Zions, Western Alliance Banks Disclose Bad Loans Tied to Alleged Fraud

(Bloomberg) -- Shares of two regional US banks tumbled Thursday after the companies said they were the victims of fraud on loans to funds that invest in distressed commercial mortgages, fueling concern that more cracks are emerging in the credit markets.

Zions Bancorp sank 12% after it disclosed a $50 million charge-off for a loan underwritten by its wholly-owned subsidiary, California Bank & Trust, in San Diego. And Western Alliance Bancorp tumbled almost 11% after it said it made loans to the same borrowers.

Zions and Western Alliance were the biggest decliners in the KBW Bank Index, which posted its steepest drop in six months. 

The disclosures add to other recent loan blowups, including subprime auto lender Tricolor Holdings, which filed for bankruptcy last month and triggered a near-total wipeout on some debt. That was followed by the bankruptcy of auto-parts supplier First Brands Group. JPMorgan Chase & Co. and Fifth Third Bancorp disclosed hundreds of million of dollars in combined losses tied Tricolor, while Jefferies Financial Group Inc. disclosed exposure to First Brands.

While those hits can be easily absorbed by the biggest US banks, the totals are more worrisome for regional lenders.

“If JPMorgan has a loan problem with Tricolor, it’s puny,” Mike Mayo, an analyst at Wells Fargo & Co., said in an interview. “But if smaller banks have problems with these loans, it takes more of a hit.” 

Zions said in a lawsuit that California Bank & Trust is owed the money from two investment funds tied to Andrew Stupin and Gerald Marcil, among other parties. 

California Bank & Trust provided two revolving credit facilities to the borrowers in 2016 and 2017 totaling more than $60 million, to finance their purchase of distressed commercial mortgage loans, according to the lawsuit. The terms gave the bank “first-priority, perfected security interest” in all collateral, including each mortgage loan purchased by the investment funds.

But after an investigation, the lender found that many of the notes and underlying properties were transferred to other entities. And those properties have already been foreclosed on or were about to be, according to the lawsuit.

Brandon Tran, an attorney representing Stupin and Marcil, declined to comment. A representative for Western Alliance also declined to comment, while Zions and California Bank & Trust didn’t respond to requests for comment. 

Zions’ investigation was prompted by a Western Alliance lawsuit against the same group filed in August, Zions said. 

Western Alliance also lent money to the same investor group, for them to originate or buy mortgage loans, according to the bank’s lawsuit in August. The outstanding balance of that loan is $98.6 million. 

Western Alliance found that the collateral was supposed to be backed by a first-priority lien, but that wasn’t the case. It alleged that the borrower created fake title policies by omitting the senior liens.

At the same time, the borrower drained funds from accounts that acted as additional collateral, according to the lawsuit. As of Aug. 18, the borrower held a little over $1,000 in their bank account at Western Alliance, while the required monthly average was $2 million, according to the lawsuit.

Western Alliance, which also has exposure to First Brands, said it doesn’t expect the issue to change its 2025 outlook.

“There have been a number of ‘one-off’ credit events that a number of banks have previewed going into the quarter,” Terry McEvoy, an analyst at Stephens Inc., said in an interview. “They have not gone unnoticed by bank investors.”

--With assistance from Georgie McKay.

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