Texas CUSO Powers Deemed Threatened
A regulatory proposal in Texas that could potentially change how credit union service organizations in the Lone Star State are monitored is coming under fire from several industry groups.
At issue is a subsection in a proposal from the Texas Credit Union Commission within the Texas Credit Union Department that reads: "All legal limitations imposed on a credit union by Texas Finance Code, Title 3, Subtitle D and any rules adopted under that subtitle, apply equally to CUSO activities."
Under the proposal, the commissioner may limit or refuse to permit any CUSO activity or service based upon supervisory, legal or safety and soundness reasons.
In a May 24 comment letter, the NACUSO said it is uncertain of the full implications of the proposal and requested clarity on what the term "limitations" means.
"If the intent is to subject CUSOs to the same regulatory restrictions and supervisory authority as those facing credit unions, this is a serious departure from the current powers in every other state that regulates credit unions and the federal authority of the NCUA," NACUSO President/CEO Jack Antonini wrote.
There is no jurisdiction in the United States that restricts CUSOs to those activities only credit unions are permitted to perform, according to NACUSO, adding that the NCUA does not have regulatory authority over CUSOs but has expressed a desire to petition Congress for that authority.
NACUSO also expressed concern with a proposed rule that would require prior written approval from the Texas commission for any proposed investment or loan to a CUSO that will cause the total aggregate investments in, and loans to, that CUSO to exceed 15% of the credit union’s net worth.
"By statute and rule, investment limitations in any one CUSO of no more than the lesser of 5% of assets or its reserves and undivided earnings and of an aggregate of investments and loans to all CUSOs not being able to exceed 10% of unconsolidated assets seem sufficient without additional limitations which might result in some CUSOs being stalemated for investment dollars and/or borrowing authorization," Antonini wrote.
The Texas CU Commission has also proposed a 20-day notice if a CUSO makes a material change in its organizational structure or performs a new activity. NACUSO said more clarity is needed on what changes would apply.
The Texas Credit Union League has also taken issue with the proposal, saying it appears to be a conflict between existing regulations in the Texas Credit Union Act and other laws CUSOs may be subject to.
Jeff Huffman, TCUL vice president of government relations, said one example of how applying all provisions in the Credit Union Act on a CUSO may be problematic is in the case of one owning an insurance operation. Given the insurance agency has a different purpose and powers than a credit union, applying everything in the act may prove challenging, he offered.
"To TCUL's knowledge, most CUSOs are well run. If there are issues the regulator has with a credit union’s investment in a CUSO, we feel the changes to the regulation should be narrowly drawn to address the specific concerns," Huffman wrote in a May 27 comment letter.
Based on feedback, members of the Texas league have raised a long list of concerns about the proposal including whether the state’s credit union department will attack or shut down member business lending CUSOs, according to Huffman. The Texas state charter would likely be disadvantaged in comparison to the federal charter and other state charters regarding operating a CUSO if the proposal is adopted, the league reported.
Other questions raised were what will the appeal process be as a result of the proposed changes, and what recourse will a credit union have if ordered to divest itself of the CUSO and the credit union suffers. The league also asked on behalf of its members if credit unions that already passed the 15% threshold would be grandfathered or potentially ordered to divest.
Huffman said the league suggested that as an alternative to moving forward with the proposed draft regulation, an advisory group be convened instead to work through the concerns of the Texas Credit Union Department’s staff regarding CUSOs.
NACUSO cautioned the state regulator not to move too quickly.
"We understand that the commission may be addressing the aftermath of the poor lending practices of some credit unions with significant investments in its CUSOs. If this proposal is a reaction to poor management decisions involving a single CUSO or a small number of CUSOs, we respectfully suggest that it is an overreaction," NACUSO wrote.