David Dunn, president/chief operating officer at Middletown, Pa.-based Impel Consulting Group, a strategic planning CUSO, has trained NCUA examiners a few times over the years. The latest round of training sessions had a reinvigorated interest in CUSO activities and how credit unions are using these entities. Over the course of a handful of sessions, there were an estimated 45-50 examiners in the room.
"NCUA is going to start challenging CUSOs more," Dunn said. "I think after seeing the losses that the industry and the share insurance fund has suffered, there are some big loans that NCUA is very concerned about that have not gone bad yet."
The NCUA has said it would increase scrutiny of credit union service provider relationships. In a December 2007 letter to credit unions, the regulator gave examiners the go-ahead to assess whether a credit union is effectively evaluating and monitoring its third-party relationships. A new examiner questionnaire released last spring honed in on three areas that require extra special attention: strong due diligence, risk measurement, monitoring and control and risk assessment and planning.
Dunn, a business lending and underwriting expert and former head of several related CUSOs, said the NCUA wants to dig deeper to learn more about loan types and if the authority for these loans is in place.
Another area of note is how CUSOs earn their revenue and how risks come into play on how it affects those fund streams, he noted.
According to the NCUA, examiners may consider recommending a CUSO for review if during an examination of an affiliated credit union, certain questions arise, such as does the financial condition of the CUSO significantly affect the operations of a credit union or group of credit unions that depend on it for service? Are there any conflicts of interest? Or if services offered are permissible, are there other red flags? With business lending CUSOs, for instance, underwriting processes are being looked at more carefully, particularly if the person overseeing this analysis has the necessary experience.
"One of the lessons we wanted to give examiners is there is a variance of skills from one CUSO to the next. What happens is this may allow credit risk to spread," Dunn said.
A business services CUSO may hire someone to do underwriting, but if the owners aren't originating any loans, the entity will not make any money. On top of that, Dunn said many credit unions go into CUSOs not understanding how to sell or market business services. One first step is recognizing that the CUSO is "ready, willing and able" to service the loan, but if there is no direction coming from the owners, there's nothing to work with.
And, there's the danger. Idle CUSOs become a loan participation desk, Dunn said. Coupled with weak underwriting, he said, they open the door for risk exposures to spread like wildfire throughout the industry.
The NCUA has continued to stress that credit unions are responsible for precision due diligence. On the other side, examiners must also understand the services offered by the CUSO, market trends and conditions, and service viability. These are just a few areas that are taken into consideration. Depending on the type of service offered, the review could extend into a number of other critical areas.
At the NCUA training sessions, Dunn said some of the common questions examiners asked were where are CUSO executives coming from and if it's banks, why are they leaving those financial institutions. Another question is what is motivating credit unions to start more CUSOs.
"If you talk to any of the long-established CUSOs, some will tell you that it's difficult to find credit analysts," Dunn said. "The good ones, banks tend to keep them around the longest."
Examiners certainly want to ensure that CUSOs have highly skilled staff. A growing trend within the credit union industry is the migration of bankers to the movement. Dunn said that may continue as frustrated senior officers "get tired of the carousel of mergers and acquisitions."