At Earnings, Merchants Bank Cites Trouble With Fraud

Merchants Bank of Indiana, a go-to lender for multifamily dealmakers across the U.S., cited commercial mortgage fraud for its poor second-quarter earnings.

The Carmel, Indiana-based regional bank reported a 50 percent drop in net income to $38 million in the second quarter on Monday after its provision for credit losses jumped 432 percent.

It blamed the increase in credit losses on a decline in multifamily values, along with an active investigation of borrowers into mortgage fraud or suspected fraud.

“We have implemented strategies to address our asset quality issues and to enhance our overall risk management practices to ensure long-term resilience,” said Michael Dunlap, chief operating officer at Merchants in a statement announcing the earnings on Monday. “We are optimistic about our future and confident that our collective efforts will drive the stability and growth of our institution.”

The regional bank, with $19.1 billion in assets, is the only bank known to have publicly acknowledged extensive issues related to an expanding mortgage fraud investigation. The Real Deal has documented schemes where multifamily borrowers juiced rent rolls or purchase prices to extract larger loans from lenders. But so far, despite arrests, indictments and blacklists, lenders have not reported many issues.

In its second-quarter earnings, Merchants said it wrote down 14 customers, totaling $46.1 million, compared to only $3.5 million during the same period last year.

The bank did not name the borrowers or properties where it identified fraud, but a review of property records shows Merchants lent to affiliates of Moshe Silber and Aron Puretz.

Puretz and Silber both pleaded guilty last year for their roles in schemes in which they submitted fake purchase prices to obtain larger loans from lenders. Puretz was sentenced to five years in prison. Silber was sentenced to 30 months.

Puretz and Silber’s fraud was uncovered as part of the Department of Justice and Federal Housing Finance Agency’s expanding probe into mortgage fraud. More indictments are expected to come.

Other agencies are also looking into suspected fraud.

The Allegheny County District Attorney’s office in Pennsylvania is pursuing Silber with felony charges for misappropriating money from an apartment complex in West Mifflin, Pennsylvania. (Merchants provided an $18 million loan to finance the property in 2023.)

Merchants’ loans extended to borrowers facing civil and non-criminal allegations of fraud. The bank provided a $22 million loan to the late Mendel Steiner for an apartment complex in Lafayette, Indiana, in 2022. Steiner has been accused of inflating rent rolls in at least one lawsuit.

In its earnings, Merchants said it obtained additional information through court-appointed receivers to assess the underlying collateral of its “challenged” loans. After an analysis, it increased its “substandard” loans to $417.7 million in the second quarter from $246.8 million in the second quarter of 2024.

Merchants, however, said its “loan portfolio remains well collateralized.” The bank noted that it has made efforts to reduce its credit risk through loan sales and securitizations since 2019

The bank also stressed its ability to tap into a $5 billion credit line with the Federal Home Loan Bank and the Federal Reserve Discount window. Both are considered lenders of last resort.