IG: NCUA Small Credit Union Examiners Need Better Training

With better training on small credit union examinations, National Credit Union Administration examiners could have caught an alleged $1.3 million fraud sooner at an Indiana credit union, the agency’s Inspector General said in a new report.

The agency liquidated the Indianapolis’ Newspapers Federal Credit Union on March, 31, 2021, at an estimated $2.29 million cost to the agency’s Share Insurance Fund.

The NCUA chartered the credit union in 1961; it primarily served current and past employees of the Indianapolis Star and their families. At the time of liquidation, the credit union had one branch location, three employees, 1,143 members and $6.28 million in assets. The Elements Financial Federal Credit Union assumed most of the credit union’s shares.

The IG determined that the credit union failed due to fraudulent activities of credit union employees. The alleged fraud, the IG said, was executed through a loan lapping scheme, a practice that involves falsifying internal loan records to hide misappropriated cash. About $1.3 million of fraudulent loans were identified as part of the scheme from July through September 2020.

The report stated that the credit union’s examinations fell under the Small Credit Union Examination Program, which tailors the exam process for the smallest credit unions. However, the IG said, agency examiners were not effectively trained for those types of exams.

“We believe if examiners had sufficiently completed certain SCUEP steps, and related follow-up steps as designed by the SCUEP, they may have identified the loan lapping scheme earlier,” the report stated.

The IG said that the small credit union exam process appears to have been designed to expose fraud risk, but that based on discussions with examiners, there appeared to be an “overall inconsistency of understanding” about how to complete certain parts of the process.

That inconsistency may be caused by training issues and examiners may be hampered by the limited amount of time they are given to conduct exams at small credit unions. Examiners said they are given 40 hours to conduct each small credit union exam.

In a memo attached to the report, NCUA Executive Director Larry Fazio said he agreed with the findings and that agency management will review the small credit union exam process. That work, he said, will be completed by Dec. 31, 2022.

Related:

NCUA Office of Inspector General Report: Material Loss Review of Indianapolis’ Newspaper Federal Credit Union

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