With much more at stake, it is no surprise that credit union service organizations are sounding the alarm louder than credit unions regarding an NCUA proposal that would alter how CUSO relationships are regulated.
Credit Union Times contacted several CUs to get their take on how an amendment to Part 712 of the CUSO rule would require all CUSOs to file financial reports directly with the NCUA and the appropriate state supervisory authority. That requirement would apply to federally insured state-chartered credit unions as well.
The NCUA also wants to limit these FISCUs’ aggregate cash outlays to a CUSO. The concern, the regulator said, is that less than adequately capitalized FISCUs pose “serious risk to their members and the National Credit Union Share Insurance Fund when investing money into failing CUSOs.”
Of the CUs contacted, most did not return calls and others were not available or willing to comment.
A senior vice president of a $585 million CU said after discussing the matter with his CEO, “we don’t think we would have any substantial input for you at this time.” The CU has an alliance with a large CUSO.
The executive added, "We have a number of strategic initiatives going on right now, and, therefore, we really haven’t had the opportunity to fully dissect the NCUA proposal.”
Representatives from a billion-dollar CU with a bustling commercial lending program did not return several phone calls. A CU with board ties to another CUSO also failed to respond. An interview with a West Coast CU was canceled.
But Steven Stapp, president/CEO of the $767 million San Francisco FCU, criticized the NCUA’s proposal on several levels. He suggested the agency develop a risk-based model and look at the activity that is being conducted rather than casting an entire net over all CUSOs.
“Disclosure of client information by CUSO versus vendors does create an unfair situation,” Stapp said. “The 22 [basis points] of at-risk capital by the industry is very well-diversified. It’s not the investment that puts a credit union at risk, rather it’s the activity that a credit union conducts that puts them at risk.”
Meanwhile, CUSOs continue to turn up the heat on the proposal. Financial Service Centers Cooperative Inc. is against the changes, saying the impact could cut into CUSO income and ultimately water down or eliminate service to CUs.
“Many successful CUSOs that drive significant savings and income to credit unions do not have a sizeable capital structure or generate significant income,” said Sarah Canepa Bang, president of FSCC, the shared branching and remote services CUSO.
“This is certainly true of FSCC and shared branching where the dividends are the number of shared branches and access points we generate for our credit unions–not monetary return on the investment,” Canepa Bang said.
Randy Karnes, CEO of CU*Answers, recently sent out an email praising the National Association of Credit Union Service Organizations’ stance but urged that it not mimic other groups. The Grand Rapids, Mich.-based CUSO provides core processing, consulting, management and technology services
“The only thing I ask of NACUSO is that they not borrow a cheap and easy page from CUNA and NAFCU here–do not rally us against a threat, a perceived enemy, a critical risk to simply garner attention and increase your dues,” Karnes wrote, adding, “instead push all CUSOs to understand the opportunity in this, to push for innovation here for the entire industry and to be dynamic in whatever action we take.”
Karnes also blasted the NCUA’s motives saying, “What they want to do is cast doubt, induce fear and cause pause so that they can somehow garner influence over another source of income for their agency.”
“The NCUA has destroyed more member capital in the last two years than CUSOs could do in 20 should every game plan go awry,” Karnes said.
He suggested approaching those “who think they know how to manipulate the system for a small win–go to the members, go to the employees, go to the volunteers and go to the customers of CUSOs in a way that is more viral and violent than the subtle and expensive understated slicksters who currently cast our messages at the other trades.”
Kent Moon, president/CEO of Member Business Lending LLC, is more willing to work with the NCUA and considers the agency “an asset, an ally” to the South Jordan, Utah-based CUSO. Still, he too, questioned the NCUA’s intentions especially in what he sees as a heightened environment of government spending backlash and criticism of the regulator’s own budget.
Instead of the NCUA mandating new edicts, Moon suggested the agency come up with a memorandum of understanding between it and other regulators to collaborate on duties in an effort to reduce oversight costs.
The former SBA director recalls a similar measure between that agency and the Internal Revenue Service on in situations involving borrowers providing false tax returns to obtain government-guaranteed loans. The two entities worked together to red flag these scenarios while adhering to privacy laws, he said.
“There are better solutions. There can be collaboration and cooperation between the regulatory bodies,” Moon said. “When I wrote regulations, there were phrases you wanted to weigh carefully–anything with ‘will,’ ‘shall’ or ‘must.’ If you want to establish a basic rule, use ‘may,’ ‘should’ or ‘could.’ What it said is we are relying on you and your professional business discretion for good business practices.”
NACUSO Chairman Pete Snyder argued that failed CUSOs generally do not get that way due to a lack of regulatory authority. The culprits tend to be ineffective leadership at the management or executive level, a lack of internalized skills based on the products or services offered or a lack of scale, he pointed out. The principal and founder of Snyder Consulting Solutions, Snyder said that has been his experience in aiding troubled CUSOs.
“There are a significant number of CUSOs that have demonstrated the appropriate business model to accomplish goals within what the regulators want,” Snyder said. “There are less troubled CUSOs than troubled credit unions.”
Snyder said he makes that distinction to note that the NCUA has complete authority over FCUs but that has not stopped losses from occurring.
He went back to the mid to late 1980s when CUs were active in the auto leasing business. The number of those CUSOs that met their demise back then had more to do with weak leadership and skills, not regulatory authority, Snyder said.
Another consequence of the NCUA’s proposal would be investment CUSOs being held to “a higher and more convoluted standard” than their competitors, he warned. These entities are already regulated by the Securities and Exchange Commission and other agencies.
“The FDIC and others cannot go to external providers and say ‘we are going to regulate you,” Snyder said. “The NCUA would have to have the expertise to look at specific products and services provided by the CUSOs. What does the NCUA want to accomplish with regulating CUSOs when they don’t have the expertise?”