Fidelity Bonds

It happens. Insider abuse is a real risk that can affect any credit union, regardless of size or the controls that a credit union has in place. However, there are regulatory requirements in place that mandate fidelity bond coverage to protect credit unions from financial losses caused by dishonest or unethical actions by employees, the credit union’s board of directors, officers, supervisory and credit committee members.

Fidelity bonds can also cover losses from external events such as burglary, robbery, larceny, theft, forgery, and counterfeit money. Further, optional endorsements may extend coverage to include directors’ and officers’ liability (such as protection against legal claims/lawsuits as a result of decisions made while serving as an official of the credit union), audit expenses, and other fraud-related costs. If you have heard of blanket, surety, or discovery bond coverage, that can be another name for fidelity bond coverage.

In order to retain federal insurance through the National Credit Union Share Insurance Fund (NCUSIF), all federally insured credit unions must have and maintain fidelity bond coverage. Requirements for fidelity bond coverage are detailed in 12 CFR 713, Fidelity Bond and Insurance Coverage for Federally Insured Credit Unions. The rule sets minimum bond coverage requirements based on the credit union’s asset size. For example, the minimum required dollar amount of fidelity bond coverage for any single loss for a federally insured credit union with total assets between $0 to $4,000,000 is $250,000.

In addition to setting the minimum required fidelity bond coverage, NCUA regulations also establish a maximum allowable deductible. This deductible is calculated based on the credit union’s asset size, capital level, and composite CAMELS rating.

Credit unions must adhere to these regulatory requirements to ensure they have adequate protection against potential losses. However, if necessary, the NCUA Board may grant prior written approval for deviations from regulatory requirements, provided it determines that the credit union remains adequately insured and not exposed to undue risk.

During an examination, NCUA examiners may review a credit union’s bond coverage to ensure it aligns with regulatory requirements for coverage amounts. Credit unions that fail to maintain the required fidelity bond coverage may face serious regulatory consequences, including the potential loss of share insurance coverage. Further, federally insured credit unions must maintain federal insurance coverage to retain their charter; so, losing this coverage can result in the loss of their charter.

The NCUA offers a list of bonds approved for use by federally insured credit unions, on its website.

Under NCUA Regulation § 713.2, a credit union’s board of directors is required to conduct an annual review of the institution’s fidelity bond coverage to ensure it remains adequate relative to regulatory minimums and the credit union’s risk exposure. This annual board review must include any applications for the purchase or renewal of bond coverage, and the board must formally approve these actions through a resolution. Additionally, the regulation mandates that a non-employee board member— who did not sign the previous year’s agreement—must sign the bond agreement. All actions and approvals must be clearly documented in the board meeting minutes to demonstrate compliance.

Practically speaking, when a credit union incurs a loss due to insider abuse or external events, it should promptly review its bond agreement to understand the specific reporting requirements. This is important because failing to follow the bond company’s prescribed procedures and timelines could result in a denial of the claim.

In addition to being familiar with the requirements set by the bond company for reporting losses, NCUA’s Examiner’s Guide provides additional insight and scenarios that cover how to report and what information to provide to the bond company when reporting a loss: Reporting to the Bond Company.

Another helpful resource is NCUA’s Fraud Prevention Resources page, which includes a link to a web form for reporting internal fraud to the NCUA, along with additional guidance on preventing insider abuse.

For assistance with your regulatory compliance questions, members of America’s Credit Unions can reach out to the Compliance Team at compliance@americascreditunions.org .