With much more at stake, it is no surprise that credit unionservice organizations are sounding the alarm louder than creditunions regarding an NCUA proposal that would alter how CUSOrelationships are regulated.

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Credit Union Times contacted several CUs to get theirtake on how an amendment to Part 712 of the CUSO rule wouldrequire all CUSOs to file financial reports directly with theNCUA and the appropriate state supervisory authority. Thatrequirement would apply to federally insured state-chartered creditunions as well.

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The NCUA also wants to limit these FISCUs' aggregate cashoutlays to a CUSO. The concern, the regulator said, is that lessthan adequately capitalized FISCUs pose “serious risk to theirmembers and the National Credit Union Share Insurance Fund wheninvesting money into failing CUSOs.”

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Of the CUs contacted, most did not return calls and others werenot available or willing to comment.

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A senior vice president of a $585 million CU said afterdiscussing the matter with his CEO, “we don't think we would haveany substantial input for you at this time.” The CU has an alliancewith a large CUSO.

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The executive added, “We have a number of strategic initiativesgoing on right now, and, therefore, we really haven't had theopportunity to fully dissect the NCUA proposal.”

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Representatives from a billion-dollar CU with a bustlingcommercial lending program did not return several phone calls. A CUwith board ties to another CUSO also failed to respond. Aninterview with a West Coast CU was canceled.

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But Steven Stapp, president/CEO of the $767 million SanFrancisco FCU, criticized the NCUA's proposal on several levels. Hesuggested the agency develop a risk-based model and look at theactivity that is being conducted rather than casting an entire netover all CUSOs.

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“Disclosure of client information by CUSO versus vendors doescreate an unfair situation,” Stapp said. “The 22 [basis points] ofat-risk capital by the industry is very well-diversified. It's notthe investment that puts a credit union at risk, rather it's theactivity that a credit union conducts that puts them at risk.”

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Meanwhile, CUSOs continue to turn up the heat on the proposal.Financial Service Centers Cooperative Inc. is against the changes,saying the impact could cut into CUSO income and ultimately waterdown or eliminate service to CUs.

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“Many successful CUSOs that drive significant savings and incometo credit unions do not have a sizeable capital structure orgenerate significant income,” said Sarah Canepa Bang, president ofFSCC, the shared branching and remote services CUSO.

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“This is certainly true of FSCC and shared branching where thedividends are the number of shared branches and access points wegenerate for our credit unions–not monetary return on theinvestment,” Canepa Bang said.

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Randy Karnes, CEO of CU*Answers, recently sent out an emailpraising the National Association of Credit Union Service Organizations'stance but urged that it not mimic other groups. The GrandRapids, Mich.-based CUSO provides core processing, consulting,management and technology services

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“The only thing I ask of NACUSO is that they not borrow a cheapand easy page from CUNA and NAFCU here–do not rally us against athreat, a perceived enemy, a critical risk to simply garnerattention and increase your dues,” Karnes wrote, adding, “insteadpush all CUSOs to understand the opportunity in this, to push forinnovation here for the entire industry and to be dynamic inwhatever action we take.” 

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Karnes also blasted the NCUA's motives saying, “What they wantto do is cast doubt, induce fear and cause pause so that they cansomehow garner influence over another source of income for theiragency.” 

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“The NCUA has destroyed more member capital in the last twoyears than CUSOs could do in 20 should every game plan go awry,”Karnes said.

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He suggested approaching those “who think they know how tomanipulate the system for a small win–go to the members, go to theemployees, go to the volunteers and go to the customers of CUSOs ina way that is more viral and violent than the subtle and expensiveunderstated slicksters who currently cast our messages at the othertrades.”

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Kent Moon, president/CEO of Member Business Lending LLC, is morewilling to work with the NCUA and considers the agency “an asset,an ally” to the South Jordan, Utah-based CUSO. Still, he too,questioned the NCUA's intentions especially in what he sees as aheightened environment of government spending backlash andcriticism of the regulator's own budget.

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Instead of the NCUA mandating new edicts, Moon suggested theagency come up with a memorandum of understanding between it andother regulators to collaborate on duties in an effort to reduceoversight costs.

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The former SBA director recalls a similar measure between thatagency and the Internal Revenue Service on in situations involvingborrowers providing false tax returns to obtaingovernment-guaranteed loans. The two entities worked together tored flag these scenarios while adhering to privacy laws, hesaid.

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“There are better solutions. There can be collaboration andcooperation between the regulatory bodies,” Moon said. “When Iwrote regulations, there were phrases you wanted to weighcarefully–anything with 'will,' 'shall' or 'must.' If you want toestablish a basic rule, use 'may,' 'should' or 'could.' What itsaid is we are relying on you and your professional businessdiscretion for good business practices.”

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NACUSO Chairman Pete Snyder argued that failed CUSOs generallydo not get that way due to a lack of regulatory authority. Theculprits tend to be ineffective leadership at the management orexecutive level, a lack of internalized skills based on theproducts or services offered or a lack of scale, he pointed out.The principal and founder of Snyder Consulting Solutions, Snydersaid that has been his experience in aiding troubled CUSOs.

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“There are a significant number of CUSOs that have demonstratedthe appropriate business model to accomplish goals within what theregulators want,” Snyder said. “There are less troubled CUSOs thantroubled credit unions.”

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Snyder said he makes that distinction to note that the NCUA hascomplete authority over FCUs but that has not stopped losses fromoccurring.

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He went back to the mid to late 1980s when CUs were active inthe auto leasing business. The number of those CUSOs that met theirdemise back then had more to do with weak leadership and skills,not regulatory authority, Snyder said.

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Another consequence of the NCUA's proposal would be investmentCUSOs being held to “a higher and more convoluted standard” thantheir competitors, he warned. These entities are already regulatedby the Securities and Exchange Commission and other agencies.

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“The FDIC and others cannot go to external providers and say 'weare going to regulate you,” Snyder said. “The NCUA would have tohave the expertise to look at specific products and servicesprovided by the CUSOs. What does the NCUA want to accomplish withregulating CUSOs when they don't have the expertise?” 

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