Now that the NCUA board has approved a proposal that would require all CUSOs to file financial reports directly with the regulator and the appropriate state supervisory authority, some CEOs of member business lending CUSOs have weighed on what the the changes may mean for their operations.
In July 2011, the NCUA issued a proposal that would require all CUSOs to file financial reports directly with the regulator and the appropriate state supervisory authority. The NCUA also proposed making additional parts of the CUSO rule applicable to federally insured state-chartered CUs as well as federal credit unions.
Part of the motivation for the changes stemmed from the NCUA’s concerns that less than adequately capitalized federally insured state credit unions posed serious risk to their members and the National Credit Union Share Insurance Fund when investing money into failing CUSOs. To address the concern, the regulator proposed limiting these FISCUs’ aggregate cash outlays to a CUSO, consistent with state laws.
Critics of the NCUA’s proposal believe the agency may be overreacting towards what they say are small group of CUSOs, particularly in the member business lending space, that have brought financial losses to their balance sheets and those of their respective credit union owners as well as the NCUSIF due to overextension and mismanagement.
“I will say simply that I don’t understand the need. How much more control can they want? They already control our clients,” said Wayne Grinnik, CEO of Keystone Business Lending Solutions LLC, a Wexford, Pa.-based CUSO. “They examine our work at the credit union level so they know the quality of work we do. They examine the same work at the CUSO level.”
Formed in 2007, KBLS is owned by six credit unions and serves three other credit unions and a small bank with $62 million in loans under management, Grinnik said. As assurances to the NCUA, Grinnik pointed to several areas that the regulator currently has access to gauge financial performance including exam findings, audited financials, portfolio activity, and in some cases, independent third-party reviews. Records of continuing education for CUSO and credit union staff can also give examiners a better idea of a track record.
“The last list I saw of items required for a CUSO exam contained 64 items,” Grinnik said. “That includes our audited financials. They may not technically regulate my CUSO but in reality, they certainly control its fate.”
NCUA Chairman Debbie Matz reiterated the need to be more proactive to protect against systemic losses.
“As we all learned the hard way during the financial crisis, increasingly-concentrated assets mean increasingly shared risk,” she said during her keynote address at the CUNA Governmental Affairs Conference in February in Washington. “And with a share insurance fund of less than $12 billion, we have to pay extra attention to any credit union where a failure could overwhelm the (fund) overnight.”
Indeed, in her remarks, Matz shared an experience involving the examination of a business lending CUSO. Without revealing the name, she said many credit unions were doing business with this CUSO that had a total exposure of literally billions of dollars. However, there were several areas in which the CUSO was underperforming, setting a scene for a potential threat to all of the credit union owners, she said.
“The NCUA examiner found lapses in due diligence. In particular, the CUSO had not re-evaluated the risk in its portfolio, even though many of its loans had been issued before the housing crisis,” Matz said. “The examiner, of course, knew that NCUA does not have direct oversight authority over CUSOs. But he presented important recommendations in a thorough manner to the CUSO’s management.”
In the end, the CUSO officials adopted every recommendation and at the time of her remarks, Matz said the CUSO was providing reliable and innovative services to credit unions nationwide.
NCUA examiners have visited Centennial Lending LLC four times and each visit has been professional and helpful, said Mark Bostock, president of the commercial construction and mortgage lending CUSO in Longmont, Colo.
“They’ve been able to look at anything they wanted to look at and always gave us good feedback on what they reviewed,” Bostock said. “So, to increase their staff just to look at every CUSO out there seems like a little overkill.”
Owned by 14 credit unions, Centennial Lending manages $245 million in business loans and $733 million in residential mortgage loans for 100 credit unions in Arizona, Colorado, Nebraska, Oklahoma, Oregon and Wyoming.
Bostock said the CUSO’s entire business loan department is staffed with ex-bankers who have years of commercial lending experience in the types of loans Centennial Lending offers. There is also an independent loan committee, again made up of staff with extensive commercial loan experience that review every loan underwritten before it is sent out to a credit union for approval, he noted. Examiners see the loans underwritten by Centennial Lending at the credit unions the CUSO works with “so they always have a good feel for how we handle ourselves.”
“We’ve always taken their feedback and suggestions serious,” Bostock said of the examiners. “They’ve been able to see we do business lending in a very prudent manner. We’ve gone through the worst economic times in recent history with minimal issues.”
The National Association of Credit Union Service Organizations said it’s these layers of due diligence that many CUSOs are already engaged in on a consistent basis that the NCUA can utilize to spot potential trouble areas. The group has criticized the regulator’s proposal and most recently, NACUSO officials met with NCUA Board Member Rick Metsger, to discuss their concerns.
Next Page: Meeting With Metsger
NACUSO Board Chair Mark Zook met with Metsger in Oregon for 90 minutes on Oct. 3 and NACUSO President/CEO Jack Antonini and General Counsel Guy Messick met with him at NCUA’s headquarters in Alexandria, Va., for an hour on Oct. 10, the trade group said.
“All three of us found Mr. Metsger to be open to consideration of our position,” Messick said. “He agreed that CUSOs are an important tool for credit unions to innovate and collaborate.”
During the meetings with Metsger, NACUSO said there are ways to gather accurate information about CUSOs without regulating them. As a condition of investment, CUSOs can be required to fill out an information sheet providing its name, investors and services, Messick explained.
NCUA can then determine which CUSOs represent a higher risk and monitor them, he suggested, adding, the regulator already talks directly to CUSOs in the review process so additional powers are not needed.
“The real issue to NCUA is the inefficiency of ‘going through credit unions’ to review CUSOs,” Messick said. “They want to go straight to CUSOs as their regulator. If they rely upon credit unions reporting information on CUSOs, credit unions are not always accurate.”
While Community Business Lenders shares many of NACUSO’s concerns with the NCUA’s proposal, the Des Moines, Iowa-based CUSO’s involvement with the Regional CUSO Alliance and with examiners has helped to achieve balance. The RCA a multi-stateWhile Community Business Lenders shares many of NACUSO’s concerns with the NCUA’s proposal, the Des Moines, Iowa-based CUSO’s involvement with the Regional CUSO Alliance and with examiners has helped to achieve balance. The RCA a multi-state advocacy group that represents 15 regional business lending CUSOs, 508 credit unions and an aggregate loan portfolio of $3 billion.
“We have developed a collaborative relationship with the NCUA recognizing that our shared objective is the safety and soundness of the credit unions we work with,” said Mark Kilian, CEO of Community Business Lenders, a CUSO that supports more than 50 state-chartered credit unions in Iowa that are working to expand their membership relationships and diversify their earning assets through member business lending and manages a portfolio of more than $160 million, he added. By working with the Iowa Division of Credit Unions and leveraging technology, Kilian said CBL’s transparent approach allows its regulator to review portfolio information throughout the year.
“By providing a secured portal, the review of loan information occurs at the CUSO level allowing regulators to focus their examinations on policy and procedures,” he explained.