Now that the NCUA board has approved a proposal that wouldrequire all CUSOs to file financial reports directly with theregulator and the appropriate state supervisory authority, someCEOs of member business lending CUSOs have weighed on what the thechanges may mean for their operations.

In July 2011, the NCUA issued a proposal that would require all CUSOs to filefinancial reports directly with the regulator and the appropriatestate supervisory authority. The NCUA also proposed makingadditional parts of the CUSO rule applicable to federally insuredstate-chartered CUs as well as federal credit unions.

Part of the motivation for the changes stemmed from the NCUA'sconcerns that less than adequately capitalized federally insuredstate credit unions posed serious risk to their members and theNational Credit Union Share Insurance Fund when investing moneyinto failing CUSOs. To address the concern, the regulator proposedlimiting these FISCUs' aggregate cash outlays to a CUSO, consistentwith state laws.

Critics of the NCUA's proposal believe the agency may beoverreacting towards what they say are small group of CUSOs,particularly in the member business lending space, that havebrought financial losses to their balance sheets and those of theirrespective credit union owners as well as the NCUSIF due tooverextension and mismanagement.

“I will say simply that I don't understand the need. How muchmore control can they want? They already control our clients,” saidWayne Grinnik, CEO of Keystone Business Lending Solutions LLC, aWexford, Pa.-based CUSO. “They examine our work at the credit unionlevel so they know the quality of work we do. They ­examine thesame work at the CUSO level.”

Formed in 2007, KBLS is owned by six credit unions and servesthree other credit unions and a small bank with $62 million inloans under management, Grinnik said. As assurances to the NCUA,Grinnik pointed to several areas that the regulator currently hasaccess to gauge financial performance including exam findings,audited financials, portfolio activity, and in some cases,independent third-party reviews. Records of continuing educationfor CUSO and credit union staff can also give examiners a betteridea of a track record.

“The last list I saw of items required for a CUSO exam contained64 items,” Grinnik said. “That includes our audited financials.They may not technically regulate my CUSO but in reality, theycertainly control its fate.”

NCUA Chairman Debbie Matz reiterated the need to be moreproactive 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 keynoteaddress at the CUNA Governmental Affairs Conference in Februaryin Washington. “And with a share insurance fund of less than $12billion, we have to pay extra attention to any credit union where afailure could overwhelm the (fund) overnight.”

Indeed, in her remarks, Matz shared an experience involving theexamination of a business lending CUSO. Without revealing the name,she said many credit unions were doing business with this CUSO thathad 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 unionowners, she said.

“The NCUA examiner found lapses in due diligence. In particular,the CUSO had not re-evaluated the risk in its portfolio, eventhough many of its loans had been issued before the housingcrisis,” Matz said. “The examiner, of course, knew that NCUA doesnot have direct oversight authority over CUSOs. But he presentedimportant recommendations in a thorough manner to the CUSO'smanagement.”

In the end, the CUSO officials adopted every recommendation andat the time of her remarks, Matz said the CUSO was providingreliable and innovative services to credit unions nationwide.

NCUA examiners have visited Centennial Lending LLC four timesand each visit has been professional and helpful, said MarkBostock, president of the commercial construction and mortgagelending CUSO in Longmont, Colo.

“They've been able to look at anything they wanted to look atand always gave us good feedback on what they reviewed,” Bostocksaid. “So, to increase their staff just to look at every CUSO outthere seems like a little overkill.”

Owned by 14 credit unions, Centennial Lending manages $245million in business loans and $733 million in residential mortgageloans for 100 credit unions in Arizona, Colorado, Nebraska,Oklahoma, Oregon and Wyoming.

Bostock said the CUSO's entire business loan department isstaffed with ex-bankers who have years of commercial lendingexperience in the types of loans Centennial Lending offers. Thereis also an independent loan committee, again made up of staff withextensive commercial loan experience that review every loanunderwritten before it is sent out to a credit union for approval,he ­noted. ­Examiners see the loans ­underwritten by CentennialLending at the credit unions the CUSO works with “so they alwayshave 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 dobusiness lending in a very prudent manner. We've gone through theworst economic times in recent history with minimal issues.”

The National Association of Credit Union Service Organizationssaid it's these layers of due diligence that many CUSOs are alreadyengaged in on a consistent basis that the NCUA can utilize to spotpotential trouble areas. The group has criticized the regulator'sproposal and most recently, NACUSO officials met with NCUA BoardMember Rick Metsger, to discuss their concerns.

Next Page: Meeting With Metsger

NACUSO Board Chair Mark Zook met with Metsger in Oregon for 90minutes 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,” Messicksaid. “He agreed that CUSOs are an important tool for credit unionsto innovate and collaborate.”

During the meetings with Metsger, NACUSO said there are ways togather accurate information about CUSOs without regulating them. Asa condition of investment, CUSOs can be required to fill out aninformation sheet providing its name, investors and services,Messick explained.

NCUA can then determine which CUSOs represent a higher risk andmonitor them, he suggested, adding, the regulator already talksdirectly to CUSOs in the review process so additional powers arenot needed.

“The real issue to NCUA is the inefficiency of 'going throughcredit unions' to review CUSOs,” Messick said. “They want to gostraight to CUSOs as their regulator. If they rely upon creditunions reporting information on CUSOs, credit unions are not alwaysaccurate.”

While Community Business Lenders shares many of NACUSO'sconcerns with the NCUA's proposal, the Des Moines, Iowa-basedCUSO's involvement with the Regional CUSO Alliance and with examiners has helped to achievebalance. The RCA a multi-stateWhile Community Business Lendersshares many of NACUSO's concerns with the NCUA's proposal, the DesMoines, Iowa-based CUSO's involvement with the Regional CUSOAlliance and with examiners has helped to achieve balance. The RCAa multi-state advocacy group that represents 15 regional businesslending CUSOs, 508 credit unions and an aggregate loan portfolio of$3 billion.

“We have developed a collaborative relationship with the NCUArecognizing that our shared objective is the safety and soundnessof the credit unions we work with,” said Mark Kilian, CEO ofCommunity Business Lenders, a CUSO that supports more than 50state-chartered credit unions in Iowa that are working to expandtheir membership relationships and diversify their earning assetsthrough member business lending and manages a portfolio of morethan $160 million, he added. By working with the Iowa Division ofCredit Unions and leveraging technology, Kilian said CBL'stransparent approach allows its regulator to review portfolioinformation throughout the year.

“By providing a secured portal, the review of loan informationoccurs at the CUSO level allowing regulators to focus theirexaminations on policy and procedures,” he explained.