…to help all of Delaware’s credit unions exist, compete, and prosper                                  WINTER, 2004                                        

Telltale Signs of Check Fraud   

Check fraud prevention is a matter of policy -- and an educated front-line staff.  When a person is opening a new account, every effort to verify his or her identity should be employed.  Check deposit and cashing policy should utilize the hold periods allowed under regulation CC.  Train tellers to watch for the following telltale signs: 

1. Misspelled words.  
2. Lack of perforation (except for checks issued by U.S. Government).  
3. Different handwriting styles.  
4. Cloudy or bleached areas. Heavier felt tip pen assists in covering up bleached areas on altered checks.  
5. Erasure marks.  
6. Ballpoint pen impressions on the check that contain no ink.  
7. Irregular printing, as if two different typewriters were used to fill in the amounts and payee. 
8. An improbable combination of payees -- for example: "Payable to ABC Company or John Smith."  
9. Unnaturally close digits in the amount sections.  
10. An unusual amount of toner pile-up -- smudged color on the check is an indication of a photocopied check.  
11. MICR numbers at the bottom of the check will appear glossy and slightly bumpy if it's a photocopy.  
12. Make sure the Fed District numbers (1st two digits in the routing number) are reasonable in relationship with the financial institution's address. (There are 12 Fed Districts.)  
13. Fractional R & T number should be in the upper right-hand corner of a check. The denominator of the fractional R & T number should match the first 4 digits in the R & T number at the bottom of the check.  
14. Make sure the item is actually a check or share draft (MICR numbers should be at the bottom). Advertising pieces, specimen checks and gift certificates often resemble checks. 
    
     

 

 ASSET LIABILITY MANAGEMENT:  What is it?  Why is it important?

Asset Liability Management (ALM) is the continuing rearrangement of both sides of the balance sheet.  It is not a precision instrument, but an on-going process of planning, organizing, controlling assets and liability volumes, mixes, maturities and rates to maintain a specified interest margin.  The GAP ratio is generally defined as Rate Sensitive Assets (RSA) minus Rate Sensitive Liabilities (RSL) divided by assets.  While ALM does not eliminate interest rate risk, it does allow you to generate returns that are commensurate with the risks taken.  ALM policies and procedures are increasingly being scrutinized by your regulator and insurers.  It is an absolute necessity in today’s changing and increasingly challenging environment.

 Risk Identification
Some types of controllable risks which can affect the level of risk exposure to your credit union’s financial position are:

Interest rate:  the risk that changes in the market interest rates will adversely impact financial performance.

Liquidity:  the risk that current loan and deposit withdrawal demands will exceed the available liquid assets.

Credit:  the risk that the quality of the loan portfolio will be impaired, either through inadequate loan underwriting standards or other factors, which could result in significant loan losses.

Default:  the risk of an investment loss due to the inability of the issuer to meet contractual obligations for principal and interest repayment.

Concentration:  the risk associated with concentrating loans to a particular borrower or member group and/or inadequate diversification of the investment portfolio.

Call:  the risk that funds will be returned before they are expected.

Custody:  the risk that investments held for safekeeping by others will not be kept or maintained as agreed, thereby exposing the credit union to possible loss.

Your asset liability management policy should state:  It is the policy of the credit union to control risk and maintain safety and soundness while pursuing acceptable methods of achieving maximum yields from earning assets to provide competitive dividends and interest rates to members.

Authority
The board of directors is ultimately responsible for the asset liability management practices in your credit union.  In actuality, the board will delegate the day to day authority for making asset liability management decisions to the CEO.  These decisions must, of course, be made in accordance with the asset liability management and investment policies.  The CEO then reports monthly to the board on ALM activities.

Compliance
All policies and practices governing ALM must be in full compliance with all applicable state and federal laws, rules and regulations.

Adapted from The California Credit Union League’s Resource Guide for Small Credit Unions

(more on ALM in future issues of Essentials) 

TRUST ACCOUNTS

 What is a trust account?  A trust account is defined as a legal relationship in which one person holds property for the benefit of another.  The Trustor is the individual creating the trust and the Trustee is the person holding title to the trust property.  The person for whose benefit the property is held is called the Beneficiary.  It is possible for the same person to act in several different capacities under a trust, for example the trustor and the trustee are often the same person.

The most common form of a simple revocable trust account is the Totten Trust.  In a Totten Trust, the trust relationship is established by the form of the account and the terms of the account agreement between the credit union and its member.  The only property subject to the terms of the trust are the funds on deposit in the account.  This type of trust allows a member to hold funds for another person, subject to the member’s control during their lifetime.  Upon the death of the member, the funds in the account are paid to the beneficiary designated in the account agreement only after the credit union has obtained a certified copy of the member’s death certificate and the designated beneficiary’s identity has been adequately verified. 

In the Totten Trust account, the member acts as both trustor and trustee.  According to the law and terms of the agreement, the trust is revocable and the member/trustor can withdraw all or any part of the funds during his/her lifetime.  Because this is a revocable trust and the member/trustor has access to the funds and can revoke the trust at anytime, the social security number used for tax purposes must be that of the member/trustor.

Living Trust

The increased popularity of living trusts compels credit unions to understand their role and responsibilities as depositories for the living trust.  Providing this service is an excellent opportunity to serve your members’ needs without incurring additional liability.

A living trust, often referred to as a family trust, is commonly used as an estate planning device to avoid the delays, costs and publicity of the probate process.  A living trust can also be used for transferring management of property, tax planning and a variety of other purposes.  Unlike the Totten Trust, the terms of the trust relationship are contained in a trust instrument which is created, usually with the aid of an attorney or an estate planner, outside and independently of the credit union.  Furthermore, the terms of the trust will generally cover most, if not all, of the member’s assets, not simply the funds on deposit in a particular account.

Living trusts are revocable, either in whole or in part, during the trustor’s lifetime.  When the trust agreement is prepared and signed, the trustor’s assets are then transferred to the trustee to be held and managed in accordance with the terms of the trust agreement. 

Following the trustor’s death, assets are held and/or distributed in accordance with the terms of the trust agreement.  An individual, as trustor, may transfer his property to himself as trustee under the terms of the trust agreement.  A husband and wife, as trustors, may transfer their property to themselves under such an agreement.  If a member wants to include his credit union account(s) in the trust, the account(s) must be transferred to the trustee under the trust agreement.

For both state and federally chartered credit unions, the trustor must be the member.  Generally speaking, no special form of account agreement is needed to establish a share account for a living trust.  However, most credit unions also obtain a Trustees Agreement signed by each trustee.  This agreement is designed to indemnify and hold the credit union harmless from any liability related to any transactions initiated by the trustee on the account.

Setting up trust accounts takes more time and careful oversight, but these types of accounts are a convenient member service that an increasing number of your members are requesting. 
 

 Please tell us what you think...
Do you find the information in this publication useful, interesting and/or applicable to your credit union?  What information would you like to see in the Essentials?  Do you wish to continue to receive this newsletter?  Please e-mail your comments to jane@dcul.org.  Thanks!

Essentials is published periodically by:
The Delaware Credit Union League
4 Quigley Boulevard
New Castle, DE  19720
(302) 322-9354 or (800) 292-7875
Fax: (302) 322-9354
Editor: Jane Bailey
E-Mail: jane@dcul.org