“A good sense of smell and independent processes are very important ingredients for loan quality,” said Bill Beardsley, president/CEO of Michigan Business Connection LLC, a CUSO that manages nearly $200 million in CU business loans.

“Borrowers can be complicit in their deception. A lender makes his or her own companies with fictitious loans,” Beardsley said. “This is not an original problem. It's not a credit union problem. It's a financial institution problem.”

Separation of powers is likely the most effective way to thwart kickback schemes and embezzlement, Beardsley offered. The use of a third party such as an underwriter or CUSO helps bring objectivity, he said, adding there must be a clear division between the person meeting with borrowers and those approving the loans. Civil and criminal background checks on all guarantors are necessary.

Authorities allege that Liddle and Ruiz worked together to approve suspicious loans in exchange for more than $1 million in kickbacks. Beardsley said if those kickback funds were in small, undetectable amounts, they could have been disguised as fees. He goes back to his suggestion of having several sets of eyes involved.

“When you're underwriting a loan, the underwriter should follow a lot of the loose ends until they tie up,” Beardsley said. “You have to ask, 'Where is the money going?' Do your own independent confirmation. Is there a payoff letter? Is it being settled through an independent title company?”

In the midst of cash-stripped times, for some credit unions, it may be hard to swallow loan portfolio review costs, said Michael Gudely, president/CEO of Innovative Business Solutions, a business lending CUSO in Fort Mill, S.C. One of biggest takeaways from Liddle's involvement with AEA is that when credit unions consider the cost of internal infrastructure, they should look at the expense relative to the cost of risk exposure.

“Some get a lot of heartburn over it,” Gudely said on those who balk at the associated costs.”But they're making a $600,000 or a $1.6 million loan.”

Gudely agreed that separation of powers is critical. The originating lending employee should not have the authority disburse loan proceeds. Tellers and branch personnel should not accept a loan proceeds check for deposit other than into the account of the named borrower.

Likewise, lenders should also not be permitted to cash loan proceeds checks in order to take the money to the borrowing member.

Ideally, on a monthly basis, loan reports should identify any system changes to terms, past due items and repossessions and foreclosures, among other information, Gudely suggested. The report should be provided to senior management, the loan committee and the board of directors. In the pre-closing stage, approved documents should also be provided to the documentation employees prior to the generation of a closing package. “Anytime there are changes in the system, everyone needs to see the changes,” Gudely said. ?

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