RTC needs complete and current information to ensure that it maximizes recoveries from the sale of its large inventory of hard-to-sell assets, which includes nonperforming loans. With complete and current asset information, RTC could provide investors with pertinent data about assets being offered for sale. RTC has found that the quality of the data it makes available to prospective bidders directly affects how investors bid on assets: better quality data lead to higher bids and, conversely, poor quality data lead to lower bids. Therefore, RTC has spent a great deal of time and resources attempting to provide investors with pertinent loan data before an auction to assist them in making bidding decisions and to increase investor participation and enhance asset recoveries. At the time of the August 1993 national auction, RTC data showed that it held about 122,000 nonperforming residential, consumer, and commercial loans with a total book value of $17 billion. By February 1994, this inventory had been reduced to about 96,300 loans with a book value of $11.9 billion. As shown in figure 1, these assets were primarily serviced by contracted loan servicers. RTC has used a variety of sales methods to dispose of the nonperforming loans of thrifts placed under RTC control, including Standard Asset Management and Disposition Agreement (SAMDA) contracts, securitization, portfolio sales, auctions, individual asset sales, and workouts. Open outcry auctions are used to sell most types of smaller balance (less than $50,000) nonperforming loans. RTC’s December 1993 Business Plan lists national auctions as the primary disposition strategy for performing and nonperforming “other” loans. It also lists auctions as a secondary disposition strategy for nonperforming single-family mortgages. To increase recoveries on the sale of these assets, national auction sales have become an important element of RTC’s overall asset disposition strategy. Before June 1991, nonperforming loans were normally assigned to SAMDA contractors. These contractors were required to negotiate with defaulting borrowers and handle the foreclosure and sale of collateral, if necessary. However, RTC concluded that it could dispose of nonperforming loans more expeditiously through auctions, thereby reducing asset holding costs and administrative expenses and increasing net recoveries. Accordingly, in June 1991, instead of giving nonperforming loans to SAMDA contractors for disposition, RTC’s field offices began using regional auctions. In September 1992, RTC held its first large, broad-scale national nonperforming loan auction in Los Angeles. At this auction RTC sold $416 million in nonperforming loans, recovering about $247 million, or about 59 percent of the book value. On the basis of the results of this initial auction, RTC decided to use national auctions as a primary disposition method for nonperforming loans. It shifted responsibility for conducting auctions from its field offices to the National Sales Center in Washington, D.C. According to RTC, through national auctions, it can dispose of large numbers of loans at a single event and improve its ability to group loans by investor preferences, such as loan type, loan size, or location of collateral. RTC believes it can increase investor participation and maximize recoveries by using national auctions to dispose of nonperforming loans. The National Sales Center has conducted 4 national nonperforming loan auctions, which disposed of about 43,440 loans with a total book value of about $1.6 billion. According to RTC, it has recovered 50 to 60 percent of the loans’ book value in each of these auctions. As shown in table 1, in the August 1993 auction RTC sold 11,181 loans with a total book value of $673 million and realized net proceeds of $330 million. RTC establishes the selection criteria for the loans to be offered in each auction. In general, for the August 1993 auction, loans had to be nonperforming with a maximum loan amount of $5 million and at least 91 days past due, except that loans secured by real estate had to be at least 121 days past due. The specific criteria used for this auction are listed in appendix I. RTC identified loans for the auction using its central loan database, which contains information on most RTC loan asset types. The database compiles data reported by loan servicers, whom RTC contracts to collect payments from borrowers and perform other tasks. The database contractor who maintained the central loan database used the August 1993 auction’s loan selection criteria specified by RTC to search the database to identify potential loans and create a separate auction database of loans meeting the criteria. After the August 1993 auction, about 425,000 active loans remained in the central loan database. Loan servicers and SAMDA contractors were then asked to send the loan files for the nonperforming loans identified to the national auction site in Kansas City. They were also to provide payment histories, appraisals, and updated legal information that may not have been in the files. Loan servicers were requested to submit monthly loan status updates to keep the auction database current. These updates were to include data such as the unpaid principal balance, current interest rate, maturity date, and number of days delinquent. A contractor hired by RTC to do due diligence work reviewed the loan files to verify data about each nonperforming loan. This contractor also created diskettes containing loan data that interested investors could purchase for $250 to review the loans being offered in the auction. In addition to conducting the auction, an auctioneer hired by RTC coordinated the marketing process and scheduled investor reviews of loan files. Investors reviewed the loan files and/or the loan data diskettes to decide whether to participate in the auction and how much to bid on loans. RTC used imaging technology to provide investors access to information in loan files while protecting the original loan documents. It scanned the documents in the loan files and created image databases on computer disks. For a period of about 4 weeks before the auction, investors could use image workstations at the auction site in Kansas City to view loan documents and study the payment histories for loans being offered for sale. The use of the imaging technology allowed multiple investors to review the same loan files simultaneously. Both GAO and the RTC Inspector General (IG) have issued reports on RTC’s use of auctions to dispose of assets. For example, the IG looked at two earlier auctions held in December 1991 and April 1992 by RTC’s Denver and Atlanta field offices. The IG reported that RTC may not have maximized its recovery for some loans sold in these auctions because it did not have an effective screening mechanism and adequate loan information before the auction. As discussed in this report, these conditions had not been corrected at the time of the August 1993 national auction. GAO, the IG, and RTC’s Office of Contractor Oversight and Surveillance have all issued audit reports on loan servicing activities that identified weaknesses in RTC’s oversight of loan servicers that could affect the quality of loan data they reported to RTC. For example, in April 1992, we reported that RTC did not adequately oversee loan servicers. It did not require its field offices to audit the servicers’ loan collection records and verify the accuracy of their loan status reports. Instead, RTC relied totally on the servicers to keep accounting records that accurately reflected what debtors had paid and what loan balances remained. Also, in an October 1993 report, the IG reported that the loan servicing efforts of one contractor were hampered because of continuing problems, such as incorrect loan balances, large loan payment suspense account balances, and unreliable delinquent loan reports. The IG reported that many of the contractor’s adjustable interest rate loan amortizations, payoff calculations, and payment postings were not accurate because its information system contained numerous errors resulting from poor quality conversions and mistakes made by unqualified conversion and posting personnel. Furthermore, in a December 1993 report, the IG reported that the Kansas City Financial Service Center did not have an efficient system for maintaining loan servicing information and did not determine and monitor reporting requirements for each servicer. The related audit reports listed on pages 36 and 37 describe the environment in which the August 1993 nonperforming loan auction was planned. The problems identified in these reports help explain the difficulties RTC experienced in selecting loans for this auction and providing current and complete data to investors prior to the auction. The RTC Completion Act requires RTC to respond to problems identified by auditors. Consequently, RTC is in the process of improving the maintenance of loan servicing information and other loan servicing problems identified by GAO and the IG. RTC’s goal is to reduce its universe of loan servicers, standardize the scope of services it requires, competitively bid new contracts as existing contracts expire, and better support the needs of the loan sales initiatives. The objectives of our review were to determine (1) how RTC selected loans to be offered in its August 1993 national nonperforming loan auction and (2) whether RTC provided investors with adequate and useful data on loans being offered for sale. RTC was identifying the loans for this auction when we began our work in February 1993. We were able to observe how RTC gathered loan data and processed loan files before the auction. We also attended the auction in Kansas City, MO. To determine RTC’s process for selecting loans for the auction, we reviewed the Asset Sales Guide, the loan selection criteria, and policy directives governing auctions. We reviewed RTC records and reports from the due diligence contractor. At the National Sales Center in Washington, D.C., we interviewed the Acting Director of National Auction Programs, auction marketing specialists, and the National Loan Auction Marketing Coordinator. We interviewed the due diligence contractor to determine how data were gathered for the auction database and reasons for auction inventory changes. We also observed the contractor reviewing loan files during the due diligence process. We visited RTC’s central loan database contractor to discuss the creation and maintenance of this database.