USACM Explains Differences Between Pre-Petition Account Statements, the June 30 Account Statements Mailed July 25, and the Checks and Accompanying June 30 Statements Mailed August 26

(Sept. 6) USACM has received a high volume of telephone calls, emails, Website FAQs and Feedback Forms in the past several weeks from Direct Lenders with questions, concerns and complaints regarding their pre-petition account statements, the post-petition June 30 Account Statements, and the interim distribution of funds prepared and mailed by USACM on August 26. USACM has reviewed the statements and its accounting in light of these responses and provides the following explanation to assist Direct Lenders in understanding the documents they have received.

Pre-Petition Account Statements Versus June 30 Account Statements Mailed July 25
Prior to the bankruptcy filing, most USACM investors received statements every month about their Legal Vesting Accounts that they believed were the true and accurate statements of the performance of each loan and the position of their investment in each. We now know that prior management of USACM misrepresented the performance of more than half the loans, diverted principal repaid by certain Borrowers for use as interest to all investors, and failed to equitably enforce the terms of all Loan Agreements with Borrowers and Loan Servicing Agreements with investors.

Mesirow conducted 75 days of forensic accounting beginning before the Chapter 11 petition filing to reconstruct the general ledgers for all 115 loans in the USACM portfolio, and the account ledgers for 3,600 direct lenders and 3,200 total members of the First Trust Deed Fund and Diversified Trust Deed Fund.

The proper accounting conducted by Mesirow included extraordinarily complex calculations of investor interest correctly based on entry, assignment and exit dates, application of Borrower payments to interest and fees, then principal, etc.

What we know now is that the account statements issued by USACM prior to the petition filing were largely inaccurate and should not be used for comparison with the new Account Statements prepared by Mesirow and mailed July 25.

The June 30 Account Statements Mailed July 25 – What’s Right and What’s Wrong
The most important thing to know about the June 30 statements mailed July 25 is they are the true and accurate picture of what each Legal Vesting Account has EARNED through June 30. This is a critical point to remember when we talk about the checks and Account Statements mailed August 26 which show what amount of those earnings USACM was able to distribute based on what the Company was holding in its Collection Account as of June 30. Very simply – it’s the difference between what you earned versus what USACM could give to you.

From its forensic accounting, Mesirow constructed a template for presenting the position of each Legal Vesting Account in each Loan. The first statements using these templates were for the period from the inception of each Direct Lender’s involvement in each loan through April 12, 2006, the day prior to the bankruptcy filing. These statements were produced by BMC Group using Mesirow’s data, and were mailed on July 11. The account statement package included a 2-page explanation, plus a Loan Summary, plus one sheet for each loan for each Legal Vesting Account.

Two weeks later on July 25, the process was repeated to prepare and mail statements showing activity from loan inception through June 30, 2006. When these packages were mailed out, USACM and Mesirow instructed Direct Lenders on how to read the documents in the package to determine their true position in each Legal Vesting Account…specifically, Direct Lenders were instructed to “Add together all their Line 12s on each individual Loan Sheets” to reach a “net” number. The Line 12 numbers showed their true position in each loan.

WHAT’S RIGHT – Mesirow and USACM confirm that the individual loan sheets for each Legal Vesting Account contain the true and accurate position of each Account in each Loan as of June 30 to the best of USACM and Mesirow’s ability to determine it based on all available records. Adding the Line 12s from the June 30 statements produces an accurate result. USACM has created a Feedback Form for Direct Lenders to use if they believe they have information that can help clarify or correct errors in the underlying available data used to calculate the true and accurate status of an Account’s position in a Loan.

WHAT’S WRONG – Mesirow and USACM have become aware and acknowledge that the amount due to (Due from) Investor from the individual Loan Sheets to the Loan Summary Sheet in the June 30 statements and NOT the Line 12 total. Some of the numbers on the Loan Summary sheet in the column labeled “Amount To (Due From) Investor” for each Loan may not be the numbers from Line 12 if there are funds NOT in the Collection Account. Because of this, the Total number at the bottom of the column may be inaccurate and should not be relied upon. Direct Lenders are advised to ignore the Loan Summary Sheet for the June 30 statements. Instead, Mesirow and USACM advise Direct Lenders to follow our original instructions to add all the Line 12s from their individual Loan Sheets to determine their true and accurate position through June 30. We can only give you checks for what is IN the collection account.

June 30 Statements Mailed July 25 Versus June 30 Statements Mailed August 26 with Checks
The Bankruptcy Court on Aug. 4 approved USACM to distribute the correct funds to Direct Lenders from the funds USACM was holding in its Collection Account. In many cases, USACM has not collected all the money Direct Lenders have earned. Remember…we said earlier that the June 30 statements mailed July 25 show what Direct Lenders have EARNED and the checks and June 30 statements mailed with them on August 26 represent the amount USACM could distribute from the funds it has collected of the total earned, less the court ordered holdbacks and loan servicing fee holdbacks. In many cases, the checks Direct Lenders received do not match the amounts they thought they were getting based on the June 30 statements mailed July 25.

Can USACM Give Me a Statement That Shows All the Math and Accounting Used to Determine What I Have Earned and What I Got Paid So I Can Match it Against My Own Calculations?
Yes and No. Yes – We have already provided all Direct Lenders with a true and accurate statement of the position of each Legal Vesting Account in each loan as of June 30, and we showed on each page the categories of accounting we used to determine the position of each Direct Lender. No – we do not have the resources to put all of Mesirow’s forensic accounting on paper for every Legal Vesting Account for every loan, nor do we have the resources to debate our research and the approach to reconciling all accounts with Direct lenders who want to challenge us. Direct Lenders need to understand USACM and Mesirow’s accounting are subject to the approval of the Committees, the Financial Advisors for the Committees, and the Court.

OK, but the numbers still don’t match up between the two June 30 statements. Why?
The June 30 statements mailed on July 25 actually reflect transactional data through June 27, not June 30. Mesirow calculated the data using its computer systems and provided it to BMC Group to produce and mail statements. Because of production and filing deadlines, these statements did not reflect collections made past June 27. The June 30 statements prepared and mailed with checks on August 26 reflect transactions through July 1 because the checks and statements were produced using USACM’s production accounting system. Between the preparation of the two June 30 statements, the reconstructed ledgers of USACM were transferred from Mesirow’s system to USACM’s system. USACM was able to include collections from the end of June and July 1 into the payments made to Direct Lenders.

This is incredibly confusing. Can’t USACM and Mesirow make this easier to under and follow?
We would love to sit with each Direct Lender and walk them through their accounts until they see how we reached our conclusions and they understand how messed up USACM’s business was when Mesirow was first retained. There simply are not enough resources or enough time to do this for each of our 5,000-plus clients. We are doing the best we can based on the enormity and complexity of this situation, and the incredible deadline constraints USACM and Mesirow must work under every day.

Is this going to get better?
Yes, we are in the process of preparing monthly statements for July, which will show both the information for July and the Loan to Date. We hope to have August statements by the end of September and October statements by a more normal monthly schedule. You may also track collections for your loan on the Weekly Collections Report which is now published. Remember, we can only give you a check based on what has been collected for the loan in which you are a Direct Lender.