CUSO Can Falter After Mergers and Conservatorships
At one point, the high-flying commercial lending CUSO formed through Eastern Financial Florida Credit Union funded more than $200 million in business loans and served dozens of credit unions nationwide.
That was 2007. Two years later, the Florida Office of Financial Regulation issued a cease and desist order against Eastern Financial for unsound lending and operational practices and requested a review of all business loan workouts performed by its CUSO, CU Business Capital LLC.
If a credit union liquidates, whatever its interest was with the CUSO becomes part of that credit union’s estate, Small said. If the CUSO or others do not buy that liquidated credit union’s shares of the CUSO back, the credit union’s interest in the CUSO goes with the credit union’s other assets to the NCUA’s Asset Management Assistance Center with that credit union’s estate.
“So if a failed credit union owns 50% of a CUSO, then somebody either has to buy those shares or the AMAC will try to sell them with the rest of the credit union’s assets,” Small explained.
That proactive measure will be helpful down the road, he offered. Lauer said from a pure cash flow perspective, a CUSO may have to determine what happens if a credit union wants to be paid out. Depending on the CUSO’s success, the amount could be quite substantial. On the flip side, a sale to the acquiring credit union might be a viable option especially if that CUSO can aid in gaining market share.
Most CUSOs are limited liability companies and if a credit union is merged away and not the surviving entity, it is no longer an owner, Lauer said. The investment documents or bylaws should include language indicating that. In an LLC, it would be a disassociation. In a corporate situation, the entity would no longer be a shareholder.