Loans

For most credit unions, the loan portfolio is the largest asset and loan interest is the primary source of income. Insufficient internal controls could increase risk exposure, resulting in operating losses and/or erosion of capital.

Examiners review loan operations to verify that the credit union has sufficient internal controls over the lending process to safeguard assets and prevent the possibility of fraudulent loans, misappropriation of loan payments, and hiding of delinquency.

Examiners perform procedures based on the nature of each credit union’s operations and the different types of loan products offered. To review a credit union’s controls over loans, examiners:

  • Evaluate whether management has established adequate lending standards and maintains proper controls over the lending program by reviewing lending policies and procedures

  • Obtain loan officer or credit committee meeting minutes and verify accurate minutes have been maintained

  • Determine the composition of the loan and collection departments and confirm that the role of each employee provides for sufficient segregation of duties

    • Approval, processing, and disbursing duties are separated (for small credit unions, a credit committee may provide the mitigating control and the supervisory committee performs reviews)

    • Loan officer and collection duties are separated

  • Analyze member concentrations for compliance with regulatory and policy limits—for example, concentration of loans to one member, members with the same address, total member business loans, etc.

  • Test loan interest income and accrued loan income for reasonableness when compared to published loan rates

  • Determine whether loan files have been maintained in a secure, fireproof area

  • Review the process to scan documents and dispose of hard copies if the credit union maintains an electronic loan documentation system

  • Determine if the supervisory committee, internal auditor, or other designated third party has performed a documented review of lending controls

  • Identify and follow-up on red flags

Last Updated on October 14, 2021