LAS VEGAS — The common thread running through some of the creditunions that have recently experienced significant lending andoperational troubles was the connection those losses had to theirCUSO relationships.

With a more proactive stance in mind, the NCUA is tackling thecurrent CUSO environment from a number of fronts, including avendor authority model that gives more weight to portfoliomonitoring, NCUA Board Member Gigi Hyland told attendees at theNational Association of Credit Union Service Organization'sannual conference in Las Vegas last week.

One measure will be working more closely with state regulatorsto get an “overall picture of systemic risk” Hyland offered. Shesaid state regulators tend to oversee only the areas they haveauthority over. The NCUA would like to talk to these agencies toget a better handle on what CUSOs are doing, she added.

Still, one concern raised from an attendee was whetherregulatory burdens will arise, as multiple agencies couldpotentially have an overlap of authorities.

“We don't want to become a mini SEC,” Hyland said. “Vendorauthority seems like a win-win because we can go in, identifyproblems 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 roomthat the savings and loan crisis is a solid example of what mayhappen if problems are not identified early on and addressed.

“The question is if we had vendor authority [over some of therecent financially troubled credit unions], would it have preventedsome of the losses,” Kohn said.

NCUA examiners hired specifically to examine CUSO operations andportfolios may be one way to spot red flags. Kohn said theregulator has discussed whether it has adequate expertise on staffto monitor CUSO activities or whether the agency will have toprovide additional training. The latter move may lead to anincrease in NCUA's budget to make the accommodation.

Kohn said it takes three to four years to train examiners. TheNCUA has hired a number of staffers over the years but moreresources may be needed to monitor CUSOs if the regulator movesforward with a new vendor authority model.

More examiners would also come into view when looking at howNCUA's regional offices handle those CUSOs that cross state lines,Kohn said. Hyland reiterated that the regulator wants to work morewith states to find out the impact on staffing, workable solutionsand if shared exams can work.

Pointing to the recent losses at Texans Credit Union through itscommercial lending CUSO, Hyland said new authority changes arepressing. She gave several examples where, if the NCUA had theauthority to intervene with CUSOs that had an impact on troubledcredit unions, the losses could have been minimized. For instance,the $1.6 billion Texans CU, through its CUSO, Credit UnionLiquidity Services LLC, had $800 million in its commercial lendingportfolio. That figure has since dropped to $272 million after theeconomic downturn.

“We could see things were going wrong but we had to go throughthe side door and through the maze to get there,” Hyland said aboutTexans. “By the time we got there, it was too late.”

She also cited other credit union failures such as Norlarco andCentrix.

“These were perfect examples of us not having the authority togo in. The credit unions were not getting the right information andneither were we,” Hyland said.

Hyland was optimistic that a new vendor authority model wouldgive the NCUA more regulatory teeth. She cautioned that if the newauthority model moved forward, it would “not derail innovation”among CUSOs and credit unions. 

Concerns Rise Over How and When CUSORegulation May Change

In a room filled easily with more than 100 people, NCUA topofficials heard their share of questions and trepidations on howcredit union and CUSO relationships may be monitored goingforward.

On the hot seat during a lunch session at the NationalAssociation of Credit Union Service Organizations' annualconference in Las Vegas last week were NCUA Board Member GigiHyland and Gary Kohn, NCUA senior policy advisor.

One of the first questions asked had to do with what the newvendor authority model may look like and how it differs from whatis on the books now. Hyland said talking with the NCUA's sisterregulatory agencies to see how they are doing it would be a goodstart.

“Initially, the focus would be on how broad we can get and couldthere be a marriage of vendor authorities,” Hyland said.

Guy Messick, general counsel for NACUSO, asked if any newapproaches would produce an uneven playing field for CUSOs,specifically on the cost impact. Hyland said the plan would be tokeep authority “as broad as possible.”

Would there be any incentives to promote innovation by creditunions and CUSOs, another attendee wondered.

“Timing is everything in life. We have to be a patientregulator,” Hyland said. “There is not a reluctance to embraceinnovation. We want to see credit unions succeed but in a safe andsound manner.”

Hyland pointed to a discussion the NCUA andNACUSO had a few years ago on peer-to-peer lending. The NCUA wasnot entirely sold on the concept, she reminded.

“History is so important to give insights into why examiners dowhat they do,” Hyland told attendees.

Several heads nodded throughout the room when this question wasasked: “With Texans, what would you have done if you had theauthority?” Hyland said the NCUA would have gone into the CUSOearly on in 2008, when trouble spots started to emerge in thecredit union's commercial lending portfolio. Kohn said what made itmore difficult for the regulator to make a move is the differencein state and federal law in Texas on the percentage amount that canbe invested in CUSOs.

Another common question was whether new regulations would bedetrimental to what's really at stake: serving the members. Hylandsaid there has to be a collaborative effort with the stateregulators. As a federal insurer, the NCUA would want to know how astate's insurance fund is affected if a credit union gets infinancial trouble behind a CUSO relationship, she noted.

One attendee wanted to know the most current cost of the creditunions that have been recently conserved. Hyland said a tally ofthe losses could easily produce that figure. The same attendee alsowondered what additional costs would be needed to regulate CUSOs.Hyland said a cost benefit analysis may get to the crux of theissue: “a different way to give the regulator a sense ofcomfort.”

The short answer is vendor authority is a good way to determinea cost breakdown, Hyland said, adding she is open to feedback andsuggestions on alternatives.

Meanwhile, Kohn reminded the audience that it will ultimatelytake an act of Congress before any substantial changes are madewith vendor authority.