LOS ANGELES – A state appeals court yesterday upheld a lower court ruling that CUNA Mutual Group’s CUMIS Insurance Society is not responsible for a $243,700 fraudulent home equity line of credit transfer overseas because the credit union making the bond claim did not comply with the insurer’s required security procedures before making the wire transfer.

In its ruling, the California Court of Appeals for the Second District, noted that CUMIS had notified Universal Studios CU in February 2007 that its new bond would require that all replacement telephone numbers for requesting wire transfers must be received at least 30 days prior to receipt of the (wire transfer) instruction.

The notification requirement is central to the bond claim for the credit union, which transferred the funds to what turned out to be a fraudulent member who had changed the phone number on the real member’s account five days before.

The lower court concluded that the credit union had not complied with the bond's security procedures for funds transfers and that CUMIS had properly denied payment under the bond. The appeals court concurred and dismissed the credit union’s claim. “We conclude the funds transfer exclusion was conspicuous, plain, and clear. It appeared in the section of the bond entitled,” ruled the appeals court.

Dozens of credit unions were hit by the one or more similar HELOC schemes in 2008 through 2010. Among them were: U.S. Senate FCU, Navy FCU, Pentagon FCU, State Department FCU, Affinity FCU, Financial Resources FCU, BMS FCU, FDU FCU, L’Oreal USA FCU, New Jersey Gateway FCU, North Jersey FCU, Novartis FCU, Picatinny FCU, Self Reliance FCU, First Financial FCU, as well as JP Morgan Chase, Wachovia, Washington Mutual and Bank of America.

In this case, the credit union received a telephone call from an individual who identified himself as William Ryder, a member, on January 8, 2008. The individual requested that the credit union change his telephone number. The credit union asked the individual to state Ryder's Social Security number, date of birth, mother's maiden name, and current transaction activity and the individual provided correct answers, so the credit union changed the telephone number on Ryder's account.

Five days later, on January 14, 2008, the Credit Union received via fax a completed wire transfer request form directing that $243,678.19 be transferred from Ryder's homeowner's line of credit to an account held by Fuji Bullion Ltd. at HSBC Bank in Hong Kong. The form had a signature on the line for the "Member's Signature." The credit union conducted its standard security procedure to verify the information on the form to ensure it matched the information in his file and determined that Ryder's account had sufficient funds. The signature on the form was compared to Ryder's signature on file; the credit union concluded they matched.

The credit union made a telephone call to contact Ryder, using the number on his account. A man answering the phone said he was Ryder and confirmed that he had submitted the wire transfer request. The completed form, Ryder's file, and the verifying information were reviewed by two credit union employees, first by the electronic funds coordinator and then by her supervisor. Having completed its security procedure without detecting a hint of fraud, the credit union transferred the funds.

On January 30, the real Ryder's wife contacted the credit union by telephone to inquire about refinancing a loan. During the conversation, she was told about the wire transfer and replied that neither she nor her husband had requested a change in their telephone number or a transfer of funds. The credit union investigated the matter and unsuccessfully tried to recover the transferred funds.

The credit union made a claim under its CUMIS bond. But CUMIS informed the credit union's CEO the bond did not cover the loss because the credit union had not verified the wire transfer request by using a "secure telephone number" within the meaning of the bond, namely, a "replacement telephone number for the member . . . that (the credit union) received at least 30 days prior to receipt of the (wire transfer) instruction." Instead, the credit union had used a telephone number that had been changed on Ryder's account five days before the wire transfer was processed.

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