NCUA Risk-Based Rules Would Stifle Collaboration
In February the NCUA published proposed new risk-based capital rules for the credit union movement, which include a 250% risk weighting on investments in CUSOs.
The industry has until May 29 to provide comment letters on the proposed regulations to the NCUA board secretary. CO-OP Financial Services took the opportunity to do so because we believe the 250% weighting will stifle risk sharing and collaboration, the very reason CUSOs exist.
The CUSO risk metric is not justified when the true nature of CUSO investment is considered. And, the figure is strikingly arbitrary for a several reasons, including the fact that there is no differentiation based on the business purpose of the CUSO, the ownership structure of the CUSO – single or multiple owners – or the corporate structure of the CUSO.
The proposed regulation suggests that unless the CUSO pays a cash dividend to the credit union owners, there has not been a return on the investment and the investment is at risk. However, many credit unions receive annual returns of 100% to 200% on their CUSO investments through cost savings together with higher service levels. Investments in CUSOs that specialize in providing services such as information technology are not always intended to provide a cash investment return. They are cost-sharing models that the investing credit unions value highly.
In fact, there is no evidence that an IT CUSO (which is considered risky or complex in NCUA's proposed rule) has ever caused an investment loss of a systemic nature and, thus, has ever caused a loss to the agency's insurance fund. Indeed, two attorneys speaking on the proposed rules at NACUSO on April 15 could not produce an example when asked.
It is also not clear from the proposed regulation whether the capital risk rating will apply to the original investment only – or also to the current value of the CUSO.
There are many CUSOs that pay their shareholders cash dividends every year, but in addition these investing institutions have also built significant allocated equity beyond their original investment. We are concerned that the proposed risk rating could also be applied to the increased value of the CUSO investment through profits earned by the CUSO. This militates against the very results that NCUA should want to see from any CUSO development – a profitable investment.
The high-risk rating for CUSO investments acts as a clear disincentive for investments. Consider the following:
The delinquent consumer debt over 60 days is risk rated at 150% and delinquent first lien mortgage debit is risk rated at 100%. However, investments in CUSOs like CO-OP – that have added millions to the bottom line of credit unions – are deemed riskier, with a 250% risk rating.
There is no consideration for what types of services are being provided; whether the investment represents necessary operational expenses that would be otherwise incurred; whether the amount invested is material; whether the CUSO has a history of profitability; or whether the investment amount has been fully recovered by the credit union through savings or income.
In our comment letter, we requested that NCUA remove any risk weighting above 100% for CUSO investments and loans. A weighting above that percentage is inconsistent with the best interests of the credit union industry.
At the very time that CUSOs are most needed to help sustain credit unions, we are concerned that the NCUA may be creating a regulation that will have a negative effect on investments in CUSOs. We ask all of our industry colleagues to please write to the NCUA by the May 29 deadline and urge the board to remove or significantly reduce the proposed risk rating for CUSO investments.Stan Hollen is president/CEO of CO-OP Financial Services in Rancho Cucamonga, Calif.Contact(800) 782-9042 or email@example.com.