Questions Linger Over CUSO Rule
As one of the industry's largest CUSOs, PSCU has been working behind the scenes to ensure that its 700 credit union owners will be ready when the NCUA's amended CUSO rule goes into effect June 30.
The work is happening despite the St. Petersburg, Fla.-based payment processing CUSO's serious concerns about the implications of the NCUA's actions, said Fredda McDonald, EVP at PSCU, which serves more than 1,500 financial institutions.
“We are finalizing amendments with our member-owner credit unions to address the new rule,” she said. “We are also hearing concerns from our credit unions and other CUSOs regarding the NCUA's legal authority for this rule.”
One major sticking point with the CUSO rule is the risk of potential disclosure of confidential business information and subsequent competitive disadvantage against non-CUSO entities that provide the same services, McDonald pointed out. Another issue is the expenses associated with the amended regulation.
“The burdens on the credit union industry of additional regulations and the costs of compliance are real,” McDonald said. “Protecting the ability of credit unions to form CUSOs as cooperative entities to provide services is fundamental to the success and future of our industry.”
While the June 30 is the deadline for the amended rule to go into effect, the reporting requirements will not start until Dec. 31, 2015, according to the NCUA.
Like other CUSOs, CU Direct is also working with its shareholders to comply with the new rule and will be prepared to share information as appropriate with investor credit unions and the NCUA, said Bob Child, chief of staff at the Ontario, Calif.-based lending services CUSO that serves more than 1,100 credit unions.
“We have provided our investors with those assurances. It is our understanding that the larger CUSOs are doing similar to us,” Child said. “As it relates to the official date, this is more of a formality given that CU Direct has always worked with its shareholders to build best-in-class programs that are in compliance with state and federal regulations.”
The controversy started back in July 2011 when 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 agency also proposed making additional parts of the CUSO rule applicable to federally insured state-chartered credit unions as well as federal credit unions.
Last November, the NCUA board approved those amended changes to the CUSO rule.
Part of the motivation for the adjustments stemmed from the NCUA's concerns that less than adequately capitalized federally insured state credit unions posed serious risk to members and the NCUSIF when investing money into failing CUSOs. The regulator wanted to limit these FISCUs’ aggregate cash outlays to a CUSO, consistent with state laws.
Meanwhile, on the eve of the CUSO rule deadline, there were still questions about who would be affected by the modifications.
Brian Lauer, a partner with law firm Messick & Lauer in Media, Pa., wrote the NCUA for clarification on which credit unions and CUSOs would be impacted. In a May 29 letter to Lauer, NCUA General Counsel Michael McKenna clarified that a CUSO was not required to enter into a written agreement in which the CUSO is obligated to submit an annual report to the regulator if the credit union does not have an investment in or loan outstanding to the CUSO.
Credit unions and CUSOs have been working diligently over the past few months to ensure they are in compliance with the June 30 deadline, Lauer said.
“The deadline has been a bit confusing because it is arbitrary. This new reporting requirement begins in December 2015 if and when the reporting database is up and running,” he explained. “There does not seem to be any justification for the June 30 deadline. This confusion is amplified by the strong reservations credit unions have over the reasons and justifications for the direct reporting in the first place.”
Some question when the agreements actually have to be amended, Lauer said. The rule only technically requires an agreement before a credit union makes an investment or loan, he noted.
“What if there is no further investment? There has also been some confusion regarding what constitutes an agreement,” Lauer said. “We have been working through these questions on a case-by-case basis.”
There have also been questions about how this information once collected will be used, Lauer said. The NCUA will soon start to collect information about unregulated private companies, he added.
“Will this information be published? Will it be accessible to the public through FOIA requests? Or will it simply sit in a data vault?” Lauer wondered.
The NCUA had not responded to these questions by press time.
Most CUSOs have put the new contract terms in place and are preparing for the compliance requirements of the new rule, said Jack Antonini, president of the National Association of CUSOs. They’re moving forward even though continuing concern exists that the rule is going to bring about increased regulatory burden and compliance costs and put CUSOs at a competitive disadvantage, he added.
“CUSOs I talked with are all well underway with the implementation of the contractual changes, and are preparing to comply with other aspects of the amended CUSO rule, but feel the onsite reviews are little more than NCUA examinations and some strong reservations remain as to whether the agency has the statutory authority to examine non-credit union entities like CUSOs,” Antonini said.