Beware Three Emerging Loss Trends

Employee dishonesty, wire transfer scams, and lender liability claims are on the rise.

April 12, 2011

Three prominent loss trends in 2010 that seem likely to carry into 2011 are employee dishonesty, wire transfer scams, and lender liability claims.

A proactive approach to addressing emerging loss trends is by far the most effective strategy credit unions can take to manage operational risk. Complacency can be costly.

Fortunately, there are some simple procedures credit unions can use to mitigate the risk of loss in all of these areas. Let’s examine three of the most prevalent losses to illustrate how credit unions can manage emerging risks.

1. Employee dishonesty

This 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 regular oversight are the three 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. This can deter would-be offenders.

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

Wire transfer scams involving home equity lines of credit (HELOC) emerged in 2007. We saw a significant resurgence in these types of claims in 2010 with losses as high as six figures.

Three common trends appear in many of these losses:

  • The transfer is requested over the phone;
  • A portion of the funds are pulled from the member’s HELOC; and
  • The wire is sent to a foreign bank.

HELOCs have been targeted in many cases due to the large available credit lines. Fraudsters have been quite successful in circumventing credit unions’ security procedures in the latest resurgence of these types of losses.

If a credit union receives a wire transfer request that matches these transaction characteristics, don’t process the wire. Immediately refer the request to a supervisor or manager.

Based on the frequency and severity of these claims in 2010, credit unions may want to establish reasonable monetary limits for all member-not-present wire transfer requests rather than allowing the full balance of the account to be wired. This recommendation is designed to protect the credit union and members, not limit member service.

Next: Lender liability losses & action steps



3. Lender liability losses

These have increased significantly among credit unions over the last two years. The rise in delinquency, repossession, and foreclosure calls attention to 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 ensure processes, procedures, and other member-facing documents (such as “notice of intent to sell”) are in compliance with these acts as well as other applicable statutory laws that may apply to your credit union.

Damages resulting from violations of these laws can be significant.

Action steps

Take these steps to guard against fraud and other risks:

  • Be proactive when addressing emerging loss trends such as employee dishonesty, wire transfer scams, and lender liability claims. Complacency can be costly;
  • Conduct a thorough risk-benefit analysis before launching new products or services. While potential profits and losses are important considerations, don’t overlook compliance best practices;
  • Conduct comprehensive internal audits to guard against employee dishonesty. Include a full scope of all credit union operations and report the results to the supervisory committee and board of directors regularly;
  • Establish reasonable monetary limits for all member-not-present wire transfer requests. This will protect the credit union and members;
  • Be particularly mindful of U.S. Bankruptcy code, Fair Credit Reporting Act, Unfair and Deceptive Trade Practices Act, and the Fair Debt Collection Practices Act requirements in your collection and reporting procedures. This will limit lender liability;
  • Examine your credit union’s insurance policies to understand what’s insurable and what isn’t. Policy language varies by insurance carrier, so include your insurance representative in these discussions;
  • Address risk assessment and planning, contracts, and monitoring when conducting due-diligence reviews of third-party vendors; and
  • Integrate governance and risk oversight into your strategic planning sessions.

BRAD MUNDINE is a senior manager, Credit Union Protection Risk Management, for CUNA Mutual Group, Madison, Wis. Contact him at 800-356-2644, ext. 5100.