Madison credit union to take an estimated $13M charge related to federal loan fraud scheme

One of the largest credit unions in Wisconsin has been affected by an alleged fraud scheme involving fake federal loans.

UW Credit Union says it has taken an estimated $13.1 million "loss contingency" charge against earnings. But the Madison-based credit union may not see such a large loss on an investment in what it thought were safe loans backed by the U.S. Department of Agriculture.

"At this time, there continues to be considerable uncertainty regarding the final loss, if any, which may result in connection with this matter," Paul Kundert, president and chief executive of UW Credit Union, said in a statement.

The credit union will still make a profit this year even with the potential loss charge, the Milwaukee Journal Sentinel ( ) reported. UW Credit Union in the fourth-largest credit union in Wisconsin. It has almost $1.9 billion in assets.

UW Credit Union was the second financial institution in Wisconsin to report it had invested in the USDA loans through Pennant Management Inc. Blackhawk Bancorp Inc. of Beloit said in October that it lost nearly $1.6 million in the fraud scheme, causing the bank to post a third-quarter loss.

Pennant, based in Milwaukee, obtains loans from the USDA and places them in funds for investments can be made. Many financial institutions consider the loans to be a low-risk investment because of the USDA backing.

In a federal lawsuit, Pennant claims the fake loans were originally sold by a prominent hotelier in Orlando, Florida, who has been charged with wire fraud in the case.

Several other financial institutions, including two in Illinois and one in Texas, have also reported investing millions in the nonexistent USDA loans.