Michael Gudely said he is aware that his position on a new proposal that that would essentially change how credit union service organizations are monitored may go against the grain.
“If CUSOs are to remain viable third-party vendors for credit unions, particularly MBL CUSOs, we must find common ground with the NCUA in its efforts to create a safer and more transparent credit union industry,” said Gudely, president/CEO of Innovative Business Solutions in Fort Mill, S.C.
In an effort to protect credit unions from losses, the NCUA board recently proposed a rule that would require all CUSOs to file financial reports directly with agency and the appropriate state supervisory authority. The proposal would also make additional parts of the CUSO rule applicable to federally insured, state-chartered credit unions as well as federal credit unions.
Gudely pointed out that he does not favor additional regulation but recognizes CUSOs “operate in a largely unregulated industry” while credit unions “operate in a highly regulated industry.”
“We should work collectively to address the breadth of the regulatory gap, rather than deny the gap exists and insist we should operate outside any regulatory guidance our client credit unions are subject to,” Gudely said.
Still, the great majority of MBL CUSOs do a “respectable and responsible” job providing services to credit unions, Gudely offered. However, a few have not and their actions have resulted in material losses, he added.
“As MBL CUSOs, we encourage transparency and full disclosure from credit union members in evaluating credit requests. In that regard, to be against financial reporting to the NCUA and or state regulatory authorities would seem to be somewhat hypocritical.”
Gudely acknowledged that his stance may not sit well with some.
“I realize this isn’t a popular stance with my CUSO peers but they need to look around and recognize the actions of a few MBL CUSOs [that] threaten our continuing business with credit unions.”
The NCUA said while there are agreements currently in place allowing the agency to inspect the books and records of CUSOs, the board would still propose requiring both FISCUs and FCUs to include in their agreements with CUSOs a requirement that a CUSO submit a financial report directly to the regulator and their SSA where applicable.
One other concern is the risk that less than adequately capitalized FISCUs pose to their members and the National Credit Union Insurance Share Fund when investing money into failing CUSOs, the NCUA said. As an intervention measure, the regulator wants to limit these FISCUs’ aggregate cash outlays to a CUSO, consistent with state laws.
Under the proposal, all requirements in the CUSO rule would also apply to subsidiary CUSOs. The NCUA said it has also recommended making conforming amendments to its regulation on the requirements for insurance.
The National Association of Credit Union Service Organizations is questioning whether the NCUA even has the legal grounds to issue such a proposal, said Jack Antonini, president/CEO of the association. NACUSO is in the process of writing its comment letter to the regulator.
“The reason [the NCUA] has asked Congress for vendor authority is because it doesn’t have that authority,” Antonini said. “Through the credit unions, they can ask for financial statements, they can restrict credit unions from making further investments into CUSO. They currently have the ability to effectively manage the CUSO’s regulation.”
Antonini said NACUSO is worried that by opening up CUSO records for all to see, it will put the entities at a competitive disadvantage with third-party vendors. Anything a government agency collects is subject to the Freedom of Information Act, he noted.
Competitors would be able to see business plans and go after client lists. Some credit unions have requested in their CUSO relationship agreements not to disclose their names mainly because they do not want to be used in advertisements, he added.
Antonini acknowledged that the NCUA does have the right to ensure that a CUSO a credit union is working with is safe and sound. However, since the regulator already has the authority to order a cease and desist and see a CUSO’s records, he said the NCUA’s proposal is redundant.
The losses sustained through several member business lending CUSOs over the past few years, particularly Texans Credit Union’s commercial ending subsidiary, may have been the motivation behind increased scrutiny, some argue. Antonini said MBL CUSOs are a very small percentage amount of the more than 700 operating today.
“I would have to think that one CUSO caused the entire regulatory burden that all the other CUSOs have to submit to,” Antonini said. “I understand about controlling losses to credit unions. If [the NCUA] wants to mitigate or minimize losses, they should deal with that particular [CUSO]. We believe they have that capability today.”
El Paso Affordable Housing CUSO President Larry Garcia said he believes the NCUA is trying to ensure credit unions are making good investment decisions.
“I need to examine this proposed rule more closely, but on the surface, it seems to me that the NCUA just wants to make sure credit unions are following good business practices,” said Garcia in the Texas Credit Union League’s Lone Leaguer.
Meanwhile, the Texas league said it continues to be concerned about increased regulatory burdens on the credit union system saying “the focus on increased regulation of CUSOs is concerning in the general sense.”
Back on its home turf, the league has taken issue with proposed CUSO regulation in the Lone Star State. Winter Prosapio, TCUL assistant vice president of public affairs, recently told Credit Union Times that it is pleased the Texas Credit Union Commission is at least addressing some clarification concerns with the proposal.