CUSO Insurance Investment Must Meet Customer Base Rule, Says NCUA
Federal credit unions can invest in or buy an insurance agency as a credit union service organization as long as the entity meet’s the NCUA customer base requirement.
The agency provided that guidance in a June 3 legal opinion on the matter. At issue was if a FCU would be permitted to purchase or invest in an existing insurance agency as a CUSO if the insurance agency would change its customer base to primarily serve credit union members.
The NCUA was also asked if the target insurance agency could maintain existing franchise agreements with other companies and offer new franchises once it became a CUSO. Under the agreements, franchisees would process applications exclusively for the CUSO, and, although the franchisees would serve non-credit union members, they would primarily serve members.
Under NCUA rules, FCUs have the authority to invest up to 1% of their paid-in and unimpaired capital and surplus in CUSOs structured as a corporation, limited liability company or limited partnership, wrote Hattie Ulan, NCUA associate general counsel.
Insurance brokerage or agency is a preapproved category of activities related to the daily operations of credit unions, according to the regulator. The rule lists four permissible insurance-related services as examples: agency for sale of insurance, vehicle warranty services, group purchasing programs and real estate settlement services.
Before making an investment, an FCU must determine whether a CUSO meets the customer base test, in that it primarily serves credit unions, the FCU’s members, or the members of other credit unions contracting with the CUSO.
"While the CUSO rule does not establish a bright-line definition of ‘primarily serves,’ it has been NCUA’s longstanding position that the determination as to whether a CUSO complies with the customer base requirement be made on a case-by-case basis using a totality of the circumstances test," Ulan wrote.
As such, the NCUA said an FCU should review several variables, including the number of affiliated members served, gross or net revenues derived from members, members’ assets under management, number of policies sold to members, number of services sold to members and the availability or accessibility of services to members.
The customer base requirement must be met at the time the FCU invests in the CUSO, according to Ulan. After that, a reassessment on who is being served must continue.
"To do otherwise would permit a large loophole in the CUSO rule, allowing negligent or unscrupulous CUSOs to ignore the customer base requirements once fully funded from FCUs. This practice could easily lead to safety and soundness problems, and perhaps even threaten the National Credit Union Share Insurance Fund," Ulan wrote.
In the specific case presented in the legal opinion, the inquirer said the target insurance agency currently serves the general public and would convert to an agency that primarily serves credit union members. The NCUA reiterated the customer base requirement that must be in effect at the time of the purchase or investment.
The inquirer said target insurance agency-franchisor and future CUSO enters into franchise agreements that permits franchisees to do business under the franchisor name and marketing. Franchisees sell insurance policies underwritten by carriers selected by the franchisor exclusively for the agent of record, the franchisor. All commissions for policies sold by franchisees are paid to the franchisor, which then compensates the franchisees.
Ulan said the CUSO may enter into new franchise agreements to offer additional agents, as franchisees, the opportunity to sell permissible insurance services to members. If the CUSO continues to meet the customer base requirement, an FCU is not prohibited from investing in an insurance agency CUSO that uses franchisees to sell its services, she added.