After receiving more than 280 comment letters on the matter, credit unions may see a final amended CUSO proposal by midyear.
Katherine Weber, founder of the Weber Firm LLC, a Pennsylvania law firm that represents CUSOs and credit unions, shared that update at a March 7 NAFCU webinar on preparing for the heightened scrutiny of CUSOs.
Although the NCUA does not have direct regulatory power over a CUSO yet, it has significant power over any CUSO owned by a federally chartered credit union, according to Weber.
The CUSO regulation proposed by the NCUA last summer would create direct regulatory authority, Weber said. Although this regulation may not be implemented as proposed, CUSOs can expect to have additional regulatory constraints once the regulation is final.
CUSOs around the country are already experiencing direct inquiries from the NCUA, she noted.
“The best line of defense is being prepared. Credit unions considering ownership in a CUSO or use of a CUSO's services must understand the due diligence necessary for preparation for an exam related to such a CUSO,” Weber said.
Credit unions using CUSOs, whether as an owner or on a contract basis, should understand and know the services being provided by the CUSO, Weber advised. NCUA examiners are increasingly interested in verifying a credit union's due diligence related to its CUSO relationships.
Weber said the pressure on the NCUA to adopt changes to the CUSO rule stems from concerns over systemic risk and protecting the National Credit Union Share Insurance Fund, among other issues. She said she does not believe the proposal will be completely withdrawn as some in the industry have called for.
The NCUA has indicated there will be a distinction made between those CUSOs offering what it describes as risky products and services and those primarily providing operational support to credit unions, Weber said. At this point, the regulator has not said which services would be considered risky, she added.
“NCUA has the authority to require a credit union to divest its interest in the CUSO. While not direct authority, it certainly is one big hammer,” Weber said.
For now, Weber suggested that the best line of defense is to cooperate with examiners, understand the CUSO's business, establish corporate separateness and seek advice from an attorney or accountant.
The due diligence part of it involves risk share and allocation, compliance requirements, establishing a point person at the credit union, have the ability to explain the CUSO services and conduct audits. Weber urged credit unions and CUSOs not to take a set it and forget it approach.
Most of those against the proposed CUSO rule amendments cited the need for more clarification. NACUSO President/CEO Jack Antonini questioned the definition of 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 shortly after the NCUA issued its proposal last year. “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.
There were other concerns about exposing CUSO financial records and the impact that access would have on competing with nonindustry firms.