ARLINGTON, Va. — The findings from a key survey from NASCUS reveals that credit unions are using CUSOs to provide services at a lower cost to members and not necessarily to generate large profits.

Released on Dec. 19, the NASCUS Survey of the State Credit Union System was prepared for former House Ways & Means Committee Chairman Bill Thomas (R-Calif.), who requested information regarding state-chartered credit unions' use of their tax-exempt status. The survey collected data from 502 credit unions.

The data showed that among state-chartered credit unions with less than $50 million in assets, only 3.25% of those reporting CUSO investments received more than $10,000 in annual net income. Approximately 39% of state-chartered credit unions with more than $500 million in assets with CUSO investments reported earning more than $10,000 annually in net income from a CUSO, according to the survey. These same credit unions said net income in a CUSO accounted for less than $1,000 of their income.

The NASCUS Survey did not attempt to determine whether the income generated by CUSO investments was derived from services to members or generated by CUSOs providing services for a fee to credit unions.

“The numbers suggest, however, that the predominate purpose of the CUSO investments was to provide services at a lower cost to the state-chartered credit unions and their members, not to generate profit,” the survey reads.

For Dennis Pierce, chairman of NACUSO, the findings are not surprising. The bigger issue is that more credit unions are forming or linking up with CUSOs to leverage operational capability as a means to reduce costs for everyone.

“When you look at [the data] in the context of all credit unions, it's accurate,” said Pierce, who is also CEO of $1.7 billion CommunityAmerica Credit Union and chairman of the CommunityAmerica CUSO One board of directors. “We talk a great deal of our ability to cooperate. When you get down to the nuts and bolts and the nitty gritty and look at the efficiencies, [CUSOs] are a great way for the industry to expand its reach and leverage costs.”

State law or interpretation by a state credit union regulator determines the type of CUSO investments permissible by state-chartered credit unions, according to NASCUS. For that reason, there is no single template for what states consider a permissible CUSO investment. Of the credit unions surveyed, approximately 67% of smaller credit unions use their CUSO investments to provide back office services, with mortgage processing topping the list. The numbers are just as high for large state-chartered credit unions, with nearly 54% reporting that they used CUSOs to provide back-office services. The survey showed ATM and other services were used the most by larger credit unions.

The disparity in some areas between smaller credit unions' use of CUSOs compared to larger credit unions' use for many is a matter of priority, said Guy Messick, legal counsel for NACUSO and an attorney with Messick & Weber, P.C.

“Larger credit unions might have the staff and resources to understand collaboration and CUSOs. Some smaller credit unions have to struggle to get through the day-to-day such as responding to regulatory issues such as the Bank Secrecy Act,” Messick said, adding there are still some success stories. “For smaller credit unions, CUSOs might be the difference between survival and being merged out of existence.”

Messick said the implementation of the incidental powers rule required that credit unions move their investment programs out of CUSOs and in-house. State-chartered credit unions with more than $500 million in assets reported only 6.99% of use in this area over the past five years while the rest reported 6.05% or less.

“Even those [investment] services were small; I thought it would be more,” Messick said. “If the investment services were done through CUSOs, you would have seen a difference there.”

NASCUS also attempted to look at the characteristics of CUSO investments to determine the degree to which these entities were used by state-chartered credit union members and non-members. The association found it difficult to determine the breakdown saying many CUSOs provide services only to a single credit union or, more frequently, to a group of investing credit unions. Consequently, these entities are not used by any natural persons, whether member or non-member.

In many other cases, a CUSO is used by a group of non-investing credit unions, such as a shared branch. In this case, if tracked, a shared branch used by a single credit union's members might only constitute 3% total transaction volume, yet by definition, 100% of the use was by members of credit unions since only those holding accounts at credit unions could access them at a shared branch, NASCUS said. Less than 1% of state-chartered credit unions responding reported annual CUSO use by more than 30,000 non-members. By contrast, more than 82% of responding state-chartered credit unions reported no use of CUSO services by non-members.

Above all, the reason for the survey was to show how credit unions are using their tax-exempt status. Messick said the data clearly shows there's no abuse going on.

“They're not using their non-profit status to generate large amounts of income. Financial institutions are expected to provide a full range of services,” Messick said. “For credit unions, it's about getting scale to stay in business.”

“NASCUS presented the information as we found it. It was all factual,” said Sandra Troutman, executive vice president of government relations at NASCUS. “The next step is up to Congress. We don't have an actual plan [going forward]. A lot of work went into it.”

Meanwhile, Pierce said he would like to see what will happen with CUSOs as guidance on unrelated business income tax continues to unfold. The NASCUS survey sought data on UBIT but the results did not produce sufficient data to come up with any concrete conclusions.

“How will [UBIT] affect credit unions' use of CUSOs and answering tax liability questions? There are some advantages you can leverage for reductions. It will take some time because there's no resolution in the UBIT area,” Pierce said.

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