Despite the rash of frauds, the NCUA is optimistic that thehealth and stability of credit unions have improved so much that itis projecting a positive outlook for the National Credit UnionShare Insurance Fund this year.

The Rundown

• Credit unions seek balance in combating fraud.
• Internal controls, quality applicants still importantfactors.
• Providing relief during financial hardships remains a coregoal for most.

With the recent guilty verdict against a businessman thatscammed $7.5 million from the former Lockheed Credit Union toobtain a number of loans, the decision may have offered anotherinstance of assurance that the public is becoming increasingly fedup with fraud.

In late February, a jury found Brent Edward Lovett guilty ofbank fraud for bilking Logix Federal Credit Union out of $7.5million by providing false information to obtain loans. At the timeof the indictment in 2006, the $3.4 billion Logix FCU in Los Angeles was known as Lockheed CreditUnion.

While Logix FCU scored a victory with Lovett's conviction, overthe past year, the credit union industry has witnessed severalcases when either an employee or member managed to concoct a ofbackroom operation that led to them getting millions of dollarsthrough kickback schemes and other shady arrangements.

Through his company Bay Resorts International, Lovett leased twocommercial buildings in Las Vegas, which were later bought for $6million. Through Equity Resource Inc., another company owned byLovett, he purchased the buildings for $10 million using a loansecured from the credit union, according to the indictment.

Lovett apparently made false statements to Lockheed FCU on hisapplication involving Bay Resorts. After he obtained the loan, helet the buildings go into foreclosure and kept approximately $1.3million for himself, according to the indictment.

Lovett is now facing up to 30 years in prison and a $1 millionfine. He is scheduled to be sentenced on May 29.

Despite the rash of frauds, the NCUA is optimistic that thehealth and stability of credit unions have improved so much that itis projecting a positive outlook for the National Credit Union Share Insurance Fund this year.

“While the demands on the share insurance fund in 2013 will bedetermined by many economic factors and by possible unforeseeablelosses, the most likely scenario we project would result in anequity ratio for the share insurance fund at just under 1.30% ofinsured shares by the end of next year. That would mean there wouldbe no need for a premium increase,” said NCUA Chairman Debbie Matzin a statement after the agency's board meeting last November.

For now, are credit unions beefing up their due diligence inlight of the pocket of lending scams that have surfaced or is itbusiness as usual?

“One of the biggest challenges for credit unions is they areinformal. Unfortunately, there's no visibility on what'shappening,” said Rohit Arora, co-founder and CEO of Biz2Credit, a New York firm that connects small businesses withfinancial institutions for their financing needs.

While fraud is as old as hand-operated cash registers, Arorabelieves what has evolved is the mode of checks and balances.

“There might be some C-level folks who want to fulfill amission, which is great, but when you're handling someone else'smoney, you need to have the technology,” Arora said.

Even with the best technology in place, there is still noguarantee that an employee or member won't be tempted to raid acredit union's coffers. Internally, the NCUA continues to emphasizethat credit unions officials are responsible for implementing asystem of sound internal controls and for ensuring that thecontrols are regularly followed by management and staff.

“The purpose of internal controls is not to entrap employees;rather, good internal controls provide a working environment inwhich good employees are not tempted to do something they would notordinarily do,” reads a NCUA letter to credit unions on fraud andembezzlement.

Outside of the credit union walls, most are likely aware thatauthority should never be given to one person–guidance the NCUA hasalso emphasized.

The $747 million Texas Trust Credit Union in Mansfield hasn't had any type ofinternal or external problems with its lending programs because itadheres to regulatory requirements and what are essentially goodbusiness practices, said Willy Kelsey, chief operating officer.

“No one person has the authority. We have all types of checksand balances in our systems. Yes, we do take losses on loans. Somedo go bad, but we stay the course,” Kelsey said.

Texas Trust marked a banner 2012 with its lending services,which included auto and personal loans, home mortgages andcommercial loans, growing nearly 24% last year, according to thecredit union. Kelsey said mortgages led the way thanks in part to120 internal referrals each month. Of the 13,231 members thatjoined Texas Trust in 2012, 35% of them took out a loan, headded.

But the quality of the loan applicant is still key, Kelseynoted.

“They're just not referring everyone and their brother.”

While the Great Recession led to many members nationwidestruggling with unemployment, foreclosures and rising debt, TexasTrust still felt that it was important to meet members where theywere. As a result, the credit union grew its auto loan portfolio to$145 million in 2012 and commercial loans increased from roughly $5million to $12 million last year, Kelsey said. Keeping an eye onwhat's productive for both the credit union and the membercontinued to help Texas Trust stay true to its due diligencepractices while expanding its reach.

“A lot of credit unions made revisions when the Great Recessionhappened in 2008. We maintained our core practices,” Kelsey said.“With the sequestration, it's a different chapter in the same book.We don't look at just their credit score, we look at their entirefinancial picture. We're going to continue on that path.”

Arora said at the end of the day, credit unions are businessesand must continue to operate in a way that protects them fromfraud.

“You can have the best social mission but the only way toachieve that is having a lot of capital and managing it well. Ifnot, the credit union ends up broke,” he offered. “If you don'thelp yourself, how can you help others?”