The failure of a credit union is an event which must be giventop priority by the NCUA in order to determine what happened, whyit occurred, who contributed to its demise and what needs to bedone going forward to prevent a reoccurrence at another creditunion.

A failure of any credit union impacts every credit union. Notonly is there the potential of a loss to the share insurance fund,but also there is the negative publicity that impacts the entireindustry. That is why an independent analysis of the reasons forthe failure is important for the industry, regulator andinsurer.

A recent article in CU Times (NCUADeclines to Indentify Exam Changes, April 17, CU Times)addressed the failure of the Taupa Lithuanian Credit Union and thereport issued by the NCUA Inspector General. It keyed on theexamination process, what the IG said could have been done betterand how NCUA responded to the findings.

Financial regulators are and should be very cognizant of thefact that when an institution over which they have regulatoryauthority fails; they bear the burden of responding why such anevent occurred. In addition, they are mandated to put in place thesteps necessary to correct any missteps on their part thatcontributed to the failure.

The article contains quotes from a high level NCUA employee who,when asked what action has been taken to prevent another Taupa,stated that steps have been taken but would not get into specifics,saying, “it's part of the exam process and we really don't discussthat in detail.”

This response is somewhat concerning since the report on thefailure issued by the IG was specific on areas where NCUA couldhave done a better job.

In his analysis, the IG cited the NCUA as well as the Ohioregulator for clearly missing signs of impropriety. The IGreferenced credit union activities that raise red flags that theexaminer missed; found that the NCUA examiner and Ohio SupervisoryAuthority could have reduced or mitigated the $33.5 million loss;stated that examiners relied on statements provided … instead ofperforming a confirmation of cash balances and found credit unionboard minutes missing. The IG cited previous fraud recommendationsto the NCUA to implement a more comprehensive strategy forresponding to red flags; fraud training for examiners; implementprocedures to address fraud risks and establish fraud resources andtools.

One can appreciate the NCUA not wanting to publically talk aboutall the methods and tools they use to detect fraud. However, theyneed to go beyond saying they are doing things and instill aconfidence within the industry that they have a handle on theproblem.

In addition, it would help to know that the members of the NCUAboard are satisfied that the criticisms and failures have beenadequately addressed. It would help to know that they have beenbriefed on the specifics of fraud detection and are satisfied thateverything possible is being done to uncover and control thisabuse. It would help to know that they are the ones making thedecisions that the procedures put in place are adequate to handlethe problem.

It would also be reassuring if the IG initiated his own reviewof what the NCUA has put in place, how examiners are being trainedand if his past recommendations have been implemented. He bears theresponsibility to ensure the errors he found have been correctedand that must be done before there is another failure resultingfrom fraud.

The ways to detect fraud and the procedures used by examinersare not state secrets. The books and records reviewed, thequestions that should be asked as well as the verifications thatshould be made are regulatory best practices. NCUA must be open,honest and transparent on what they do and how they do it.

Perhaps everything possible is being done but it is up to theNCUA board to verify that and show the industry they are incharge.

Michael E. Fryzel

Attorney

Chicago