Credit unions face unprecedented threats in the current financial services environment. Credit union leaders must identify these threats and create strategies to manage the exposures in ways that fit with their risk tolerance. Complacency or procrastination can be costly.
A comprehensive corporate governance program will also help credit unions identify opportunities, anticipate threats, and balance risk with reward. And as credit unions look for new ways to generate income due to shrinking spreads, they’ll need to conduct proper due diligence when obtaining services through third-party vendors.
Three loss trends
Expect three prominent loss trends from 2010 to continue in 2011: employee dishonesty, wire transfer scams, and lender liability claims.
Fortunately, there are some simple procedures credit unions can follow to reduce the risk of loss in each of the three categories:
1. Employee dishonesty is nothing new, but it appears to be on the rise. Credit unions aren’t immune to this type of loss, which can range from minor to catastrophic.
Internal controls, comprehensive audits, and consistent oversight are the keys to managing embezzlement risk. These tools, in addition to minimizing risk and establishing accountability in the event of employee discrepancies, are highly effective in creating the perception of oversight to your entire staff.
Conduct comprehensive internal audits regularly. Include a full scope of all credit union operations and report the results to the supervisory committee and board of directors.
2. Wire transfer scams involving home equity lines of credit (HELOC) emerged in 2007. There was a significant resurgence in these claims in 2010 with sizeable losses.
Common trends that appear in these losses:
HELOCs have been targeted in many cases due to the large credit lines. Fraudsters have been successful recently in circumventing credit unions’ security procedures.
If a credit union receives a wire transfer request that matches these transaction characteristics, staff shouldn’t process the wire. Instead, they should immediately refer the request to a supervisor or manager.
Based on the frequency and severity of these claims in 2010, credit unions might want to establish reasonable monetary limits for all member-not-present wire transfer requests rather than allow the full balance of the account to be wired.
3. Lender liability losses have increased significantly among credit unions during the past two years. Rising delinquency, repossession, and foreclosure rates underline the need to ensure compliance with applicable laws and regulations that govern these procedures.
Be particularly mindful of U.S. Bankruptcy Code, Fair Credit Reporting Act, Unfair and Deceptive Trade Practices Act, and Fair Debt Collection Practices Act requirements in your collection and reporting procedures.
Consult with an attorney to make sure processes, procedures, and other member-facing documents (such as “notice of intent to sell”) comply with these acts and other applicable statutory laws. Damages resulting from violations of these laws can be significant.
Next: Noninterest income