Fraudulent activity covered up by top leadership and a failure by NCUA examiners to adequately follow up on red flags caused the failure of St. Paul Croatian FCU, according to a report by the NCUA's Office of Inspector General.
The Cleveland-based credit union's top management didn't implement proper controls and oversight and its former CEO "manipulated loan records and masked the suspected loan fraud by constantly refinancing certain loans or making advanced payment on those loans," the report said.
The NCUA conserved the $238.8 million credit union on April 23 and liquidated it on April 30.
The failure, which is estimated to cost the NCUSIF $170 million, was also caused in part by the fact that a majority of the credit union's loans weren't share secured, according to the report. In addition, the former CEO allegedly ordered the staff not to freeze the shares to secure the loans even though he had told NCUA examiners that the credit union's data processing system lacked the ability to freeze the shares.
In addition, the report documented how the CEO "instructed the staff to find a member with sufficient shares in their account to cover the pledged shares. This account was listed on the share pledge security agreement for that borrower. Credit union staff would then allegedly 'witness' forged signatures on the share pledge agreement."
The report criticized the NCUA's examination procedures for not adequately evaluating internal controls, for not following up on the credit union's compliance with Document of Resolution issues and for not expanding its examinations when there were red flags indicating higher risks.
NCUA Executive Director David Marquis responded by noting the procedures that the agency has in place for evaluating risks and for taking stronger action when the conditions of a credit union necessitate it. He did not discuss the agency's actions with regard to St. Paul Croatian FCU but wrote that the NCUA is "committed to improving our existing supervision mechanisms."
Shortly after the agency placed the credit union into conservatorship, Region III Director Alonzo Swann was transferred to another position and subsequently retired from the agency.
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