While NCUA made clear in a 2005 legal opinion that a CUSO could buy nonperforming loans as part of its debt-collection services, the regulator acknowledged that it had not fully addressed if debt restructuring was allowed.
The agency provided clarification in a May 18, 2009 opinion letter after a group of state and federal credit unions-wanting to create a CUSO to consolidate back-office functions-asked if the new entity could also engage in the purchase and collection of delinquent loans.
Albin said CUSOs should not restructure a loan under their authority to purchase and service nonperforming loans in a manner that circumvents lending restrictions applicable to federal credit unions, such as restructuring a loan with maturity terms longer or interest rates higher than permitted for a federal credit union. CUSOs continue to be prohibited from engaging in the origination of new consumer loans, other than credit card lines of credit, residential mortgage loans and student loans, Albin noted.
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NCUA's CUSO rule was amended to provide several new permissible CUSO activities related to the routine operation of credit unions, including the purchase and servicing of nonperforming loans. The purchase of nonperforming loans was recognized in a 2005 legal opinion letter as a permissible part of a CUSO's debt-collection activity. The letter said that, with limited exceptions, CUSOs are not permitted to engage in consumer lending. In the case addressed in the 2005 opinion, the CUSO would not be involved in debt restructuring.
Albin said the 2005 opinion did not fully address the authority of a CUSO to engage in debt restructuring when it buys nonperforming loans.
The May 18 clarification has helped the group that made the recent inquiry take the next steps, said Michael Lozoff, a partner with Adorno & Yoss LLP and director of the law firm's credit union group who wrote to the NCUA on the credit unions' behalf. At this point, the creation of a CUSO that would buy, sell and collect delinquent loans is in the concept stage, he emphasized. Because the discussions are still early, the credit unions involved requested anonymity, Lozoff said.
"They're discussing the feasibility, structure and fees. Coming out of those discussions is whether they can put together a business plan to circulate among their boards," Lozoff said, adding that the group of credit unions was scheduled to meet on July 1.
The motivation behind launching the CUSO stems from the credit unions' vested interest in the loans and desire to do "a good job collecting them," Lozoff said. By and large, they do a good job, but the credit unions are also carrying the loans on their books as charge-offs, which impacts their reserves, ratios and their overall financials, he said.
"They're lessening their loan losses, even if they only get 20 cents on the dollar, for instance. If the CUSO is successful, credit unions get back some of that discounted distribution," Lozoff said. "It seems to be a better idea than dealing with increasing delinquencies."
While there are collection departments at credit unions and CUSOs that do debt collection, the NCUA's clarification "further professionalizes collections," Lozoff said. Now that a CUSO can be set up to deal with nonperforming loans, a certain amount of expertise will be required, and credit unions will have an inherent advantage.
"Since the 2005 letter, there are a few CUSOs that buy loans and collect them, but they're probably some that are not doing it within the guidelines that Sheila outlined but didn't know it," Lozoff said.
"I suspect in some type of loan-modification efforts, there can be a violation of interest rate limitations."
The credit unions that Lozoff represents "were always willing to work within [the NCUA's] limitations but wanted to know to what extent they could alter these loans."
"It's a small point but an important one in these remarkable times," Lozoff said.
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