NCUA’S significantly expanded final CUSO rule

by Jane Pannier

The NCUA has amended—or rather, significantly expanded—the scope of the existing CUSO (Credit Union Service Organization) rule. Although NCUA does not have direct statutory authority to regulate CUSOs, it does have the authority to regulate the investments and loans a credit union makes to a CUSO. NCUA believes the changes made to the CUSO rule are necessary in order to safeguard the NCUSIF, which has experienced some losses as a result of CUSO failures. Their objectives for the new rule are to broaden the scope of the coverage in order to better understand CUSO activities and to have greater ability to evaluate their financial strength.

So what does this rule actually do? Specifically, the final rule expands the coverage of the provisions that pertain to financial statements, accounting requirements, and audits to federally insured, state-chartered credit unions (FISCUs). The final rule also limits the ability of “less than adequately capitalized” FISCUs to recapitalize CUSOs in which they are owners. Lastly, there are new reporting requirements for CUSOs, as well as new requirements for subsidiaries of CUSOs.

Operational Requirements

Expanded Requirements for FISCUs

Currently, only two provisions of Part 712 apply to FISCUs: the need for corporate separateness and the requirement to provide NCUA and state regulators with access to the CUSO’s books and records. The new rule adds several other provisions to those that apply to FISCUs.

RECAPITALIZATION OF INSOLVENT CUSOS

The first change affects situations in which a FISCU wants to recapitalize an insolvent CUSO. Effective June 30, 2014, FISCUs that are less than adequately capitalized or a FISCU that would become less than adequately capitalized by the recapitalization of a CUSO must obtain prior written approval from the appropriate state agency before making an investment that results in a cash outlay—measured on a cumulative basis over seven years—in a CUSO in an amount that exceeds their state investment limit. If their state does not set an investment limit for investments in CUSOs, the FISCU must obtain approval from the appropriate state agency before making an investment in a CUSO that will result in an aggregate cash outlay, measured on a cumulative basis over a 7-year period, which would exceed 1% of the FISCU’s paid-in and unimpaired capital and surplus. FISCUs must also submit a copy of their requests to NCUA in order to apprise them of the activity. The important take away here is that this rule change does not require that a less than adequately capitalized FISCU divest itself of its investment in the CUSO. It is just not able to make additional investments without prior written consent from the state regulator.

ACCOUNTING, AUDITS, AND FINANCIAL STATEMENTS

Beginning on June 30, 2014, a FISCU’s agreement with a CUSO must require that the CUSO use GAAP accounting methodology, provide financial statements on a quarterly basis, and obtain an annual financial statement audit by a licensed certified public accountant. On the other hand, a CUSO that is wholly owned by one FISCU is not required to obtain a separate annual financial statement audit if the CUSO is included in a consolidated financial statement audit of its credit union owner.

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