By Ray Birch
MADISON, Wis.—Fraud from bad checks being written on home equity lines of credit (HELCs) is on the rise, and the crime can easily lead to a six-figure loss for a credit union from just one event, one expert is warning, while also sharing best practices for spotting and stopping the fraud.
In just one event, a fraudster was able to use counterfeit HELC checks that led to losses of more than $1 million.
“This has become a trend within the last two years,” said Ken Otsuka, senior risk consultant for CUNA Mutual Group. “We are seeing fraudsters manufacturer fraudulent checks against members’ HELC accounts and in many cases those fraudulent checks are just perfect counterfeits. These can easily be six-figure losses.”
Fraudsters are swiping the funds via unauthorized advances on HELCs. Their methods are varied, but often they use social engineering schemes to target call centers, where they impersonate members and request a canceled HELC check or order share drafts on member accounts, Otsuka explained.
“Recently, we saw a case that involved a fraudster who took over a member’s account from online banking, captured that member’s login credentials—probably through malware,” Otsuka related. “This member had a HELC and the fraudster logged into the member’s account through online banking and requested share drafts on that member’s account and funded the share drafts by taking HELC advances.”
But that is not the only way members are being targeted. Otsuka said HELC fraud is being carried out through wire transfers of funds, as well.
What Makes the Crime Easy
One big reason for the increase in fraud: It has been easy for crooks to manufacture fraudulent checks, said Otsuka.
“Back in the late ’90s new check printing software was introduced that made manufacturing checks pretty easy using your own home computer and printer,” said Otsuka. “Also, HELCs are a public record. So, it's easy for fraudsters to find members who have HELCs. Again, they use social engineering tactics against the credit union to request a copy of a member’s canceled check. It could be a HELC check or a share draft.”
And then there is another big factor driving the rise in HELC check fraud: rapidly rising home values in nearly every market in the country, pointed out Otsuka.
“Home prices have really escalated, which makes HELC fraud more attractive,” he said. “People now have more equity in their homes. I am aware of one event where a fraudster manufactured three near perfect counterfeit HELC checks. The three checks cleared and the loss totaled more than $1 million.”
What a Credit Union Can Do
To defend against the crime, Otsuka recommends credit unions review all large-dollar checks presented for payment.
“For example, a credit union can establish a monetary threshold—maybe it's $25,000 or $50,000. They should set the amount based on their risk tolerance,” said Otsuka. “The credit union should see whether the check number is in sequence with recently cleared checks from the member’s account. And, if it is not, that is an indication it could be counterfeit.
He also said the credit union should look to see if the phone numbers on member accounts for any of the large checks have recently changed. Otsuka said criminals will impersonate a member and trick the credit union into changing the phone number on the account. If the CU calls the member to verify if the member actually issued the check, they will call the fraudster instead.
Otsuka recommends credit unions call members for each of the large-dollar checks presented for payment.
Ken Otsuka
What Can’t Be Counted On
What credit unions can’t count on, he warned, is just making sure the signatures match.
“The signatures, too, can be excellent forgeries,” Otsuka cautioned, noting crooks can lift the member’s signature from mortgage documents that are publicly available.
Fighting HELC type of fraud can be time consuming, acknowledged Otsuka, noting CUs must move quickly—same day—on these large checks.
“This type of review has to be very timely to allow the credit union to return unauthorized checks by the midnight deadline,” Otsuka explained. “Credit unions have until midnight on the next banking day to return that item to the institution where it was originally deposited.”
The warning signs for HELC check fraud, reiterated Otsuka, are large-dollar checks drawn off HELC advances, a recently changed phone number, and a check number that is out of sequence with recently deposited checks. Otsuka said it is a good idea to set a fraud trigger for high-dollar checks coming from a member whose phone number was recently changed.
‘A Lot of Money is at Stake’
“Not all credit unions are putting these controls in place due to the time it takes, and due to the fact they have to move very quickly on the fraudulent check when they spot one,” he said. “This potentially takes a lot of employee hours. However, there is a lot of money at stake. This is a high-dollar crime. This is a bit of a dilemma. But I argue that these controls are worth the time—even if the credit union catches and stops only one of these bad checks, it is well worth the effort.”