The NCUA is going back to the drawing board on its CUSO rule andthe industry is happy.

“The [comment] letters indicated that the proposed rules wereseen as having gone too far. So my sense is that the agency wantsto find a way to achieve its goals of ensuring the safety andsoundness of the system in a less intrusive way than they hadoutlined,” said Guy Messick, general counsel of the NACUSO.

CUNA Senior Vice President and Deputy General Counsel MaryMitchell Dunn said the overwhelming opposition in the letters inlight of the already heavy regulatory burden indicates that theagency probably realizes it went too far.

After receiving more than 280 comment letters, most of which contained seriouscriticisms, the NCUA has begun the process of overhauling therule.

NCUA spokesman David Small said the agency “always takes intoaccount the comments it receives on proposed rules.” However,Messick, Dunn and others said, based on their conversations withagency officials, these changes will be more than just slightrevisions to the original proposal. The changes won’t be finisheduntil next year, according to several industry sources.

After most comment periods, the agency makes changes to itsproposals, but they are often just minor tweaks to the proposedrule. This time is different because industry officials and stateregulators found major flaws with the rule.

The NCUA’s proposed rule would require all CUSOs to filefinancial reports directly with the NCUA and the appropriate statesupervisory authorities. The board also proposed limiting federallyinsured state-chartered credit unions’ aggregate cash outlays to aCUSO.

It also proposed that less than adequately capitalizedstate-chartered federally insured credit unions to get permissionfrom their regulators before making investments in a CUSO. The rulewould mandate CUSOs to use GAAP accounting, prepare quarterlyfinancial reports and get annual audits. In addition, the rulewould expand the definition of CUSO to include CUSO subsidiaries.

At the time the agency issued the rule in July, NCUA ChairmanDebbie Matz said “we have our hands tied behind our backs withoutattaining this information.”

The agency has also said it plans to ask Congress to for thepower to examine CUSOs, which Matz has said is needed to furtherensure the industry’s safety and soundness.

Messick said he has conveyed in its meetings with regulatorsthat CUSOs “do well under the current regulations, which have inplace safeguards to ensure safe practices. But we fear that theproposed rules will stifle innovation and collaboration and notnecessarily be more effective at guaranteeing safety andsoundness.”

He added that “to the agency’s credit, they have been receptiveand seem to want to improve the rule.”

NAFCU Vice President and General Counsel Carrie Hunt said theagency hasn’t given any hints as to what changes they might make inthe proposed rules. However, she expressed hope that the concernsraised about the legality of the proposed rules, especiallyrequiring financial reporting by the CUSOs, and the addedregulatory burden could likely prompt significant revisions.

“The agency doesn’t have the authority to regulate third-partyvendors and trying to do so would prompt litigation,” Hunt said.“Also, we question the need to add to the regulatory burden of7,000 credit unions just because a few of them had problems causedby CUSOs. We think it would make more sense for them to have theirexaminers be more vigilant in dealing with those credit unions thathave difficulties in this area, rather than add to everyone’sburden.”