While the National Association of Credit Union Service Organizations said it is pleased that the NCUA was responsive to some of the concerns expressed about the final CUSO rule, the group continues to questions whether it’s even needed.
On Thursday, the NCUA Board finalized a rule that would require CUSOs and their subsidiaries to report information directly to the NCUA and state regulators, as applicable.
“The new direct reporting requirement is unquestionably an additional administrative step and burden that will have to be met going forward by the growing number of credit unions with ownership interests in CUSOs and the CUSOs themselves,” said NACUSO President/CEO Jack Antonini and NACUSO General Counsel Guy Messick.
CUSOs that offer complex or high-risk services such as credit and lending, information technology, and custody, safekeeping and investment management services must report more detailed information, including financial statements and general customer information.
Any subsidiary in which a CUSO has an ownership interest in any amount will be subject to the rule if the subsidiary is primarily engaged in providing products or services to credit unions or their members, the NCUA Board said.
A state-chartered credit union that is or would be rendered less than adequately capitalized by additional investment in a CUSO must also obtain approval from its state regulator and notify an NCUA regional director prior to making the investment.
Still, the new reporting requirement could potentially help the NCUA see how instrumental CUSOs have been.
“If it is handled properly and not expanded into an unwarranted and statutorily unsubstantiated exam process that puts CUSOs at a competitive disadvantage versus their non-CUSO competitors, it could result in NCUA gaining a better understanding of CUSOs,” Antonini and Messick said.
They added, “And – if they look at the data with an open mind – the significant value they provide, it could be a positive step in helping NCUA recognize the importance of CUSOs to building the net worth of credit unions so desired by the regulators in this tight margin marketplace.”
The NCUA said since 2008, nine CUSOs have caused more than $300 million in direct losses to the Share Insurance Fund and led to the failures of credit unions with combined assets of more than $2 billion.
“Because we continue to see no compelling reason for such a regulation when less than two percent of credit union assets are invested in CUSOs and therefore systemic risk is hardly in play, NACUSO feels the need to remind NCUA that - under the existing regulation - a CUSO agrees to permit NCUA to inspect its books and records as a condition of a credit union’s investment,” Antonini and Messick noted.
NACUSO said the NCUA already has the power to look at the CUSO’s business information under the current rule. The new rule “has added the affirmative obligation on the CUSO to report certain business information directly to NCUA. This is a substantive expansion of NCUA’s authority over CUSOs.”
“We are pleased that NCUA has stated that it will be sensitive to preventing the public disclosure of sensitive business information such as customer lists and financial information, but we still have serious concerns over the security of the information and the need for it to be protected as confidential trade secret information and not released to competitors under the Freedom of Information Act,” NACUSO said. “We will continue to have ongoing discussions with NCUA on this specific concern.”
NACUSO said responsible and limited information gathering that enables NCUA examiners to better evaluate the risk of CUSO investments on the balance sheets of the credit unions they regulate and insure is not, within itself, bad public policy.
“Utilizing data gathering to do an ‘end around’ on the lack of statutory regulatory and examination authority over CUSOs would be bad public policy,” NACUSO said.
The association said it will be watching closely NCUA’s data gathering efforts to ensure that “they stay consistent with the stated limitations of this rule and do not evolve into de facto regulation and examination through the data gathering process.”
Meanwhile, the National Association of Credit Union Supervisors said it is carefully reviewing the final CUSO rule after it raised substantive concerns with the rule as proposed in 2011 and is evaluating how the final rule addressed those concerns.
NASCUS has said a better approach to evaluating the credit union and CUSO relationship would be to emphasize credit union due diligence as part of the routine examination.
“If during the course of an examination regulators conclude a more detailed review of the CUSO is necessary, then authority already exists at the state and federal level to obtain additional information as needed,” NASCUS wrote in its comment letter in August 2011.
NASCUS also suggested the NCUA fully exempt state-chartered credit unions in states where the state regulator exercises sufficient CUSO oversight to mitigate material risk and the agency reorganize their rules and regulations to ease regulatory burden by consolidating share insurance rules.