CHICAGO-As credit unions seek to grow business lending, one person is warning that written agreements between business clients and CUs are key to managing risk in that sector.
When things go wrong, noted Ken Otsuka, senior consultant, risk management, at CUNA Mutual Group, having a written agreement pushes the liability for any losses back onto the business' shoulders and helps protect the credit union.
Among the pertinent items such an agreement should cover, said Otsuka, are:
• Minimum requirements for hardware and software to ensure image quality (particularly important for CUs offering remote deposit capture)
• Deposit and file limits
• Maintenance and destruction of original items (including safekeeping original items until they are destroyed)
• Item eligibility, including whether or not foreign items will be accepted (usually not)
• Availability of funds
• Monetary limits on wire transfers
For credit unions offering remote deposit capture, that agreement can also help against loss exposures from the likes of dishonest employees, forged checks or the theft of personal information, said Otsuka. He went on to stress that such a contract should protect the CU in the event that checks are deposited to the branch after they've already been deposited via RDC.
Teller training is also critical, said Otsuka, who offered his insights during NASCUS' recent annual meeting, since tellers are often the first line of defense against fraud. "There are no rules or regulations that say you must deposit checks from a business member to a business account," he said, so frequent teller training can help control losses. Another option, he said, is a teller station specifically for business transactions. Otsuka went on to recommend verifying the ID of depositors as authorized signers on business accounts and prohibiting authorized signers from cashing checks payable to that business. "This is all Teller 101," he said.
For CUs entering the business account space, verifying the status of the business during the account-opening process is also important, said Otsuka. That includes verifying the status of the business (such as examining the articles of incorporation or a current business license) and corporate resolutions, including identifying authorized signers and what transactions they can perform. Detailed risk assessments are also recommended, including evaluating the business itself and the type of industry it fits into (along with determining whether or not the CU wants to serve that business) and analyzing the company's financial statements.
Severity Of Losses
The whole purpose of performing these types of evaluations at the start, said Otsuka, is to offer services to those businesses least likely to abuse them.
Otsuka said that although business accounts can be advantageous for credit unions, due-diligence and a thorough risk assessment are of the utmost importance. The severity of losses can exceed that of personal accounts, and (depending upon insurance coverage) businesses are not protected by Reg. E the way consumers are.
