New CUSO Regs Prompt a Mountain of Concern
Several new concerns have been raised about the NCUA’s proposal to regulate CUSOs, including whether the regulator took the time to think through its plan.
In late July, the regulator proposed a rule that would require all CUSOs to file financial reports directly with the NCUA and the appropriate state supervisory authority. The board also proposed limiting federally insured state-chartered credit unions’ aggregate cash outlays to a CUSO.
“[There] are a number of terms in the proposed rule that give the impression that it has not been completely analyzed as to its impact and are in need of significant clarification,” wrote Jack Antonini, president/CEO of the National Association of Credit Union Service Organizations in its Aug. 4 comment letter to the NCUA.
For one, NACUSO questioned the definition of a “subsidiary.” Under the NCUA’s proposal, all requirements in the CUSO rule would also apply to subsidiary CUSOs. The association asked does a CUSO have to have controlling interest in a company or does a 1% ownership in a company make the company a subsidiary?
“The informal rule has been that if there is an intent that a subsidiary of a CUSO was formed for the purpose of evading the CUSO rule, that would not be allowed,” Antonini wrote. “We ask that this continue to be the rule as there may be very good business reasons for a CUSO to invest in a company that is not a CUSO.”
NACUSO also sought clarification on what is meant by “aggregate cash outlay on a cumulative basis,” questioning if this is reduced by dividends received by the credit union from a CUSO investment. The group was also unclear how far back this cumulative calculation would go.
“What if a credit union invested in a CUSO and has written the investment off 10 years ago, does that count? How do investments in other CUSOs figure in to the analysis? What is the procedure to obtain NCUA approval to make additional investments? What are the standards of review that NCUA will use? Is there a time period in which NCUA must respond to a request or can the request go unanswered, effectively denying the request?”
NACUSO said because of the uncertainties, the proposal gives “the impression that it has not been completely analyzed as to its impact and [is] in need of significant clarification.”
David Small, NCUA assistant director of public affairs, said the agency will wait until the comment period is over and the board has had the time to consider everything.
There are also fears about how exposure to CUSO documents could impact vendors outside the credit union industry. If the NCUA changes the way CUSOs are regulated, it would “single-handedly kill the one competitive advantage the credit union industry has,” said Lisa Renner, CEO of CU Holding Co. LLC in Lenexa, Kan.
That advantage would be “a unique business model that enables collaboration and innovation so credit unions can achieve economies of scale, increase efficiencies, share intellectual capital, provide better service to members and mitigate risk,” Renner said.
CU Holding provides payroll, marketing, short-term lending, mortgage, title, and research and development services to more than 200 CUs.
“Increasing regulation will put CUSOs at a competitive disadvantage with non-CUSO competitors,” Renner wrote in an Aug. 4 comment letter to the NCUA. “First, it increases overhead costs for CUSOs making it difficult to compete on price. Second, it exposes confidential business plans, balance sheets, income statements and customer lists.”
Renner said through decreased expense and increased income, CU Holding has benefited its CU owners and clients by hundreds of thousands of dollars. However, measuring CUSOs by the same metrics used for CUs could be detrimental in the long run.
“In the broader business environment, you would not measure an IT firm against a marketing company, or a payroll company against a mortgage company. Yet, if all CUSOs are lumped together and measured against the same metrics, that’s exactly what will happen,” Renner wrote.
Loan losses caused by several business lending CUSOs should not be a reason to penalize all CUSOs, Renner said.
Meanwhile, if the NCUA follows the model outlined in its proposed rule to review CUSOs based solely on balance sheets and income statements, more questions are bound to come up, NACUSO said.
“What will be the NCUA’s standards of review for CUSO success? Does NCUA intend to shut down a CUSO that does not have a large balance sheet or income statement regardless of the positive financial or service impact the CUSO has for its credit union owners,” NACUSO asked.
Whether the NCUA even has the legal authority to issue its proposed CUSO amendment is also in question, the association pointed out. The regulator does not currently have vendor authority as a result of previous temporary vendor authority not being renewed by Congress when it expired in 2001 after the Y2K crisis, according to NACUSO.
“While the agency recognizes in its own statements that it does not have statutory authority to regulate CUSOs, NCUA has expanded its existing reach over CUSOs through their credit union owners through this proposal by requiring CUSOs to provide financial information directly to NCUA which NCUA will retain and evaluate” Antonini wrote. “This looks and feels like vendor authority and the direct regulation of CUSOs which has not been authorized by Congress.”
NACUSO said most CUSOs and their credit union owners share this concern and fear that the legal authority for this proposal could, if finalized in its current form, “could conceivably become a source of lengthy and expensive litigation for the agency and the credit unions that fund the agency to sustain.”