At its Dec. 18 board meeting, the NCUA issued a final rule amending its CUSO regulation to add two new categories of permissible CUSO activities: credit card loan originations and payroll processing services. It would permit CUSOs to originate and hold credit card loans as a principal on their own behalf or on behalf of credit unions. The NCUA said it has generally permitted CUSOs to engage in loan origination where a degree of expertise is required to be successful such as business and student lending.
Russell, president/CEO of TMG Financial Services, a credit card agent issuing company for credit unions, said the new CUSO activities are a real advantage because even though banks dominate the credit card market, many are scaling back their programs. Launched in 2007, TMGFS manages 14 credit card portfolios serving nearly 9,000 accounts and $10 million in receivables.
"The point I posed [to the NCUA] was most credit unions can't afford to have a specialized credit card underwriter on their staff," Russell said. "For at least 75% of credit unions that issue credit cards, a collaborative model would be useful and create economies of scale."
Under the NCUA's final rule, federal credit unions that sell their card portfolios to CUSOs, like TMGFS, can become owners. Russell said the regulatory amendment comes a long way from late summer 2007 when the CUSO wanted to expand to other states. TMGFS is moving forward to find more partnerships to fund its credit card portfolios and build on an 18-month-old platinum reward card program. A small business card is poised to debut in the first quarter.
Meanwhile, Dave Serlo, president/CEO of PSCU Financial Services, said the NCUA's inclusion of credit card loan origination as a permissible CUSO activity is an important first step given the fact there has been a surge in credit unions selling their portfolios in recent years to the banking industry.
"This was an effort to give credit unions another alternative to keep business within the credit union industry," Serlo said. "All in all, it's a big first step."
The second step will rely on Visa and MasterCard regulations, Serlo offered. For many years, they required portfolio owners to be insured by the FDIC. Since both card companies have recently become publicly held, bylaws are under review, and there is the possibility that the FDIC requirement may be eased, he added. PSCU has a partnership with Wescom Credit Union that enables credit unions to sell their portfolios to the $3.4 billion financial institution. In 2006, Wescom bought Silvergate Bank, an industrial bank loan charter, which allowed it to buy credit unions' credit card portfolios. The NCUA's recent rule change now gives PSCU the direct availability to buy the portfolio from the credit union.
"We're optimistic that [Visa and MasterCard] being publicly held and recognizing the changes in the marketplace, that they may be open and willing to discuss relaxing or eliminating this [FDIC] requirement," Serlo said.
In spite of strong objections from the banking industry, the NCUA also included payroll processing services as a permissible CUSO activity. The regulator said since FCUs have provided services and support to their small business members for years, enabling CUSOs to provide this service "is a logical, efficient expansion of CUSO authority." Ray Crouse, president/CEO of Co-operative Payroll Solutions LLC, agreed that the industry indeed has strong ties to the small business market. Owned by seven CUSOs, the firm offers processing services in 22 states.
Prior to the ruling, Co-operative Payroll came in as the back-end processor for a credit union. That middle step is now gone and additional interest from credit unions wanting to invest in the CUSO is starting to build, Crouse said.
"We look forward to allowing credit unions to embrace those small businesses that are not being served," Crouse said. "We're taking the capability of a national provider and tailoring it to the credit union industry."
Guy Messick, general counsel for NACUSO, said while there was "sufficient authority already in place, it's always very helpful to have it in black and white." He would like to see more.
"Right now, we have mortgages, student loans, business loans and now credit card loans. In my judgment, there's no policy or purpose to limit those areas."