, postal money orders, traveler’s checks

- Each approving body may grant availments within its approved limit. Said limits
shall be the maximum amount outstanding at any one time per client. As long as
within its authority limits, availments shall be limited to six (6) times per month
unless client has a credit line, such that limit will be according to line amount or if
within an omnibus line, up to the sub-limit for the BP facility, if specified.

- If a client avails of the BP facility on a regular basis for more than six (6) times per
month, a BP or guidance line may be recommended for deserving clients.
 - Recommendations for BP (whether case-to-case or line basis – guidance line or
otherwise) should contain justifications and other information to enable proper
evaluation like other credit proposals.

- Availments in excess of the BP line shall be referred to the appropriate committee

who has the authority to approve total availments including the excess drawing on the
line.

- Case-to-case purchase of out-of-town checks, especially of non-prime clients shall be

accepted strictly on a collection basis only. And as withdrawals shall be allowed
unless the check has been cleared or upon EXCOM’s confirmation. These shall be
approved by the appropriate body with the authority over the amount.

- Unpaid DBP’s are not to be repurchased.

- Charges should be collected on bills purchased.

Reviewed by/Date : ____________

Team Leader