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:
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.
Take these steps to guard against fraud and other risks: