Indianapolis’ Newspaper credit union failed due to fraud by a small CU staff, possibly board chair, NCUA OIG finds

A material loss review of the $2.29 million estimated share insurance fund loss due to the failure of Indianapolis’ Newspaper Federal Credit Union earlier this year showed the institution failed due to fraud involving a “loan lapping” scheme involving the credit union’s CEO, its other two employees and possibly its board chair, a recent inspector general report shows.

In the report, dated Dec. 15, the National Credit Union Administration (NCUA) Office of Inspector General’s (OIG) said a loan lapping scheme involves falsifying internal loan records to hide misappropriated cash. “Cash proceeds from the alleged fraudulent loans, or alleged fraudulent advances on loans, were used to make payments on existing loans, thus concealing levels of delinquencies at the Credit Union,” it states.

The report says that about $1.3 million of alleged fraudulent loans were identified as part of the scheme from July through September 2020. It states that NCUA Southern Region Officials determined the credit union to be insolvent and executed liquidation orders March 31, 2021.

Factors contributing to the credit union’s “misstatement,” the OIG report states, included lack of management integrity, ineffective board oversight, and unsafe and unsound lending practices.

The report also says NCUA examiners might have uncovered the activity earlier – and mitigated the loss to the National Credit Union Share Insurance Fund (NCUSIF) – if they had “more thoroughly addressed certain risks identified through completion of the Small Credit Union Examination Program (SCUEP) and performed suggested additional procedures as a response to the risks identified.”

The OIG made one recommendation to management related to loan concentrations to a single borrower or associated borrowers: enhance annual SCUEP training related to concentration risk. This enhanced training, it said, should include additional emphasis on applicable NCUA guidance (e.g., NCUA Letter to Credit Unions, 10-CU-03 – Concentration Risk), as well as discussion and training related to the application and enforcement of such guidance; and discussion of the importance of application to smaller credit unions and the risk of loss to the NCUSIF. Management agreed and said this work would be completed by Dec. 31, 2022.