A principal lending manager will not be held liable for failing to maintain reasonable supervision if he or she can show evidence of any of the following, except

• A. Prior violations by others
• B. Efforts to implement a supervisory system
• C. No knowledge of violations
• D. Attempts to conceal damage when learning of a violation

Answer: (D)

The concept being tested is supervisory liability and what can serve as a defense for a principal lending manager who’s accused of failing to maintain reasonable supervision. The idea is that if the manager can show evidence of certain constructive actions or circumstances, he or she can be considered to have maintained, or attempted to maintain, adequate oversight.

Why the stated choices fit as defenses: Showing prior violations by others can indicate that violations were already recognized as a risk and that systems or controls were in place to monitor or address issues, which supports a position of reasonable supervision. Demonstrating efforts to implement a supervisory system directly shows proactive steps to prevent problems and to oversee compliance. Having no knowledge of violations can be used to argue that there was no willful neglect or awareness of problems that would require corrective action, aligning with reasonable supervision.

Why the exception is the best answer: attempting to conceal damage when learning of a violation reveals deliberate concealment and bad faith, which undercuts any claim of reasonable supervision. It demonstrates intent to hide problems rather than manage or mitigate them, so it would not be a defense to liability.

In short, the first three illustrate due care and proactive oversight, while hiding violations shows a breach of duty that would sustain liability.