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What happens when sanctions screening fails

Sanctions screening is one of the most fundamental controls in a financial institution’s compliance program. In today’s global climate, it is more important than ever. Yet when banks and credit unions discuss sanctions risk, the conversation often focuses solely on the sanctions screening software. Is the system calibrated correctly? Are we using the right vendor? Are alerts manageable? Those questions about the tool matter, but they can distract from the bigger issue: the safety and soundness of your financial institution and national security.

When sanctions screening fails, the consequences extend far beyond a missed alert. The impact can involve regulatory penalties, operational disruption, reputational damage, and even threats to the U.S. financial system.

More importantly, sanctions failures rarely result from a single mistake. They usually reveal deeper weaknesses in the institution’s sanctions compliance program, including governance, sanctions data quality, training, or oversight. Financial institutions should understand what consequences occur when sanctions screening breaks down and how robust screening programs help avoid compliance issues.

This article covers these key topics:

The hidden signs of inadequate sanctions screening
Common mistakes with sanctions compliance
Operational drivers of missed transactions
The value of self-reporting sanctions misses

The hidden signs of inadequate sanctions screening

Sanctions screening issues rarely announce themselves right away. In many cases, the problem begins with something small. A PEP (politically exposed persons) name variation that slips past a filter. A payment message missing critical information. A list update that did not load correctly into the system.

The transaction processes normally, and the customer never notices anything unusual. The institution continues operating as if nothing happened. The problem may not surface for weeks, months, or even years. It might be discovered during an internal audit, a regulatory exam, or a vendor system review. In the worst scenario, the institution learns about the failure only after law enforcement or regulators identify the transaction. By the time the issue is discovered, exposure may involve hundreds or thousands of transactions.

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Common mistakes with sanctions compliance

A common misconception is that regulators focus solely on individual sanctions violations. In reality, examiners are far more interested in why failures occurred.

When sanctions screening fails, regulators begin asking questions such as:

Was the sanctions program appropriately risk-based?
Were screening filters properly calibrated?
Was there adequate management oversight of the monitoring system?
Did the institution test the screening process regularly?
Were employees trained to recognize potential sanctions risks?
Did management respond appropriately when issues were identified?

A single missed transaction can quickly evolve into a broader program review. What begins as a technical failure can become a governance issue.

The true cost of sanctions violations

Sanctions violations can carry significant financial penalties. Large global banks have paid penalties totaling hundreds of millions, or even billions, of dollars. In a recent enforcement action, OFAC issued a civil money penalty against a Chicago-based private equity firm for violations of U.S. sanctions on Russia. The case was settled for $11,485,352.

Community banks and credit unions rarely face penalties on that scale, but the financial impact can still be substantial. Enforcement actions often include significant civil money penalties, independent monitors, or mandated program remediation.

The operational costs may be even higher. Institutions may need to conduct extensive transaction reviews, spend time on root-cause analysis, rebuild screening models, or implement new systems. These remediation efforts can take months or years.

Reputational risk cannot be overlooked in sanctions screening. For financial institutions, trust is currency. When a sanctions failure becomes public, the reputational consequences can remain long after the regulatory issue is resolved. Correspondent banking partners may reevaluate relationships. Customers may question the institution’s risk management practices. For smaller institutions in particular, reputational damage can be difficult to recover from.

Operational drivers of missed transactions

Sanctions violations are often symptoms of broader program weaknesses. Many sanctions failures are initially blamed on technology. While systems certainly play a role, the root cause is frequently operational. Common drivers include:

Poor data quality. If payment messages or customer information are incomplete or inconsistent, even the best screening system will struggle to identify matches.
Weak governance. Institutions sometimes treat sanctions screening as a technology function rather than a compliance responsibility.
Inadequate testing. Without regular model validation and scenario testing, screening systems may gradually drift away from effective performance.
Training gaps. Frontline employees may not recognize sanctions red flags or may rely too heavily on automated controls.

What strong programs do differently

Institutions with strong sanctions programs treat screening as part of a larger risk management framework rather than a standalone system. They focus on several key practices:

Strong data governance. Accurate and complete customer and transaction data are foundational to effective screening.

Regular testing and tuning. Screening filters should be tested against known scenarios and adjusted as risks evolve.

Clear escalation paths. Employees need to understand when and how to escalate potential sanctions concerns.

Independent oversight. Internal audit or third-party reviewers should periodically evaluate the effectiveness of the sanctions program.

Continuous training. Staff across the organization should understand how sanctions risks intersect with daily operations.

The value of self-reporting sanctions misses

When a sanctions miss is identified, timing matters. Regulators expect institutions to act quickly and voluntarily disclose potential violations. Delays can raise concerns about the effectiveness of your controls and your ability to detect issues in real time.

Self-reporting does more than demonstrate transparency. It can directly impact outcomes. Regulatory agencies, including OFAC, specifically consider voluntary self-disclosure when assessing penalties. In many cases, institutions that self-report may face significantly lower monetary penalties than those where violations are discovered externally.

Just as important, early reporting allows you to contain the issue, address root causes, and present a clear remediation plan. Prompt self-reporting signals a strong compliance culture and can materially reduce both regulatory and financial consequences.

A strong sanctions screening program

Technology plays an important role in sanctions compliance, but technology alone cannot prevent failures. A screening system is only as strong as the governance, data, and oversight that support it.

When institutions view sanctions screening as part of a comprehensive compliance program rather than a simple software function, they are far better positioned to prevent the kinds of failures that attract regulatory attention. When sanctions screening fails, the issue is rarely just about the transaction that slipped through. It is about the program that allowed it to happen.

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FAQs

Why is sanctions screening important?

It helps protect financial institutions from regulatory penalties, reputational damage, and risks to national and global financial systems.

What happens when sanctions screening fails?

When sanctions screening breaks down, the consequences can go far beyond a missed transaction. Institutions may face regulatory penalties, operational disruption, reputational harm, and even risks tied to national security.

What typically causes sanctions screening failures?

Failures are rarely due to a single issue. They usually stem from broader weaknesses such as poor data quality, weak governance, insufficient testing, or gaps in employee training.

What do regulators focus on after a sanctions failure?

Regulators look beyond the missed transaction to understand why it happened, evaluating areas like risk management, system calibration, oversight, and staff training.

Why is self-reporting sanctions violations important?

Voluntarily reporting issues demonstrates transparency and can significantly reduce penalties. It also allows institutions to address problems early and strengthen their compliance programs.

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Opportunities for credit unions beyond real estate

Commercial lending is increasingly seen as a critical growth opportunity. Yet even credit unions with available capacity under their member business lending caps often struggle to expand. Omar Shute explained why and how to evolve in a recent Abrigo webinar.

Key topics covered in this post:

Who is participating in commercial lending now?
Why credit unions rely on CRE
Commercial lending challenges and strategies
Delivering better value for members

The gap in commercial lending: Limited participation, concentrated volume

Credit unions have long relied on commercial real estate (CRE) lending as a cornerstone of their commercial portfolios. It’s familiar, collateral-backed, and often viewed as a lower-risk entry point into business lending. But that comfort can also limit how broadly institutions expand their commercial programs.

As a result, commercial lending remains underpenetrated across credit unions overall, with most growth concentrated among a small subset of institutions. In a recent Abrigo webinar, Omar Shute shared the following statistics to illustrate the significant opportunity for credit unions to expand—especially those looking to stay competitive as industry consolidation continues.

75% of credit unions do not do any commercial lending, meaning only about 25% are active in the space.
Of those that do lend commercially, just 10% of credit unions originate 90% of all commercial loans, showing how concentrated activity is among a small group.
The number of credit unions has declined significantly—from ~24,000 in 1970 to about 4,300 today, with projections dropping further to 2,800–3,300 in the next decade due to consolidation.

Those credit unions that want to survive will need to explore the realm of commercial lending beyond CRE.

You might like this panel session, "How credit unions grow commercial lending."

Credit unions’ reliance on CRE: Comfortable, but limiting

There are clear reasons why CRE dominates many portfolios. These loans are tangible, relatively straightforward to underwrite, and align well with the risk frameworks many institutions already understand. For teams transitioning from consumer lending, they offer a natural starting point.

Because of this, CRE has become what Shute calls the “sweet spot” for many institutions entering commercial lending. But what makes it accessible also makes it limiting.

“The drawback is that they are more transactional in nature,” he said. “Your borrowers are going to be very, very sensitive to interest rates, and they will drop you for another lender for ten basis points better rate.”

In the CRE space, even strong relationships can be disrupted by small pricing differences. At the same time, shifting market conditions (rising rates, tighter underwriting, and changes in property demand) are adding new layers of complexity and concentration risk. The result is a portfolio that may grow in size, but not necessarily in strength. And for many institutions, growth slows not because of market conditions or regulatory limits, but because their commercial lending programs were never designed to scale efficiently.

Transactional relationships and operational drag

The biggest challenge with a CRE-heavy strategy is not the asset class itself but those transactional relationships. Too often, Shute says, credit unions book large real estate loans but fail to capture the customer in other areas. Borrowers may finance properties with the credit union while maintaining operating accounts, treasury services, and day-to-day financial activity elsewhere. This disconnect leaves significant value on the table.

In addition, lean teams, manual processes, and concerns about risk oversight make it difficult to increase volume without adding complexity. In many cases, credit unions hesitate to expand not because they lack opportunity, but because scaling feels operationally out of reach. Without the right commercial lending infrastructure, growth becomes difficult to sustain. Institutions find themselves balancing loan demand with internal capacity, rather than building a program designed for consistent, repeatable expansion.

Where growth happens

To move beyond transactional lending, credit unions are looking at commercial and industrial (C&I) lending and business lines of credit as the next step. Unlike CRE, these products are tied directly to a business’s operations—how it generates revenue, manages expenses, and navigates day-to-day cash flow. That connection naturally opens the door to broader engagement. When a credit union supports a business’s working capital needs, it is far more likely to capture operating accounts, treasury services, and payment activity. It also creates opportunities to serve employees, expand membership, and build relationships that extend well beyond a single loan.

Equally important, these lending segments can be structured to be efficient and scalable. By prioritizing the right mix of loan types, member segments, and operating models, credit unions can grow their portfolios in ways that align with both member needs and internal capacity.

Cash flow, not just collateral

One of the main reasons credit unions hesitate to expand beyond CRE is risk perception. Real estate offers something tangible—a physical asset that can be appraised, monitored, and, if necessary, liquidated.

But in practice, said Shute, commercial loans are repaid through cash flow, not collateral. A business with strong, consistent cash flow, healthy debt service coverage, and an active deposit relationship can present a more stable repayment profile than a marginal CRE deal supported primarily by property value. Shifting the focus from collateral to cash flow allows credit unions to evaluate risk more holistically and identify opportunities that may otherwise be overlooked.

Just as importantly, aligning credit policy, governance, and risk management frameworks to support these types of loans is key to scaling safely. Growth doesn’t require loosening standards—it requires designing processes that make disciplined lending repeatable.

Start small and scale strategically

Expanding beyond CRE does not require a complete overhaul of the lending program. In fact, the most successful institutions focus on building scalable foundations rather than simply adding volume. That might include introducing targeted business lines of credit, standardizing underwriting approaches, or leveraging partners to supplement internal expertise. Technology also plays a critical role by streamlining workflows, improving consistency, and reducing manual effort. These steps help credit unions increase lending volume and consistency while still meeting board and examiner expectations. More importantly, they enable growth without materially increasing headcount or fixed costs—an essential consideration for institutions operating with small teams. CRE will continue to play an important role in commercial lending portfolios, but credit unions that combine CRE with C&I lending, treasury services, and deposit strategies are better positioned to compete effectively and deliver greater value to their members.

This blog was developed with the assistance of ChatGPT, an AI large language model. It was reviewed and revised by Abrigo's subject-matter expert for accuracy and additional insight.

FAQs

Why should credit unions grow beyond commercial real estate lending?

Credit unions should grow beyond commercial real estate lending because a CRE-only strategy can limit relationship depth, increase rate sensitivity, and concentrate portfolio risk. Expanding into C&I lending and business lines of credit helps credit unions build broader member relationships and create more durable growth.

Why do so many credit unions still rely on CRE lending?

Many credit unions rely on CRE lending because it is familiar, collateral-backed, and often easier for teams transitioning from consumer lending to underwrite. That familiarity makes CRE a practical starting point, but it can also prevent commercial programs from expanding strategically.

Where can credit unions find commercial lending growth beyond CRE?

Credit unions can find commercial lending growth in commercial and industrial lending and business lines of credit. These products connect more directly to business operations and cash flow, helping credit unions win operating accounts, treasury services, payment activity, and deeper member relationships.

How can a credit union expand commercial lending without adding too much complexity?

A credit union can expand commercial lending by starting with targeted products, standardizing underwriting, strengthening governance, and using technology or external partners to reduce manual work. Scalable growth comes from disciplined, repeatable processes that support volume without materially increasing headcount or fixed costs.

Why choose Abrigo for CRE lending?

Abrigo is a strong choice for CRE lending because it helps credit unions and banks scale commercial lending with more consistent workflows, lower origination costs, and stronger risk oversight. Abrigo’s commercial lending software supports repeatable underwriting and operational efficiency, which is especially useful for institutions that want to grow CRE lending without relying on manual processes or adding significant complexity.

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What's the difference between annual and loan reviews?

Financial institutions conduct one as first-line risk management to identify emerging risk tied to a borrower. The other is an independent function evaluating portfolio credit risk "from the ground up."

Key topics covered in this post:

What an annual review is
What an annual review is not
What loan review is
What loan review is not

Often confused, the terms serve different functions

In credit risk management, few distinctions are more frequently blurred—or more consequential —than the difference between the processes known as annual review and loan review. The terms are often used interchangeably at financial institutions, leaving many people confused.

But words matter. Annual reviews of loans and the loan review process represent fundamentally different concepts, performed by different parties, for different purposes.

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What is an annual review in lending?

An annual review is a first-line risk management activity conducted by lenders or portfolio managers on a borrower with one or more outstanding credit facilities. The goal of an annual review of a borrower should be to identify emerging risk factors as part of ongoing monitoring of lending and assess whether mitigation is possible.

When should a financial institution conduct an annual review?

An annual loan review may coincide with a renewal or new extension of credit. In other cases, the review is a standalone activity. An example of the latter is a review in the second year of a multi-year term loan where no financial transaction (i.e., renewal, new loan, etc.) transpires.

What’s involved in the annual review process?

When tied to a loan renewal or new debt, the annual review process is typically a full underwriting of the new exposure, including an evaluation of existing facilities. When an annual review stands alone, however, re-underwriting is neither necessary nor efficient.

This is where confusion and wasted effort often arise. Unless a loan is in default, the bank or credit union’s ability to materially change the credit during an annual review is limited so long as the borrower is performing as agreed. The purpose of an annual review, therefore, is not to recreate underwriting. Again, lenders or portfolio managers should be trying to detect any emerging risk factors and, if found, determine whether mitigation is possible.

That means the yearly review process should be risk-based:

For credits rated “Average” or better, the review may be limited to confirming or improving the risk rating.
For weaker credits, or where the credit risk rating process leads to a downgrade, deeper analysis may be warranted to understand any loss of flexibility in repayment and the likelihood of further deterioration.

What an annual review is not

In all cases except renewals or extensions, the annual review remains a review of the current condition; it is not a full underwriting. There is nothing new to underwrite.

Once a credit is placed on the problem loan report (“Special Mention” or worse), the annual review process should be suspended. These credits are already subject to far more intensive and more frequent monitoring. When and if the credit returns to pass status, the annual review process can resume.

What is loan review?

Loan review, also known as credit risk review, is something entirely different from the annual review.

It is a second-line, independent function of risk management at a financial institution. Typically reporting to the board, loan review is performed by trained specialists who were not involved in underwriting or approval. The loan review program or team assesses the portfolio “from the ground up” by sampling portfolio segments and aggregating the results of the review of individual borrowers in those segments to find patterns and trends that deserve management and board attention.

Loan review’s purpose is clearly articulated in the FFIEC’s Interagency Guidance on Credit Risk Review Systems (May 2020), including:

Identifying actual and potential credit weaknesses early
Validating and, when necessary, adjusting risk ratings
Detecting trends and concentrations that may threaten portfolio quality
Assessing the adequacy of credit policies and compliance with them
Evaluating the performance of lending personnel and management
Providing the board and management with an objective assessment of portfolio quality
Supporting accurate financial and regulatory reporting, including the allowance for credit losses (ACL)/allowance for loan and lease losses (ALLL)

When should loan review occur?

Loan review may be conducted through periodic, point-in-time examinations or continuous monitoring of targeted segments, such as recent originations. The best practice is to employ both methods, with continuous monitoring augmented by the deeper dive of the examinations. Most financial institutions tend to focus on their commercial lending activities, but the institution’s investment portfolio and Wealth Management group (i.e., the credit risk associated with fiduciary activities) may also be subject to credit risk review.

What’s involved in loan review?

Conducting loan review at a bank or credit union typically involves:

Loan review scope: The foundation of an effective loan review process is determining the scope of the review. In other words, scoping identifies how much of the universe of loans should be reviewed during the review period (usually 30 days). Loan review software like Abrigo’s conducts dynamic risk assessments and automated scoping to create risk-based samples in minutes.
Loan review work: The analysis and review of loans is the bulk of this function, and it’s where staff focus on tackling the objectives listed by regulators (see above).
Output: Loan reviewers produce a loan review report explaining what was reviewed and why, as well as any conclusions and recommendations for credit risk management and staff. Abrigo’s AI-powered Loan Review Assistant generates draft narratives based on your organization’s policies and data analysis, speeding up loan reviews by 30%.

What loan review is not

As part of its review of individual credit, loan review should not involve re-underwriting credit. Rather, its focus is on the adequacy of the underwriting process undertaken at the time the credit was originated or renewed, including any updates identified through the annual review. Further, loan review is not the simple acceptance of the institution’s credit risk management framework (policies, guidance, risk rating framework, etc.) and only focusing on the adherence of the underwriting process to that framework. Rather, loan review must assess that the framework itself is adequate and recommend changes to ensure the institution operates in a safe and sound manner. Remember, at the end of the day, effective loan review is portfolio review from the ground up.

The distinction between annual and loan review matters

To summarize:

Annual review of a loan is:

Individual borrower analysis
First-line responsibility (lenders/portfolio managers)
May be standalone or tied to origination or renewal
Focused on identifying emerging risk factors and mitigation opportunities

Loan review is:

Portfolio or segment-level analysis
Second-line, independent oversight function
Periodic or continuous in nature (or ideally, both)
Purpose defined by the 2020 Interagency Guidance

Both functions are essential. They are complementary, not interchangeable.

Why this matters

Sound credit risk management depends on clarity of roles, discipline of purpose, and proportionality of effort. When each function does the job it was designed to do, the institution is far better positioned to spot trouble early, respond intelligently, and preserve both capital and credibility.

Getting the words right is not semantics. It is risk management.

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Regulatory relief & the impact on loan review teams

Even if financial regulatory agencies evolve or priorities shift, banks and credit unions must maintain these loan review fundamentals to maintain institutional safety and soundness.

The winds of change: Loan review impacts

Change has finally arrived in the regulatory world. For example, the OCC and FDIC have rescinded the 2013 Leveraged Lending Guidance, updated capital requirements are out for comment, and “tailoring” of supervision is gaining momentum.

In the practice of independent loan review, it’s tempting to assume these shifts will lighten our load. That’s probably wishful thinking.

Regulatory shifts may change the mechanics of supervision, but they don’t lessen the responsibility of financial institutions’ credit risk review teams. If anything, they make our role more essential in helping institutions navigate evolving expectations and maintain discipline.

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Key characteristics of effective credit risk review

Still, now is an ideal moment to revisit what loan review is fundamentally about. A good starting point is the 2020 guidance on credit risk review systems. It outlines several key characteristics of an effective credit risk review framework, which fall neatly into three categories:

Credit

Prompt identification of actual or potential loan weaknesses
Validation and adjustment of risk ratings

Portfolio

Recognition of trends affecting portfolio quality
Assessment of policy adequacy and adherence
Evaluation of lending personnel and management

Results

Objective, independent assessments for management and the board
Accurate, timely credit-quality information for financial and regulatory reporting

Focusing on what matters most for credit risk review

From this, our core mandates for loan review become clear:

Ensure risk ratings tell the truth

Are loans rated accurately, and does the rating system itself allow the institution to understand the level and direction of risk? A simple litmus test: if more than 20–25% of portfolio exposure concentrates in a single risk grade, the framework isn’t properly calibrated. In my experience, when a single grade carries more than a quarter of the exposure, it’s usually a sign that the scale isn’t distinguishing risk effectively. The loan review function must call that out and insist on a structure that distinguishes risk, not hides it.

Evaluate policy adequacy, not just adherence

Loan review teams often fixate on exceptions—sometimes obsessively. But the more important question is whether credit policies and guidelines are adequate for how the institution actually operates. If there’s a disconnect between the stated guardrails and day-to-day practice, that’s a policy adequacy problem, and no amount of exception tracking compensates for it.

For example, from a policy perspective, unsecured lending is considered undesirable and should only be made on an exception basis. Yet, a review of an institution’s portfolio indicates that a third of loans are unsecured. Further analysis indicates 95% of exposure is risk rated “4” (assuming a six-point pass scale with 4 as Average) or better, so there is no real concern on credit quality. Yet, this institution has created a rash of exceptions (a third of the portfolio!), which are unnecessary and do nothing more than create noise. The policy needs to be revisited.

If anything, labeling unsecured lending as an exception should only apply to loans risk rated 5 or worse. More appropriately however, it’s not a policy issue at all. It’s simply a portfolio segment to monitor and perhaps apply a capital allocation. It’s harder to make this kind of a call, but it’s the one that truly matters.

Assess whether people are doing their jobs

Years ago, I reviewed a small market where the four largest loans were nonaccrual with partial charge-offs. Management had been replaced, and the new folks had worked tirelessly to stabilize them. By our mechanical scoring system, however, the overall examination rating would have been “Unsatisfactory.” That was unfair. I overrode the score and argued for a more reasonable rating.

Too often, examinations elevate process over substance. The real question is whether people—lenders, managers, and the oversight function (i.e. credit)—are doing their jobs. Today, as more institutions adopt automated scoring and workflow tools, this principle matters even more. Technology can support judgment, but it can’t replace the need to understand when people are doing the right work for the right reasons. As financial institutions’ loan review software tools get more sophisticated, the discipline to challenge them—not just follow them—will be what separates effective institutions from merely compliant ones.

Communicate clearly to the board and executives

Your audience does not want a 25-page tome of charts and grids that says nothing. Keep the credit risk review report to 3–5 pages and make sure to:

State the overall portfolio condition and its trajectory
Highlight risk ratings, policy adequacy, and personnel performance
Identify action items, expected outcomes, and agreed-upon timelines

Everything else—scorecards, detail schedules, loan-level grids—belongs in an appendix.

In my early career, a boss distinguished between the “regulatory” and the “righteous.” Regulatory meant required. Righteous meant it made sense. Everything above falls into the righteous category. Even if agencies evolve or priorities shift, these fundamentals remain essential to institutional safety and soundness.

Standing still means falling behind

While the core mandates of credit risk review aren’t changing, there are areas where standing still means falling behind:

Automation is no longer optional

Automation was once limited to large institutions, but now it has become critical for community banks as well. Portfolios are more complex. Leadership talent from larger banks is migrating into smaller organizations, often bringing higher risk appetites. Borrowers themselves are more sophisticated, managing supply chains aggressively and pursuing opportunities with greater confidence.

If you are still relying on Word and Excel, and your view of portfolio risk is constrained by data built for operations rather than risk discovery, it is time to adopt a workflow platform. Automation not only accelerates the review cycle, it surfaces the “hidden mickeys” of risk that manual processes continually miss.

Artificial intelligence: Beyond the hype

AI may straddle the line between fad and transformative force, but the “righteous” use case is clear: eliminating rote, time-consuming work.

Even as a speed reader, it takes me an hour or more to scan a loan agreement. An AI-powered loan review solution like Abrigo’s can do the first pass in minutes—accurately flagging issues, freeing humans to focus on judgment, decisions, and action. Of course, like any powerful tool, AI works best with reasonable oversight. Validating outputs and keeping humans in the loop ensure technology enhances judgment rather than dilutes it. AI can draft exam results, summarize trends, and spotlight previously invisible risk pockets. This isn’t science fiction; it’s here, and it’s practical. It can speed loan reviews by 30%.

The more things change…

The more things change, the more the fundamentals of loan review stand out. Regulatory priorities will evolve, guidance will come and go, and supervisory approaches will shift. But the responsibility of loan review does not. At its core, the function exists to ensure that credit risk is accurately understood, clearly communicated, and actively managed.

That’s the standard that matters—not whether every box is checked, but whether the work leads to sound judgment and better decisions. Institutions that navigate change successfully will be those that stay grounded in these principles while embracing tools and approaches that strengthen them. In the end, safety and soundness is driven by how well we execute on the fundamentals, regardless of the environment.

FAQs

What is loan review software?

Loan review software is a credit risk review system that helps banks and credit unions evaluate loan quality, validate risk ratings, identify emerging weaknesses, and report findings to management and the board. In this context, loan review software supports a more structured, scalable alternative to manual reviews in Word and Excel.

What does loan review software help teams do?

Loan review software helps teams spot actual or potential loan weaknesses, assess portfolio trends, evaluate policy adequacy, and produce objective results for leadership. It is designed to support the core responsibilities of independent credit risk review.

How does loan review software improve risk visibility?

Loan review software improves risk visibility by making it easier to surface concentrations, weak ratings, policy issues, and pockets of emerging credit risk. Manual processes often miss “hidden” risks that automation can surface faster.

How does loan review software support regulatory readiness?

Loan review software supports regulatory readiness by helping institutions maintain consistent reviews, timely credit-quality information, and clearer reporting for management and financial or regulatory purposes.

Why choose Abrigo for loan review software?

Choose Abrigo because its loan review software helps banks and credit unions strengthen credit risk review with automation, better risk visibility, and clearer reporting for management and the board. Abrigo’s approach is built around core loan review fundamentals—accurate risk ratings, policy adequacy, emerging risk identification, and practical workflow efficiency—so institutions can move beyond spreadsheets and manual processes without losing judgment or oversight.

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Satisfying reviewers' expectations for stress testing

Financial institutions strengthen their portfolio stress testing, satisfy examiners and auditors, and gain real-world risk insights by connecting portfolio-level results to loan-level behavior and CECL assumptions.

Stress testing expectations are evolving

Over the past few weeks, I’ve had three separate conversations about stress testing. One followed an exam. Another came during a CECL validation. The third happened in a working session with an Abrigo bank customer reviewing allowance results.

Three different settings. Three different stakeholders. The same types of concern surfaced each time:

“We’re getting a lot more questions about stress testing.”

“They want to understand how we’re stress testing our portfolios.”

“We have stress testing… but I’m not sure it’s at the level they’re expecting anymore.”

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Top-down stress testing results can feel incomplete

If one of those sentences sounds familiar, you’re not alone. I’ve yet to leave a conversation like this without someone eventually pausing and saying quietly, “We should probably revisit this.”

Variations of this same feedback are showing up across a wide array of institutions. Regulators, auditors, and financial institutions themselves are all pointing toward the same conclusion: stress testing expectations are evolving, and many programs haven’t fully evolved with them yet.

Top-down, portfolio-level stress testing still plays an important role and is often the starting point for institutions trying to understand aggregate exposure. It helps leadership frame the big picture and supports board-level discussions around earnings sensitivity and capital adequacy.

On its own, however, that view can feel incomplete.

Increasingly, examiners and auditors are looking for a clearer connection between portfolio-level results and what’s actually happening within the loan portfolio. They want insight into where losses originate, which segments are most sensitive to changing conditions, and how risk migrates as the environment deteriorates.

As a result, when presentations of portfolio-level stress testing results start to sound a little too high level, you might see an examiner, auditor, or even someone on the institution’s own risk team lean forward and ask, “Okay… but which loans actually move first?” That’s not a trick question. The question is less about the numbers themselves and more about whether the institution truly understands how its portfolio behaves under stress.

The connection between stress testing and CECL

Stress testing is not new. It’s been emphasized for years, and I’ve been one of many voices making that case along the way. What has changed is the context around it.

With the adoption of CECL, regulators have been explicit that stress testing and allowance methodologies should no longer operate as separate, parallel exercises. Both rely on forward-looking views of credit loss, and both depend on an institution’s understanding of how economic conditions influence portfolio performance.

In a statement on CECL and stress testing, the Federal Reserve noted that “the current approach is conceptually similar to the CECL standard, as both methods are based on a forward-looking estimate of losses.”

That framing matters. When stress testing and allowance estimates are both grounded in forward-looking assumptions, the bar naturally rises for how results are constructed, interpreted, and explained.

In practice, that linkage tends to raise three questions during examinations and validations:

How do stress scenarios affect specific portfolio segments, rather than just the overall portfolio?
Do the assumptions used in stress testing align with the drivers used in the allowance methodology?
Can management explain which segments or borrowers are most vulnerable when conditions deteriorate?

When institutions can clearly walk through those points, conversations with examiners tend to move quickly toward implications. When they cannot, the discussion often returns to how the stress test was constructed in the first place.

When stress testing stays at the surface level

For a long time, stress testing occupied an odd space for many institutions. It existed largely as an annual exercise because it had to. And it followed this pattern: Run the scenario. Present results to leadership. Leave the analysis unchanged until the next cycle. I’ve literally seen stress testing decks that come out once a year, usually right before a meeting, and then disappear until the next cycle – untouched, unquestioned, and slightly out of date.

That approach was easier to defend when stress testing served primarily as documentation. It’s much harder to defend when regulators expect the analysis to demonstrate how the portfolio behaves under stress.

Risk can build quietly. Conditions can shift faster than portfolios adjust. In that context, stress testing is less about satisfying a requirement and more about understanding how exposed a balance sheet really is, especially when allowance estimates themselves are already grounded in forward-looking assumptions.

Portfolio-level stress results can show that losses increase under a recession scenario. The next question is where those losses originate.

Consider a commercial real estate portfolio as an example. A CRE stress scenario might indicate higher losses overall. The follow-up discussion often centers on which exposures drive that change. Office properties may react differently than owner-occupied commercial real estate. Construction loans may respond differently than stabilized properties. Loans with higher loan-to-value ratios may show earlier deterioration than those with stronger collateral positions.

Institutions that can trace stress results to those types of characteristics usually have a much easier time explaining their analysis. Those that cannot often find themselves defending assumptions rather than discussing the implications of the results.

Bridging portfolio results and loan-level insights

Connecting broader assumptions about portfolio-level results with loan-level behavior aligns closely with how CECL works. Allowance models already force institutions to think more deeply about segmentation, economic loss drivers, and the timing of credit losses. When stress testing doesn’t reflect that same level of insight, the disconnect becomes obvious – especially under examination.

Institutions with more developed stress testing practices tend to bridge the gap between broad assumptions and loan-level behavior more effectively. Some characteristics that seem to appear consistently, in my experience:

Results are presented at a segment level, allowing leadership to see which parts of the portfolio are most sensitive to economic change.
Stress assumptions generally align with the drivers used in the allowance model, including segmentation and credit migration logic.
Teams can run multiple degrees of severity, rather than relying on a single static scenario.

Most importantly, management can explain the results in practical terms. Instead of simply stating that losses increase under stress, they can describe why those losses increase and where the pressure in the portfolio is likely to emerge.

When those explanations exist, conversations with examiners and boards tend to shift from debating methodology to understanding implications.

In many cases, the issue was never a lack of awareness around risk, but a lack of depth in how that was being demonstrated.

The value of stress testing after exam season

Another shift becoming more common is how stress testing is used outside of exam season.

When stress tests are flexible enough to run multiple degrees of severity and explore different risk drivers, they naturally begin informing strategic planning discussions. Institutions often use stress analysis to evaluate questions such as:

How a commercial real estate concentration might affect capital during a recession
Whether planned loan growth could create pressure on earnings or capital under stress
How changes in underwriting standards might influence loss outcomes over time

Interestingly, this is often where teams realize stress testing becomes less stressful. When it’s used regularly, it stops feeling like a fire drill and starts functioning like a planning tool.

Capital decisions feel more grounded. Concentration risk becomes easier to visualize. Even underwriting and pricing conversations benefit from a clearer understanding of how loans behave under pressure.

Well-designed stress testing also creates a shared framework across credit, finance, capital planning, and allowance discussions. Instead of siloed views of risk, teams begin responding to a consistent narrative about how the portfolio performs under different conditions.

Would your stress test identify where losses will emerge?

The questions being asked by auditors, examiners, and management in risk discussions today reflect that shift. They go well beyond whether a scenario was run and focus instead on how scenarios were designed, how assumptions were selected, and how results influence decisions. And the institutions that can clearly walk through that logic tend to have very different conversations than those relying on surface-level stress tests.

It’s worth emphasizing that stress testing doesn’t need to be overly complex or academic to meet those expectations. It does, however, need to be intentional and designed to surface risk rather than obscure it.

Stress testing, I’d argue, is experiencing a quiet resurgence because institutions, boards, and regulators all recognize the value of understanding stress risk in a deeper, more actionable way.

For institutions willing to reassess how they approach stress testing, the payoff goes well beyond regulatory comfort. It’s better insight, stronger preparedness, and a clearer view of how the portfolio might behave when conditions don’t follow the plan.

For many risk teams right now, the most important question isn’t whether stress testing exists, but whether it’s telling them what they actually need to know: If economic stress began affecting the most vulnerable borrowers tomorrow, would the stress test identify where losses emerge and how they affect earnings and capital?

Institutions that can answer that question clearly tend to have different conversations with examiners, auditors, and boards than those presenting stress results that remain disconnected from the portfolio itself.

FAQs

What is portfolio risk stress testing?

Portfolio risk stress testing is a process banks and credit unions use to estimate how loan losses, earnings, or capital could change under adverse economic scenarios. Stress testing is a way to connect portfolio-level results to segment- and loan-level behavior so institutions can better understand where losses may emerge

Why are stress testing expectations increasing?

Stress testing expectations are increasing because examiners, auditors, and institutions want more than a high-level portfolio result. Reviewers now expect institutions to show how stress affects specific segments, how risk migrates, and how management understands the portfolio under changing conditions.

How does stress testing relate to CECL?

Stress testing and CECL are increasingly connected because both rely on forward-looking estimates of credit loss. Institutions are being asked whether their stress assumptions align with the drivers, segmentation, and logic used in their allowance methodology.

Why should institutions use stress testing outside of exam season?

Stress testing is more valuable when it is used as an ongoing planning tool instead of a once-a-year compliance exercise. Regular stress testing can improve decisions around concentrations, growth, underwriting, earnings, and capital by giving teams a clearer view of how the portfolio behaves under pressure.

Why choose Abrigo for portfolio risk stress testing?

Abrigo helps banks and credit unions move beyond surface-level stress testing by connecting portfolio-level results to loan-level behavior, CECL assumptions, and practical management decisions.

Get more out of stress testing with less effort. Abrigo can help.

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A methodical & defensible approach to pricing loans

Loan pricing models shape portfolio composition, capital deployment, and an institution’s ability to absorb stress in changing economic conditions. Loan origination systems that offer loan pricing can streamline decisions.

This article covers these key topics:

Benefits of loan pricing models
Considerations for using loan pricing in an LOS
Evaluating, reviewing, and adjusting pricing

This blog was updated from a 2022 version to include more details and newer information.

What is a loan pricing model?

A loan pricing model is a structured framework used to determine the appropriate interest rate and fees for a credit facility based on cost of funds, operating expenses, expected credit losses, capital allocation, and target return metrics such as return on equity (ROE) or risk-adjusted return on capital (RAROC).

Confidently set risk-based pricing for desired returns

Loan pricing software

For bank and credit union leaders, this definition matters because pricing decisions influence more than a single transaction. They shape portfolio composition, capital deployment, and the institution’s ability to absorb stress in changing economic conditions.

Why not price loans on 'gut feel'?

Financial institutions that structure and optimize pricing for loans are better positioned to make sure they are adequately compensated for the risk they assume. Instead of pricing loans based on a “gut feel” or matching competitors’ rates, institutions that utilize a loan pricing model during origination incorporate a more methodical approach. This disciplined approach incorporates cost, credit risk, capital usage, and profitability targets. Banks and credit unions considering a loan origination system (LOS) from Abrigo or another provider should assess their ability to incorporate a loan pricing model to accurately set and document loan prices.

Benefits of loan pricing

Match terms to borrowers

A methodical approach to pricing loans can help ensure the best loan and terms are matched to the borrower so that the financial institution makes the sale and keeps the customer or member.

Meet institutional objectives

Loan pricing models, sometimes referred to as loan profitability models, allow banks and credit unions to set prices that are consistent with other institutional objectives, such as portfolio composition goals, return on equity targets, and capital optimization strategies.

Interest rates on loans reflect more than competitive dynamics. As the Federal Reserve Bank of Minneapolis explains in What Drives Consumer Interest Rates?, loan pricing reflects funding costs, operating expenses, credit risk compensation, and required return expectations. While the article focuses on consumer credit, the same core components apply to commercial loan pricing frameworks.

Improve yield

Institutions that introduce more structured pricing methodologies often discover incremental improvements in yield. In talking with banks and credit unions, Abrigo has learned that these institutions estimated conservatively that they could pick up an additional 5 to 10 basis points in interest with more structured pricing methodologies in place. Even modest basis point gains, when applied across a portfolio, can materially affect earnings and capital flexibility.

Optimize capital

Optimizing capital through disciplined pricing provides institutions the flexibility to deploy capital into new products, new markets, or strategic growth initiatives while maintaining appropriate risk-adjusted returns.

Ensure fair lending

Another benefit of having a loan-pricing policy or model is that it provides the institution with defensible measures for justifying pricing changes and for avoiding charges of discriminatory pricing, which some lenders have faced in recent years. Officials with the banking regulatory agencies have outlined best practices for assessing fair lending risk, and one of those practices is for institutions to document pricing and other underwriting criteria, including exceptions.

Considerations of loan-pricing models

What are some considerations related to loan-pricing models for an institution's loan origination system (LOS)?

Pricing should reflect expected cash flows

At a basic level, the model should help institutions evaluate the economics and risks of the loans they are making. But loan pricing involves more than simply setting an interest rate. In practice, it requires understanding how a loan generates income, what the loan costs to produce, and what risks it adds to the balance sheet.

Most loan pricing models begin with a straightforward framework: a loan has revenue and expenses. Revenue comes from the interest charged on the loan and any associated fees. The costs or expenses of the loan include:

Cost of funds
Operating costs to make the loan
Allocations for credit risk

However, lenders must also understand how the loan will actually behave over time. For example, a line of credit may have a limit, but the amount of interest earned depends on how much the borrower actually uses. Some loan categories may have utilization rates around 40%, while others may be closer to 85%. Those differences can significantly affect the income a loan produces.

For that reason, a useful model will incorporate how cash flows behave over the life of the loan. The terms of the loan are less important than the timing and amount of expected payments.

Pricing loans means pricing risk

Another critical consideration for loan pricing models is that pricing is fundamentally about pricing risk. When lenders add a credit spread to a base rate, that spread often reflects several different risks embedded in the loan. These include:

Credit risk. The most obvious example of risk embedded in loan pricing is the risk that some loans will not perform as expected, and some portion of principal and interest may not be repaid. Pricing models, therefore, include assumptions about expected losses. Indeed, expected credit risk is a primary driver of loan pricing decisions and is embedded into interest rate setting at the loan level, according to Federal Reserve research.

Prepayments. Loan models must also account for other uncertain cash flows. Borrowers may repay loans early, refinance, or otherwise change the expected payment schedule. These prepayments affect the income that the loan ultimately produces.

Interest rate risk. The cost of funding a loan can change as market rates move. Because of this, evaluating a new loan based solely on the institution’s current cost of funds can be misleading. Some pricing approaches instead look to market funding curves to estimate how funding costs may change in the future.

Taken together, these factors illustrate why pricing loans is not simply about rate and term. Risks can vary so much across borrowers and loan types that setting the loan’s risk premium for default can be one of the most difficult aspects of loan pricing.

Loan pricing models help price the risks and can take into account the financial institution's interest rate forecasts, its appetite for risk, required collateral, loan terms, and other factors.

Using models to evaluate lending decisions

Loan-pricing models also provide objective measures to evaluate lending decisions. Modern systems commonly rely on several approaches. One method compares the loan with an alternative investment, asking whether the institution would earn more by making the loan or by leaving the funds in the investment portfolio. Another common approach is an income method that calculates expected returns, such as return on assets or return on equity.

Importantly, a loan-pricing model does not tell a lender exactly what rate to charge. Market conditions, competitive pressures, and customer or member relationships still influence the final pricing decision. The model provides a clearer view of the relative value and risk of different loans, helping institutions make better-informed lending decisions.

Reviewing and adjusting loan pricing

Loan pricing models should also make it easier for financial institutions to take into account changing environments and adjust rates as needed, something regulators have encouraged.

“Management should continuously evaluate and adjust rates in response to changes in costs, competitive factors, or risks of a particular product type,” according to James L. Adams, supervising examiner at the Federal Reserve Bank of Philadelphia.

In a newsletter for community banks, Adams cited the Fed's Commercial Bank Examination Manual, which says, “Periodic review allows rates to be adjusted in response to changes in costs, competitive factors, or risks of a particular type of extension of credit.”

Governance, documentation, and model discipline

Regulatory guidance, such as Federal Reserve SR 11-7 and the OCC’s Model Risk Management Handbook, emphasizes the need for model governance and performance monitoring. Loan pricing models in a loan origination system should include:

Documented assumptions
Defined profitability targets
Clear override tracking
Periodic review of pricing performance

Abrigo’s Loan Pricing has automation that supports defensible documentation and reporting for financial institutions with lean staffing.

Loan origination software and pricing integration

Other benefits of integrating loan pricing models into systems like Abrigo LOS are that institutions can:

Automatically incorporate risk ratings and collateral inputs
Compare multiple pricing scenarios
Solve for a target interest rate or target profitability metric
Track and archive priced loans
Generate reporting filtered by borrower, risk rating, responsible officer, or date

Integration with core systems can also allow cost-of-funds assumptions to be updated regularly based on benchmark indices.

Risk-based loan pricing allows financial institutions to offer competitive pricing on the best loans across borrower groups while either rejecting or pricing at a premium the loans that pose the highest risks. Market conditions, competitive pressures, and customer or member relationships still influence the final pricing decision. But the model provides a clearer view of the relative value and risk of different loans, helping institutions make better-informed lending decisions.

Providing systematic loan pricing for new loan origination and for annual reviews helps financial institutions calculate a defensible and consistent price. Abrigo’s loan pricing software integrates with its loan origination software to transform pricing from a bottleneck to a quick exercise. Banks and credit unions can intelligently set prices based on risk and profitability targets, configuring the model to fit their pricing sophistication, from simple to complex as needed.

FAQs

What is a loan pricing model in loan origination software?

A loan pricing model is a structured framework for setting loan rates and fees based on cost of funds, operating expenses, expected credit losses, capital allocation, and target returns. In loan origination software, it helps banks and credit unions make pricing decisions that are more consistent, risk-based, and defensible

Why do banks and credit unions use loan pricing software?

Banks and credit unions use loan pricing software to align loan pricing with risk, profitability, portfolio goals, and capital strategy. It also helps institutions match terms to borrowers more effectively and improve pricing discipline during origination.

What should institutions look for in loan pricing software?

Loan pricing software should reflect expected cash flows, incorporate credit risk and interest rate risk, support scenario comparisons, and help solve for target rates or profitability metrics. Strong systems also track priced loans and generate reporting by borrower, risk rating, officer, or date.

How does loan pricing software support governance and fair lending?

Loan pricing software supports governance and fair lending by documenting assumptions, defining profitability targets, tracking overrides, and preserving pricing records. That creates a more consistent and defensible process for explaining pricing decisions and exceptions.

Why integrate loan pricing into loan origination software?

Integrating loan pricing into loan origination software makes pricing faster, more consistent, and easier to use within the lending workflow. It can automatically pull in risk ratings and collateral inputs, compare scenarios, and reduce manual steps for lenders.

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Tax season fraud

Tax season always brings opportunity. Unfortunately, it also brings urgency, emotion, and a spike in tax season fraud.

A recent case shows just how devastating these scams can be. A 78-year-old Michigan retiree lost nearly $1 million after fraudsters posing as IRS agents convinced him he was part of a criminal investigation. The callers told him his Social Security number had been tied to drug trafficking and money laundering and that his assets could be seized. Over time, they persuaded him to liquidate investments and move funds into accounts they controlled, all under the pretense of “protecting” his money.

This was not a single impulsive transaction. It was a sustained social engineering effort built on fear, authority, and isolation. It is also a reminder that tax season fraud is not only a consumer awareness issue. It is a financial crime risk event that directly affects financial institutions.

This article covers these key topics:

The scale of tax season fraud
Who fraudsters target during tax season
Common tax season fraud tactics
The role of FIs in tax season fraud prevention

The scale and sophistication of tax season fraud

The IRS reports billions of dollars lost each year to tax-related scams and identity theft. Impersonation schemes remain one of the most common tactics. As in the Michigan case, criminals often claim to represent the IRS and threaten arrest, license suspension, or asset seizure if immediate payment is not made.

Tax season fraud works because it taps into predictable human reactions:

Fear of legal consequences
Trust in government authority
Urgency that pushes people to act before they think

Fraudsters understand this psychology, and financial institutions need to understand it as well.

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Who fraudsters target during tax season

Tax season fraud does not discriminate. However, certain groups are targeted more frequently because of financial position, life stage, or perceived vulnerability.

Older adults

Older adults remain a primary target, particularly in impersonation scams. Many retirees have accumulated savings across deposit, brokerage, and retirement accounts. That makes them attractive to criminals looking for larger balances.

Equally important, some older individuals may be more inclined to trust a caller who claims to represent the IRS, the Treasury Department, or law enforcement. Fraudsters use official language, badge numbers, and fabricated case IDs to reinforce credibility. They often spoof phone numbers to make the call appear legitimate.

For banks and credit unions, behavior can be as important as dollar amount. Warning signs may include:

Sudden liquidation of investment or retirement accounts
Large wire transfers after repeated phone calls
Customers expressing fear of arrest or asset seizure
Reluctance to discuss the purpose of a withdrawal

Frontline staff trained to recognize elder financial exploitation and fraud tactics in general can stop tax season fraud before funds leave the institution.

First-time filers and young adults

Young adults and first-time filers often lack experience with IRS processes. They may assume that email, text, or phone outreach is regular. Fraudsters rely on that uncertainty.

Many scams aimed at this group focus on refunds. Messages that claim a refund is delayed or requires verification can feel believable. When someone is expecting money, urgency does not seem suspicious.

Younger consumers may also be more likely to click links sent via text or social media. That increases exposure to credential harvesting and identity theft tied to tax season fraud.

From an institutional perspective, this activity can look different:

Multiple failed login attempts followed by password resets
New accounts opened to receive direct deposit refunds
Rapid outbound transfers after a refund posts

Connecting these signals across channels is essential.

Immigrants and non-native English speakers

Fraudsters frequently tailor tax season fraud narratives to immigrants and non-native English speakers. Threats may include deportation, visa revocation, or immediate legal action.

These scams are heavily intimidation-based. Victims may be hesitant to question someone claiming to be a government official. Language barriers can make it harder to verify information or seek help.

Financial institutions serving diverse communities should consider:

Offering fraud education materials in multiple languages
Training staff to recognize fear-based narratives tied to immigration status
Establishing clear escalation procedures when a customer appears distressed

Across all groups, transaction context matters. Significant or unusual withdrawals tied to urgent stories about government investigations should raise red flags. Empowering employees to pause a transaction and escalate concerns can significantly reduce losses.

Common tax season fraud tactics

While tactics evolve, several schemes appear year after year during filing season.

IRS impersonation scams

IRS impersonation remains one of the most damaging forms of tax season fraud. Criminals claim to be IRS agents and demand immediate payment for alleged back taxes, penalties, or criminal investigations.

Common elements include:

Threats of arrest, license suspension, or asset seizure
Demands for payment via wire transfer, cryptocurrency, or gift cards
Instructions to move funds into so-called secure accounts
Pressure to stay on the phone while completing transactions

The IRS generally initiates contact by mail. It does not demand immediate payment over the phone or request gift cards or cryptocurrency.

Financial institutions should watch for customers who appear coached, reference badge numbers or case IDs, or express fear of immediate legal consequences. Those behavioral cues often accompany tax season fraud.

Phishing emails and text messages

Phishing campaigns increase sharply during filing season. Messages commonly claim:

“Your refund is ready.”
“Unusual activity detected.”
“Verify your tax information.”

Victims are directed to websites that closely resemble IRS pages. Once credentials and Social Security numbers are entered, criminals can file fraudulent returns, redirect refunds, or attempt to take over accounts.

Downstream effects may include:

Changes to direct deposit instructions
New external account linkages
Suspicious ACH activity after credential resets

Layered authentication and anomaly detection help reduce exposure to tax season fraud initiated through phishing.

Refund theft and identity fraud

In refund theft schemes, criminals file fraudulent tax returns using stolen Social Security numbers before the legitimate taxpayer files. Victims often discover the problem only when their return is rejected.

Filing early may reduce the risk, but identity theft frequently begins months earlier through unrelated data breaches or phishing incidents. Continuous monitoring remains critical.

Institutions should pay attention to:

Newly opened accounts receiving tax refunds
Immediate withdrawal of refund funds
Rapid transfers to external accounts

These patterns can signal mule activity connected to tax season fraud.

Fraudulent tax preparers and online “tax hacks.”

Some tax season fraud originates with individuals posing as legitimate tax preparers. Red flags include:

Promises of substantial refunds
Fees based on a percentage of the refund
Refusal to sign the return as the preparer

Social media has also amplified fabricated refund strategies. Advice that encourages falsifying income or inventing credits not only creates fraud exposure but also serious compliance risk for the taxpayer.

These schemes can result in financial loss, penalties, audits, and long-term identity misuse.

Financial institutions can reinforce consumer protection by encouraging customers to verify preparer credentials such as CPA, EA, or attorney designations, sharing IRS guidance on legitimate filing procedures, and monitoring for unusual refund activity.

How consumers can reduce exposure to tax season fraud

Preventing tax season fraud requires steady, practical vigilance. Consumers should protect personal information year-round, shred tax documents before discarding them, and store prior-year returns securely in both physical and digital formats.

Strengthening digital security is also essential in combating fraud and identity theft. Use strong, unique passwords for financial and tax accounts and enable multi-factor authentication. Avoid filing taxes on public Wi-Fi.

Instead of reacting immediately to unexpected tax communication, slow down and verify:

Go directly to IRS.gov rather than clicking links
Contact your tax preparer using a trusted phone number
Independently confirm any request for payment or account changes

Monitor accounts regularly. Review bank, brokerage, and credit card statements. Early detection can significantly limit loss.

The role of financial institutions in preventing tax season fraud

Tax season fraud affects both fraud and anti-money laundering (AML) teams and frontline staff. Institutions should expect increased alert volume and unusual transaction activity during filing season. Practical steps include:

Monitoring for large or atypical withdrawals tied to government investigation narratives
Identifying rapid liquidation of investment accounts combined with outbound wires
Training frontline employees to recognize fear-based behavioral cues
Establishing clear escalation paths when elder financial exploitation is suspected

Cross-channel visibility is critical. Fraudsters often coach victims on precisely what to say. Employees who feel supported in pausing transactions and escalating concerns can prevent significant losses.

Proactive customer education also matters. Clear communication about tax season fraud reinforces trust and demonstrates a commitment to protecting the community.

Preparedness, not panic

Tax season will continue to attract criminal activity. The pressure of tax obligations and the anticipation of refunds create an environment where social engineering can thrive. Awareness, sound controls, behavioral monitoring, and consistent education materially reduce exposure to tax season fraud.

For consumers, skepticism and verification are robust safeguards. For financial institutions, vigilance and timely intervention make a measurable difference. Preparedness, not panic, remains the most effective defense.

FAQs

What is tax season fraud?

Tax season fraud is financial fraud that exploits tax filing deadlines, refund expectations, and fear of government enforcement to steal money or personal information. Common schemes include IRS impersonation, phishing, refund theft, and fraudulent tax preparers.

Who is most often targeted by tax season fraud?

Tax season fraud can affect anyone, but older adults, first-time filers, young adults, immigrants, and non-native English speakers are often targeted more aggressively. Fraudsters tailor their approach to fear, inexperience, or language barriers to make scams feel urgent and believable.

What are the most common tax season fraud tactics?

The most common tax season fraud tactics are IRS impersonation calls, phishing emails or texts, refund theft using stolen identities, and scams involving fake tax preparers or online “tax hacks.” Many of these schemes use urgency, threats, or fake refund messages to pressure victims into acting quickly.

How can consumers protect themselves from tax season fraud?

Consumers can reduce tax season fraud risk by using strong passwords and multi-factor authentication, avoiding public Wi-Fi for tax filing, and verifying unexpected tax messages directly through trusted sources. Monitoring bank, brokerage, and credit card accounts regularly also helps catch fraud earlier.

How can financial institutions help prevent tax season fraud?

Financial institutions can help prevent tax season fraud by monitoring for unusual withdrawals, rapid liquidation followed by outbound wires, suspicious refund activity, and fear-based customer behavior. Training frontline staff, improving cross-channel visibility, and establishing clear escalation paths can help stop fraud before funds leave the institution.

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2026 Nacha Rule changes: What financial institutions should know

ACH payments continue to grow, and so does the attention around them. As volumes increase and fraud schemes evolve, the 2026 Nacha Rule changes in risk management are raising expectations for how financial institutions monitor activity, use transaction data, and document risk management practices.

This article covers these key topics:

Why the 2026 Nacha Rule changes matter
Understanding monitoring expectations
Documentation and governance expectations
Practical steps to take now

Why the 2026 Nacha Rule changes matter

Industry data shows ACH transactions rising year over year, with Network payment volume increasing nearly 4.9% from 2024 to 35.2 billion payments in 2025. Attempted fraud is growing even faster. At the same time, the mix of credits and debits is shifting. While transaction counts are becoming more balanced, credits now account for roughly two-thirds of the dollar volume moving through the Network. That shift alone changes risk exposure.

Larger dollar credit transactions create different fraud dynamics than what traditional debit-focused monitoring programs were built around. Add in authorized push payment scams and transactions authorized under pretenses, and it becomes clear why the 2026 Nacha Rule changes expand expectations.

The Nacha Rule changes acknowledge this reality. They emphasize that monitoring should be risk-based, adaptable, and applied across both credits and debits, not narrowly focused on one side of the ledger.

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Monitoring expectations

Historically, some institutions focused more on debit monitoring due to unauthorized return thresholds. Under the 2026 Nacha Rule changes, that limited approach will not be sufficient.

Financial Institutions are expected to apply risk-based monitoring to both ACH credits and debits, including identifying transactions that may be unauthorized or authorized under pretenses.

Authorized under pretenses, transactions require different detection strategies. In these scenarios, a customer is manipulated into initiating a payment. The transaction appears authorized on its face, but the authorization was obtained through deception. Traditional unauthorized return metrics alone will not capture these events.

Institutions should evaluate whether their current systems, alert thresholds, and review processes account for behavioral red flags, unusual transaction patterns, and changes in customer activity that may signal elevated risk.

Standardized Company Entry Descriptions

Another critical component of the Nacha Rule changes involves mandatory Company Entry Descriptions, such as PAYROLL and PURCHASE.

At first glance, this may appear minor. In practice, it supports more transparent communication across institutions and improves downstream monitoring. Standardization reduces ambiguity, enhances data quality, and supports more effective analytics.

The Nacha Rule changes recognize that better data supports better fraud detection. When descriptions are consistent and controlled, institutions are better positioned to identify anomalies and emerging risk patterns.

Governance over how these fields are assigned, validated, and monitored will become increasingly important.

Documentation and governance expectations

Detection alone is no longer enough. The Nacha Rule changes elevate documentation from a supporting function to a central component of compliance.

Examiners will expect institutions to demonstrate how ACH risks are assessed, how monitoring rules are developed and tuned, and how alerts are reviewed and escalated.

Institutions should be prepared to articulate clearly:

How ACH risk assessments are conducted
How monitoring coverage addresses both credits and debits
How alert volumes are reviewed and thresholds adjusted
How cases are documented and escalated
How staff are trained on emerging fraud typologies

Strong governance does not require excessive complexity. It requires clarity, consistency, and the ability to evidence your approach.

Who should be paying attention to these changes

The Nacha Rule changes apply broadly across the ACH ecosystem, including:

Originating Depository Financial Institutions
Receiving Depository Financial Institutions
Originators
Third-Party Senders and Third-Party Service Providers

Even institutions with lower ACH volumes are expected to maintain oversight and controls appropriate to their role. Volume alone does not eliminate risk. Governance, monitoring, and documentation should align with the institution’s size, complexity, and risk profile.

Practical steps to prepare for the NACHA rule changes

Financial Institutions can begin preparing now by taking practical steps that strengthen both compliance and fraud resilience.

Conduct or refresh an ACH risk assessment
Review monitoring coverage for both credits and debits
Evaluate alert volumes, thresholds, and case management workflows
Update policies and procedures to reflect current fraud typologies
Confirm internal controls over Company Entry Descriptions
Provide targeted training to operations, fraud, and compliance teams

Institutions that act early will be better positioned for exams, audits, and evolving fraud schemes. More importantly, they will build a stronger and more resilient ACH program.

A balanced approach to ACH risk management

The 2026 Nacha Rule changes raise expectations, but they also reinforce flexibility. Nacha continues to emphasize a risk-based approach tailored to each institution.

These changes underscore that financial institutions must understand their ACH activity, monitor it appropriately, and document how they manage risks. Those who approach the Nacha Rule changes strategically rather than reactively will strengthen both their compliance posture and their fraud resilience.

How Abrigo can help

Preparing for the 2026 Nacha Rule changes does not need to be manual or fragmented. Abrigo supports banks and credit unions with fraud detection technology, ACH risk assessments, and Advisory Services designed to strengthen monitoring frameworks and maintain examiner-ready documentation.

Our approach respects the complexity of your work. We partner with financial institutions to enhance existing programs, align monitoring with evolving fraud risks, and support sustainable, risk-based compliance.

The regulatory landscape will continue to evolve. A proactive approach today will position your institution to manage ACH risk with confidence tomorrow.

FAQs

What are the 2026 Nacha Rule changes?

The 2026 Nacha Rule changes raise expectations for ACH risk management by requiring financial institutions to apply risk-based monitoring across both ACH credits and debits. They also place greater emphasis on documenting how ACH risks are assessed, monitored, reviewed, and escalated.

Why do the 2026 Nacha Rule changes matter?

The changes matter because ACH volumes are growing, fraud is evolving, and larger-dollar credit transactions create different risks than many debit-focused monitoring programs were built to detect. They also reflect the need to identify transactions that may be unauthorized or authorized under pretenses.

What do the new monitoring expectations require?

Financial institutions are expected to monitor both ACH credits and debits using a risk-based approach tailored to their activity and risk profile. Monitoring should account for behavioral red flags, unusual transaction patterns, and customer activity changes that may indicate elevated fraud risk.

What is changing with Company Entry Descriptions?

The rules introduce mandatory standardized Company Entry Descriptions such as PAYROLL and PURCHASE. Standardization improves transparency, reduces ambiguity, supports better analytics, and helps institutions detect anomalies more effectively.

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Financial institutions should refresh their ACH risk assessments, review monitoring coverage for credits and debits, evaluate alert thresholds and case workflows, update policies for current fraud typologies, and strengthen controls over Company Entry Descriptions. Targeted training for operations, fraud, and compliance teams is also important.

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The basics of stablecoin for credit unions

Stablecoins are a category of digital assets designed to keep a steady value, typically pegged to a fiat currency such as the U.S. dollar. By minimizing the price volatility often associated with other cryptocurrencies, stablecoins aim to offer a digital payment medium that blends the efficiency of blockchain technology with the dependability of traditional money.

This article covers these key topics:

What stablecoins are and why they matter
Stablecoins and credit union regulation frameworks
Risk considerations for credit unions
Operational opportunities and action steps

What stablecoins are and why they matter for credit unions

Stablecoins come in several forms:

Fiat-backed: Backed 1:1 by cash or highly liquid assets like U.S. Treasuries. This is the most common model and focuses on simplicity and stability. Reserves are typically held in regulated financial institutions. Transparency and regular audits are key components of trust in this model, which is considered lower risk but relies on issuer compliance and reserve verification. Examples: USDC, USDT (Tether), TrueUSD
Crypto-backed: Collateralized by other cryptocurrencies and often over-collateralized to account for price swings. Collateral is held in smart contracts rather than traditional banks. Examples: DAI, sUSD
Algorithmic: These stablecoins use code, not reserves, to maintain price stability. Algorithms automatically expand or contract token supply based on market conditions. While the goal is price stability, this model remains largely experimental. Examples: Frax (partially algorithmic), TerraUSD (defunct)

Other models to be aware of:

Commodity-backed: Pegged to assets like gold (e.g., Pax Gold)
Hybrid models: Combine multiple elements from the categories above to balance stability and decentralization

What makes stablecoins relevant to credit unions is their potential to enable near-instant payments, reduce transaction costs, and provide 24/7 settlement, enhancing member services for remittances, merchant payments, payroll, and more.

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Stablecoins and credit union regulation frameworks

An important development for credit unions is NCUA’s proposed rule under the Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act). On February 11, 2026, the NCUA issued a Notice of Proposed Rulemaking to create a framework for credit union-related stablecoin issuers known as “permitted payment stablecoin issuers” (PPSIs). Credit unions may issue stablecoins only through an NCUA-licensed subsidiary, rather than directly as a product of the credit union.

Key aspects of the proposal include:

Credit unions cannot issue stablecoins directly; issuance must occur through a licensed entity approved by the NCUA.
The structure is intended to fit within credit union cooperative models—for example, joint ownership or consortium entities.
NCUA aims to finalize rules by the statutory deadline tied to the GENIUS Act implementation timeline.

In addition, NCUA’s Financial Technology and Digital Assets resource page confirms that digital assets—including stablecoins—are being studied as part of broader fintech and blockchain developments, and that NCUA remains committed to balancing innovation with safety and soundness.

Risk considerations for credit unions

While stablecoins offer potential benefits, they also introduce specific risks that credit unions must manage:

1. Regulatory & compliance risk

Stablecoins are still coming into defined supervisory territory, but the NCUA proposal signals that regulators expect strong oversight of any issuance. Credit unions should also remember that any stablecoin holdings or transactions do not carry federal share insurance, and members should be informed of this distinction.

2. Liquidity and operational risk

Stablecoins can be redeemed rapidly—a positive for members, but a potential strain on liquidity if redemption pressure spikes unexpectedly. Institutions need to model stress scenarios that include high-volume stablecoin redemptions.

3. Third-party risk

If credit unions offer stablecoin access through third-party providers or fintech partners, they must implement robust due diligence, contract governance, and ongoing oversight. NCUA guidance on third-party relationships for digital assets underscores the need for strong risk measurement and due diligence.

4. AML and fraud detection

Blockchain transactions and stablecoin flows can frustrate traditional AML monitoring systems. Compliance programs should be assessed and updated to detect and report suspicious activity effectively.

Operational opportunities and action steps

Stablecoins may not be right for every institution right now, but there are certainly benefits to engaging in the stablecoin space. If your credit union wants to bolster member payment services, faster, low-cost payment rails could enhance member satisfaction, especially for remittances and P2P transfers. Joint initiatives with trusted partners can enable credit unions to offer digital asset access while appropriately managing risk.

To safeguard member interests and prepare for digital-asset-related developments:

Update enterprise risk assessments to include stablecoin exposure and third-party digital asset arrangements.
Engage the board with stablecoin education and governance expectations.
Strengthen AML and fraud monitoring programs to cover blockchain transaction typologies.
Monitor regulatory developments, including the GENIUS Act implementation and forthcoming NCUA guidance.
Assess fintech partnerships rigorously with enhanced due diligence and contractual obligations.

Stablecoins are moving from theoretical to regulated reality. For credit unions, the path forward will likely be measured and member-centric, prioritizing safety and soundness to maintain member trust.

FAQs

What are stablecoins?

Stablecoins are digital assets designed to maintain a stable value, usually by being pegged to a fiat currency such as the U.S. dollar. For credit unions, they matter because they can support faster payments, lower transaction costs, and 24/7 settlement.

Why should credit unions pay attention to stablecoins?

Credit unions should pay attention to stablecoins because they may expand member payment options for remittances, merchant payments, payroll, and peer-to-peer transfers. They also introduce new operational, compliance, and third-party oversight considerations that require active governance.

How should a credit union prepare for stablecoin activity?

A credit union should update enterprise risk assessments, strengthen AML and fraud monitoring, educate the board, monitor NCUA and GENIUS Act developments, and apply enhanced due diligence to fintech partners. A measured, member-centric approach helps balance innovation with safety and soundness.

How are stablecoins regulated for credit unions?

Stablecoins are moving into a more defined regulatory framework for credit unions. The article notes that under NCUA’s proposed rule tied to the GENIUS Act, credit unions would issue stablecoins only through an NCUA-licensed subsidiary rather than directly.

What risks do stablecoins create for credit unions?

Stablecoins create regulatory, liquidity, operational, third-party, AML, and fraud risk for credit unions. Institutions need to consider rapid redemption pressure, partner oversight, updated suspicious activity monitoring, and the fact that stablecoin holdings or transactions do not carry federal share insurance.

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How experts in credit union valuation services assist M&A

Consulting firms specializing in credit union valuation services bring specialized expertise in financial modeling and valuation techniques ro help institutions navigate the maze of uncertainty in merger discussions.

This article covers these key topics:

Determining the fair value of CU assets and liabilities is complex

The landscape of credit unions is constantly in flux, with consolidation trends continuing to accelerate. Mergers and acquisitions offer potential for growth but also bring complexities, especially in determining the fair value of assets and liabilities.

For credit union CEOs and CFOs evaluating merger opportunities, purchase accounting and fair value measurement under GAAP have become critical strategic considerations rather than technical afterthoughts. Consulting firms specializing in credit union valuation services can be crucial partners as institutions navigate the maze of uncertainty in merger discussions.

It’s important to understand the advantages of fair value assistance in mergers and to seek a third-party specialist with the qualities outlined below. Doing so can help credit unions choose the best partner possible for credit union merger accounting and enterprise value analysis in the evolving accounting and regulatory environment.

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The advantages of fair value expertise

The following benefits of using a third-party fair value specialist can help credit unions weigh their options and understand what to look for in a partner:

Accuracy and transparency. Firms specializing in fair value bring specialized expertise in financial modeling and valuation techniques. Their work guarantees that valuation during the merger process is accurate, transparent, and adheres to accounting and regulatory standards. These qualities will help avoid overvaluation or undervaluation during the credit union fair value accounting process and support defensible conclusions under increased audit and regulatory scrutiny.

Objectivity. Fair value specialists provide independent, objective opinions. This objectivity is especially critical when emotions run high during credit union mergers, providing a neutral baseline for negotiations.

Risk mitigation. Identifying and quantifying potential economic risks associated with financial assets and liabilities becomes much easier with a fair value expert on your team. This helps mitigate financial risks and ensure the long-term success of the merged credit union.

Regulatory and GAAP alignment. Recent accounting developments reinforce the importance of disciplined application of purchase accounting in credit union mergers. Issued by the Financial Accounting Standards Board, ASU 2025-08 amends guidance under ASC 326 and directly affects how acquired financial assets are accounted for in business combinations under ASC 805.

The update reinforces the need for:

Consistency in purchase accounting application under ASC 805
Enhanced transparency in business combination reporting
Robust support for fair value measurement methodologies under GAAP

ASU 2025-08 (Topic 326) revised accounting for purchased-credit-deteriorated, or PCD, loans and eliminated the “double count” of the credit mark and CECL provision (while reducing the amount of accretable discount).

Because PCD treatment directly affects the purchase price allocation, a qualified specialist helps ensure merger-related accounting aligns with current GAAP and evolving disclosure expectations. ASU 2025-08 applies to fiscal years beginning after Dec. 15, 2026, but early adoption is permitted.

Understanding enterprise value in credit union mergers

Why is enterprise value important? As mutually owned entities, credit unions do not exchange financial consideration in a merger transaction; hence, there is no “purchase price.” The “purchase price” is the cornerstone of determining resulting goodwill (or bargain purchase gain). Enterprise value, or the fair value of the acquired credit union, becomes the imputed “purchase price” of the transaction for purposes of business combination accounting under ASC 805 and acts as the baseline in the purchase price allocation exercise for goodwill determination.

Enterprise value considers more than just the book value of a credit union's assets and liabilities. It incorporates the entity's earning potential, market position, intangible assets, and prospects. This results in a more comprehensive and realistic valuation.

A thorough understanding of the to-be-acquired credit union’s enterprise value guides credit unions in making well-informed merger decisions. It clarifies the combined entity's pro forma capitalization and value proposition, ensuring the merger aligns with strategic goals.

How fair value firms provide support in credit union mergers

A fair value firm will provide the following support measures during the credit union merger:

Due diligence support. Fair value firms review the target credit union's financial statements, loan portfolios, deposit relationships, and other vital metrics to support a defensible fair value measurement under GAAP. This in-depth due diligence uncovers critical information and potential red flags and clearly indicates fair value before entering into a transaction. In a dynamic rate environment, this includes disciplined credit mark analysis, rate sensitivity modeling, and core deposit intangible studies.

Negotiation power. Fair value assessments can be the foundation for strong negotiation positions. Executives can enter credit union merger accounting discussions with accurate data and justifications for value, potentially leading to more favorable terms.

Post-merger integration. Fair value specialists also support a smooth integration process at closing by assisting with purchase price allocation, goodwill or bargain purchase gain calculations, and documentation required under ASC 805. Post-closing, fair value firms can assist with ensuring appropriate accounting entries and can support the ongoing accretion, amortization, and income recognition required under GAAP. Income recognition software can also streamline Day 2 accounting, taking in the purchase marks, handles both base and accelerated accretion, and ties back to CECL where needed. Everything is transparent and auditable at the loan level.

Choosing the right fair value firm

Once you have made the decision to use a fair value firm to help facilitate your credit union merger, look for the following qualities as green flags for selecting assistance:

Experience: Find fair value firms with a track record in credit union mergers. Their sector-specific knowledge is invaluable.
Credentials: Ensure the firm's professionals possess the necessary certifications and credentials in valuation.
Communication: Prioritize a firm with exceptional communication skills. They'll need to explain complex valuation concepts clearly for effective decision-making.
Comprehensive: The firm should understand the full impact of a transaction on financial reporting. Valuation, CECL, and income recognition (Day 2 accounting) are interconnected. Solving one piece of the puzzle without the whole picture can confuse and limit success. This integrated perspective is increasingly important as standards such as ASU 2025-08 shape disclosure, measurement consistency, and post-transaction reporting expectations.

Fair value analysis, CECL alignment, and day two income recognition operate as an interconnected framework within credit union merger accounting in the current regulatory environment. Partnering with a valuation firm that understands business combination accounting in its entirety helps credit union leaders make informed strategic decisions. It ensures accurate valuations and smoother transitions.

By incorporating enterprise value analysis, credit unions gain a holistic understanding of their potential partners, maximizing the chances of a successful merger.

FAQs

What is fair value in credit union merger accounting?

Fair value in credit union merger accounting is the estimated value of acquired assets, liabilities, and the overall institution for business combination accounting under GAAP. It creates the baseline for purchase price allocation, goodwill or bargain purchase gain analysis, and Day 1 merger accounting.

Why does fair value matter in a credit union merger?

Fair value matters because credit union mergers do not involve a traditional purchase price, so enterprise value becomes the imputed price used for accounting purposes. A strong fair value analysis helps leaders evaluate the transaction more accurately and supports better strategic, financial, and reporting decisions.

Why should a credit union use a fair value partner during a merger?

A fair value partner brings specialized valuation expertise, objectivity, and support for defensible conclusions under GAAP and audit scrutiny. That helps credit unions improve accuracy, quantify risk, and reduce the chance of overvaluation, undervaluation, or incomplete merger accounting.

What does a fair value firm do in a credit union merger?

A fair value firm supports due diligence, enterprise value analysis, purchase price allocation, goodwill or bargain purchase gain calculations, and Day 2 accounting needs such as accretion, amortization, and income recognition. It also helps institutions document assumptions and measurements in a way that is transparent and auditable.

What should credit unions look for in a fair value partner?

Credit unions should look for experience in credit union mergers, strong valuation credentials, clear communication, and a full understanding of how valuation, CECL, income recognition, and business combination accounting work together. A partner with that integrated perspective is better equipped to support merger accounting from due diligence through post-close reporting.

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