Credit Unions Must Be Vigilant about Loan Fraud in the New Economy

CUNA Mutual Group
November 30, 2009 | COMMENTS

The downsides to a struggling economy continue to challenge credit unions as they work to maintain strong bottom lines while serving their members. But some of those challenges can be greatly minimized through diligent oversight and safeguarding against fraud, according to Mark McDuffie, risk manager at CUNA Mutual Group.

McDuffie recently delivered that message to attendees at the 15th Annual CUNA Lending Council Conference, where his overriding theme was how to protect credit unions from fraud in a tough economy. Joining McDuffie in the presentation was Joanne Robinson, vice president of lending at Smart Financial Credit Union in Houston.

McDuffie identified mortgage fraud, loan fraud through employee dishonesty, and indirect lending fraud as the most common. "Desperate financial times are ripe for new fraud schemes. It's critically important to be aware of these schemes and do what's necessary to prevent them from happening at your credit union."

To substantiate his warning, McDuffie cited bond loss figures reported by CUMIS Insurance Society showing an increase in claims and dollar amounts between 2004 and 2008. Although the highest percentage of claims was due to fraudulent deposits at 48 percent, they accounted for just 19 percent of money paid out. Similarly, only 10 percent of claims were due to employee dishonesty, but they accounted for the greatest percentage (36 percent) of the monetary bond loss.

"Employee fraud, which is typically loan fraud, is becoming more common as others lose their jobs," McDuffie said. "One person in the household loses their job, and they almost immediately go into delinquency on their debt. In desperate times, people resort to desperate measures. And if they're working in a credit union and they know how their particular systems work, they look for ways to scam the system for financial gain."

McDuffie told the true story of a loan officer who did a share-secured loan against a number of large accounts held by two elderly credit union members. To accomplish this without immediately calling attention to the transaction, the loan officer used another employee's password—which was also fraudulently obtained—to disperse the funds. The officer then used her own family members' accounts to launder the money, which totaled more than $80,000. The officer and scam were identified when one of the elderly members saw the fraudulent loan on her monthly statement and notified the credit union.

"This is a small one, just the tip of the iceberg," said McDuffie. "There are much more and much larger loan frauds being committed by employees, but many can be prevented or more quickly identified when they occur."   

McDuffie urged the audience to have sufficient controls in place that increase the risk of being detected and, ultimately, discourage employees from taking the risk.

Mortgage fraud is also increasing as a result of current economic conditions, said McDuffie, as more and more homeowners find themselves over-mortgaged and unemployed.

One common mortgage scam occurs when fraudsters contact homeowners facing foreclosure and identify themselves as foreclosure specialists promising the credit-exhausted homeowner to pay off their mortgage and, in some cases, other outstanding bills. The homeowner willingly signs over the property deed to the fraudster, who then obtains a fraudulent release of the lien, sells the property to someone else and absconds with the money. Frequently the homeowners are told they can continue living in their home by renting it from the fraudster, money that's added to the proceeds of the illegal sale.

"This is another example of things that happen out of desperation," McDuffie said. "Mortgage fraudsters work fast enough that multiple transactions are occurring simultaneously, making it easier for them to defraud the lending institution."

As fraudsters become more sophisticated, credit unions need to be more vigilant in their prevention and detection procedures, said McDuffie, to avoid becoming the next victim.    

CUNA Mutual Group provides financial services to credit unions and their members. For more information contact Rick Uhlmann at 608-231-8940 or rick.uhlmann@cunamutual.com.