At one point, the high-flying commercial lending CUSO formedthrough Eastern Financial Florida Credit Union funded more than$200 million in business loans and served dozens of credit unionsnationwide.

That was 2007. Two years later, the Florida Office of FinancialRegulation issued a cease and desist order againstEastern Financial for unsound lending and operationalpractices and requested a review of all business loan workoutsperformed by its CUSO, CU Business Capital LLC.

The Miramar, Fla.-based credit union would eventually face its demise when the NCUA placed it in conservatorship inApril 2009, followed by a merger with Space Coast Credit Union.CUBC quietly shut down and a Maryland firm became itssuccessor. Meredith Gibson, a Space Coast spokeswoman, confirmedCUBC is no longer operating.

“The only comment we would have is that we reviewed the workbeing done by the CUSO that handled Eastern Financial's businessaccounts and made the decision not to continue using that resource.We took the steps needed to move the loans to [Space Coast's]systems,” Gibson said.

Another potential CUSO dissection made newsrecently when 16 corporate credit unions announceddiscussions to buy a wholly owned brokerage services CUSO from U.S.Central Bridge.

Meanwhile, the fate of CUSOs after a credit union undergoes amerger or conservatorship can go in a myriad of directions. Lately,the spotlight has become brighter as the NCUA continues to take over more troubled cooperatives and theties between CUSOs and their credit union owners and partners arescrutinized.

“If NCUA conserves a credit union, there is typically no changein the relationship between the CUSO and the conserved credit unionbecause NCUA's goal is typically to return the credit union to goodstanding and return it to its members with no interruption ofservice. Those services are often provided by CUSOs,” said DavidSmall, NCUA assistant director of public affairs.

If a credit union liquidates, whatever its interest was with theCUSO becomes part of that credit union's estate, Small said. If theCUSO or others do not buy that liquidated credit union's shares ofthe CUSO back, the credit union's interest in the CUSO goes withthe credit union's other assets to the NCUA's Asset ManagementAssistance Center with that credit union's estate.

“So if a failed credit union owns 50% of a CUSO, then somebodyeither has to buy those shares or the AMAC will try to sell themwith the rest of the credit union's assets,” Small explained.

Well before a merger or conservatorship, it would behoove acredit union to take a hard look at its CUSO's operating agreement,said Brian Lauer, a partner with Messick & Lauer PC in Media,Pa. The law firm serves credit unions and CUSOs.

“The biggest piece of advice would be to look at yourdocumentation on what happens if one of the owners or clients isconserved,” Lauer said. “Or, in the case of a memorandum ofunderstanding or a document of resolution, are you prepared forthat?”

One of the scenarios when the NCUA takes over is a purchase andassumption, Lauer said. The regulator can take over the assets andsell them right away. In that instance, the purchasing credit unionwill do its due diligence on all of the credit union's assets andwill only want to purchase those assets and liabilities that itdeems worthy.

Lauer said one of the more intriguing outcomes is when a mergeror purchase and assumption occurs, what happens to the investmentin the CUSO if it is owned by multiple credit unions. In the caseof a wholly owned CUSO, the subsidiary will likely continue withoutmuch change.

“With multi-owned CUSOs, it can get interesting. One of thethings we always talk about when collaborating is to make sure youchoose your partners well,” Lauer said. “It can be quitecontentious. If money is there, the acquiring credit union may notlike” a former CUSO owner wanting its investment returned.

That proactive measure will be helpful down the road, heoffered. Lauer said from a pure cash flow perspective, a CUSO mayhave to determine what happens if a credit union wants to be paidout. Depending on the CUSO's success, the amount could be quitesubstantial. On the flip side, a sale to the acquiring credit unionmight be a viable option especially if that CUSO can aid in gainingmarket share.

Most CUSOs are limited liability companies and if a credit unionis merged away and not the surviving entity, it is no longer anowner, Lauer said. The investment documents or bylaws shouldinclude language indicating that. In an LLC, it would be adisassociation. In a corporate situation, the entity would nolonger be a shareholder.

Under NCUA conservatorship since June 2010, the $900 millionArrowhead Credit Union in San Bernardino, Calif., has been workingto reduce its operating expenses, including closing several of itsbranches. Four months prior in March, the cooperative sold itsinsurance subsidiary after the firm failed to bring in anysignificant income, said former Arrowhead CEO Larry Sharp, at thetime.

In 2005, the credit union also folded Arrowhead Trust Inc. forits failure to turn a profit. The subsidiary served members as wellas corporations, employee benefit plans and nonprofit organization.It is not clear if the trust CUSO served any credit unions.

Arrowhead's home state of California, like most states, has itsown set of CUSO rules to follow. Small said some industries have anextra layer of rules such as those providing mortgage, insurance orsecurities services, depending on the state.

“Because of that heavy regulation at the state level, if acredit union merges with another, that CUSO may no longer be ableto operate in the way it had been. It is state specific though,”Small said.

Unfortunately, there is another reality that emerges in howCUSOs are dissected after a merger or conservatorship, Lauerdiscovered.

“Some credit unions can be incredibly territorial. Market shareand egos get involved,” he said. Sometimes the smaller or midsizecredit unions may have concerns with the bigger credit unions.“Others may not want credit union [alliances] forced on them.”