LAS VEGAS — The common thread running through some of the credit unions that have recently experienced significant lending and operational troubles was the connection those losses had to their CUSO relationships.
With a more proactive stance in mind, the NCUA is tackling the current CUSO environment from a number of fronts, including a vendor authority model that gives more weight to portfolio monitoring, NCUA Board Member Gigi Hyland told attendees at the National Association of Credit Union Service Organization’s annual conference in Las Vegas last week.
One measure will be working more closely with state regulators to get an "overall picture of systemic risk" Hyland offered. She said state regulators tend to oversee only the areas they have authority over. The NCUA would like to talk to these agencies to get a better handle on what CUSOs are doing, she added.
Still, one concern raised from an attendee was whether regulatory burdens will arise, as multiple agencies could potentially have an overlap of authorities.
"We don't want to become a mini SEC," Hyland said. "Vendor authority seems like a win-win because we can go in, identify problems and fix them. We don't want to conserve credit unions. We're not in the business to do that."
Gary Kohn, NCUA senior policy adviser, also told the packed room that the savings and loan crisis is a solid example of what may happen if problems are not identified early on and addressed.
"The question is if we had vendor authority [over some of the recent financially troubled credit unions], would it have prevented some of the losses," Kohn said.
NCUA examiners hired specifically to examine CUSO operations and portfolios may be one way to spot red flags. Kohn said the regulator has discussed whether it has adequate expertise on staff to monitor CUSO activities or whether the agency will have to provide additional training. The latter move may lead to an increase in NCUA's budget to make the accommodation.
Kohn said it takes three to four years to train examiners. The NCUA has hired a number of staffers over the years but more resources may be needed to monitor CUSOs if the regulator moves forward with a new vendor authority model.
More examiners would also come into view when looking at how NCUA's regional offices handle those CUSOs that cross state lines, Kohn said. Hyland reiterated that the regulator wants to work more with states to find out the impact on staffing, workable solutions and if shared exams can work.
Pointing to the recent losses at Texans Credit Union through its commercial lending CUSO, Hyland said new authority changes are pressing. She gave several examples where, if the NCUA had the authority to intervene with CUSOs that had an impact on troubled credit unions, the losses could have been minimized. For instance, the $1.6 billion Texans CU, through its CUSO, Credit Union Liquidity Services LLC, had $800 million in its commercial lending portfolio. That figure has since dropped to $272 million after the economic downturn.
"We could see things were going wrong but we had to go through the side door and through the maze to get there," Hyland said about Texans. "By the time we got there, it was too late."
She also cited other credit union failures such as Norlarco and Centrix.
"These were perfect examples of us not having the authority to go in. The credit unions were not getting the right information and neither were we," Hyland said.
Hyland was optimistic that a new vendor authority model would give the NCUA more regulatory teeth. She cautioned that if the new authority model moved forward, it would "not derail innovation" among CUSOs and credit unions.
Concerns Rise Over How and When CUSO Regulation May Change
In a room filled easily with more than 100 people, NCUA top officials heard their share of questions and trepidations on how credit union and CUSO relationships may be monitored going forward.
On the hot seat during a lunch session at the National Association of Credit Union Service Organizations’ annual conference in Las Vegas last week were NCUA Board Member Gigi Hyland and Gary Kohn, NCUA senior policy advisor.
One of the first questions asked had to do with what the new vendor authority model may look like and how it differs from what is on the books now. Hyland said talking with the NCUA’s sister regulatory agencies to see how they are doing it would be a good start.
"Initially, the focus would be on how broad we can get and could there be a marriage of vendor authorities," Hyland said.
Guy Messick, general counsel for NACUSO, asked if any new approaches would produce an uneven playing field for CUSOs, specifically on the cost impact. Hyland said the plan would be to keep authority "as broad as possible."
Would there be any incentives to promote innovation by credit unions and CUSOs, another attendee wondered.
"Timing is everything in life. We have to be a patient regulator," Hyland said. "There is not a reluctance to embrace innovation. We want to see credit unions succeed but in a safe and sound manner."
Hyland pointed to a discussion the NCUA and NACUSO had a few years ago on peer-to-peer lending. The NCUA was not entirely sold on the concept, she reminded.
"History is so important to give insights into why examiners do what they do," Hyland told attendees.
Several heads nodded throughout the room when this question was asked: "With Texans, what would you have done if you had the authority?" Hyland said the NCUA would have gone into the CUSO early on in 2008, when trouble spots started to emerge in the credit union’s commercial lending portfolio. Kohn said what made it more difficult for the regulator to make a move is the difference in state and federal law in Texas on the percentage amount that can be invested in CUSOs.
Another common question was whether new regulations would be detrimental to what’s really at stake: serving the members. Hyland said there has to be a collaborative effort with the state regulators. As a federal insurer, the NCUA would want to know how a state’s insurance fund is affected if a credit union gets in financial trouble behind a CUSO relationship, she noted.
One attendee wanted to know the most current cost of the credit unions that have been recently conserved. Hyland said a tally of the losses could easily produce that figure. The same attendee also wondered what additional costs would be needed to regulate CUSOs. Hyland said a cost benefit analysis may get to the crux of the issue: "a different way to give the regulator a sense of comfort."
The short answer is vendor authority is a good way to determine a cost breakdown, Hyland said, adding she is open to feedback and suggestions on alternatives.
Meanwhile, Kohn reminded the audience that it will ultimately take an act of Congress before any substantial changes are made with vendor authority.