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Last month, the NCUA Board issued a proposal to revise its credit union service organization regulation applicable to a wholly-owned CUSO of a federal credit union The CUSO would not be required to obtain a separate financial statement audit from a certified public accountant as long as the CUSO’s statement is included in the consolidated financial statement of the parent FCU. Consolidated financial statements are the combined financial statements of a parent organization and its subsidiaries, showing the results of operations, financial position, and cash flows of the group as a whole. CUNA’s Accounting Task Force, Examination and Supervision Subcommittee, and Federal Credit Union Subcommittee are reviewing the proposal. Additionally, CUNA is soliciting input from its members and intends to submit its own comment letter to the NCUA Board on behalf of its members. NCUA is requesting that comments on the proposal be submitted by May 23, 2005. This proposal would not change the current accounting/audit requirements in the CUSO rule that prior to investing in or lending to a CUSO, an FCU must obtain a written commitment from the CUSO that states the CUSO will: (1) account for all its transactions in accordance with generally accepted accounting principles (GAAP); (2) prepare quarterly financial statements and obtain an annual opinion audit by a licensed CPA in accordance with generally accepted auditing standards (GAAS); and (3) provide NCUA with complete access to any of its books and records. The rationale behind this provision is to require the CUSO to maintain its books in such a manner that an FCU considering investing in or loaning to a CUSO has access to accurate financial information about the CUSO on which to base its decision. Although NCUA does not directly regulate CUSOs, the agency does regulate the types of CUSO activities and services in which it is permissible for FCUs to be involved. In the rule, NCUA includes a list of categories of preapproved CUSO activities and services, including: checking and currency services; clerical, professional and management services; business loan origination; consumer mortgage loan origination; electronic transaction services; financial counseling services; fixed asset services; insurance brokerage or agency; leasing; loan support services; record retention, security and disaster recovery services; securities brokerage services; shared credit union branch (service center) operations; student loan origination; travel agency services; trust and trust-related services; real estate brokerage services; and investments in non-CUSO service providers. In addition, NCUA has full access to CUSO financial information due to its oversight of the parent FCU. In the case where an FCU owns one 100% of the voting shares of the CUSO, GAAP requires preparation of a consolidated financial statement. Consolidated statements are viewed as more meaningful than separate statements and provide a fairer picture of financial condition when one of the enterprises in a group directly or indirectly has a controlling interest in another. This rule revision would allow a CUSO to avoid the requirement to obtain a separate CPA audit if the FCU has a CPA audit on the consolidated statement. One of NCUA’s stated reasons for this change is to conform the rule to agency practice. Since 1997, NCUA has considered wholly-owned CUSOs to be in compliance with the rule’s audit provision if the parent FCU has obtained a CPA audit on consolidated statements. While GAAP would also allow a credit union that is the majority owner of a CUSO to procure a consolidated audit, NCUA is limiting the proposed amendment to wholly-owned CUSOs. The agency’s reasoning is that this step will help ensure that full disclosure of potential risks is available to prospective minority investors in the CUSO. NCUA also notes in the proposal that this change is consistent with the agency’s ongoing efforts to reduce regulatory burden, while preserving safety and soundness. This rule could certainly help reduce the regulatory burden for those of the 588 wholly-owned CUSOs (as of the June 30, 2004 Call Report) that consolidate their financial statements with their wholly owned parent FCUs and still procure their own CPA opinion audit. Specifically, the ability of the FCU to wrap its audit into the consolidated statement audit obtained by the FCU could be a material cost savings for the CUSO. As currently proposed, this rule does not provide relief to FCUs unless they receive a consolidated financial statement audit. Currently, such an audit is required of credit unions with $500 million or more in assets, although many credit unions with assets under that amount are audited annually by an independent CPA firm. This proposed rule would allow CUSOs the flexibility to make a business decision as to the cost-benefit of obtaining a separate audit of the individual entity. Obtaining a separate audit would continue to be an option based on the CUSO’s business needs. While this rule pertains only to CUSOs of federal credit unions, it could potentially impact CUSOs owned by state-chartered credit unions if state regulators follow suit.

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