NEWS, EVENTS, PUBLICATIONS & EMERGING ISSUES

SW&M EMERGING ISSUE
May 21, 2010

OFFICE OF THRIFT SUPERVISION HIGHLIGHTS IMPORTANCE OF INTERNAL CONTROLS

The Office of Thrift Supervision (“OTS”) has issued an update to its Examination Handbook regarding Management. While the OTS’s materials do not directly relate to credit unions, there are aspects of Regulatory Bulletin 37-54 (found here) that credit unions may wish to attend to when examining internal policies, audit processes, and investigations. The Bulletin highlights that fraud is becoming more expensive for FDIC insured financial institutions, and “an estimated 46 percent of all operational risk loss events are related to fraud . . . .” Credit unions are similarly experiencing increased fraud and insider abuse risks; indeed, our office has seen a significant increase of fraud and insider abuse with credit union clients in recent years. There are, however, steps you can take to help prevent or mitigate losses from these sources.

Internal controls, according to the Bulletin, are critically important, even in the face of pressure to cut costs and remain competitive. For credit unions, internal controls are all the more important in light of most credit unions’ Bond coverage—the CUMIS Bond’s “Faithful Performance” coverage pays for losses due to violations of “known and enforced” lending policies. Lack of internal controls, audit functions, and oversight might not just cause a loss: they might prevent you from collecting insurance proceeds on an otherwise valid bond claim.

With ever-increasing fraud activity, credit union management and boards should ensure that internal policies and procedures protect their institutions both on the “front end” of the lending process, and on the “back end” of quality control and any potential bond claim. Policies and compliance with them should be verifiable and checked on a regular basis. Audits of departments for compliance with policy and for quality of loans should be conducted by a Risk Management or Audit department (or an officer outside of the department with audit functions). Exceptions within lending software should be tracked and audited periodically. Indirect automobile lending operations should include reviews and audits of dealerships, and wholesale mortgage lending should include reviews of brokers.

While these practices may add steps to your production process, they are vital to maintaining high quality lending practices and preventing fraud and theft, both internal and external. Your examiners will be looking for policies and internal controls as well—NCUA has previously discussed internal controls and policies in its Examiner’s Guide (Chapter 4: Internal Controls and Chapter 7: Management). If your credit union has questions about its policies and internal controls, or if your credit union is currently dealing with an insider abuse situation, please do not hesitate to contact our office for assistance.

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