The new CUSO rule
The rule making process is sometimes involves give and take between the regulator and the regulated. The new CUSO Rule is a study in such give and take. A proposed CUSO amendment was introduced by NCUA on July 21, 2011. NACUSO, CUNA, NAFCU, credit unions and CUSOs lobbied hard against the proposed amendment. NASCUS also lobbied for changes. NCUA received 290 comment letters, almost all against some or all of the proposed amendment. The major reasons for opposition were that (1) NCUA did not need more power as it already has the power to inspect the books and records of CUSOs and compel credit unions to stop using and investing in a rogue CUSO, (2) NCUA expressed a desire to directly regulate CUSOs which would adversely affect the innovative nature of CUSOs, (3) creating regulatory hurdles for CUSO service providers and exposing client lists to Freedom of Information Requests creates competitive disadvantages for CUSOs in the marketplace, and (4) CUSOs only represent 22 basis points of total credit union assets which is an insignificant risk. NCUA did not act on the proposed amendment at the time due to lack of consensus on the NCUA Board.
NCUA reduced the scope of the proposed amendment and passed it as a final amendment on November 21, 2013. NCUA listened to the argument made that if there are high-risk CUSOs, target those CUSOs for a closer look and avoid unduly burdening all CUSOs. In the comments to the revised regulations, NCUA states “The Board emphasizes, however, that the final rule is significantly more limited in application than the proposed rule, targeted mainly to CUSOs engaged in more complex or high-risk activates, such as credit and lending, information technology (IT), and custody, safekeeping, and investment management services for credit unions.”
NCUA states that it has the power to condition the ability of credit unions to invest in CUSOs, e.g. currently NCUA requires CUSOs to follow GAAP and provide NCUA access to their books and records. Direct reporting to NCUA is but another condition of credit union investment. While direct reporting has the feel of direct regulation, NCUA acknowledges in the commentary that it does not have the direct statutory and regulatory authority to regulate CUSOs under the Federal Credit Union Act.
NCUA states that they need direct reporting as the reporting they are receiving from credit unions on CUSOs is often inaccurate and incomplete. NCUA states that it needs to have more accurate information on CUSOs to access and mitigate risks CUSOs may pose to credit unions. I am biased but I would like to turn the question around. What are the risks to credit unions if they do not use CUSOs to drive more net income to their bottom line?
Under the amendment, all CUSOs have to provide to NCUA an annual report of basic information which includes investors and credit union client names. If a CUSO owns a subsidiary or has a non-credit union parent organization, the CUSO must also report information regarding their subsidiary and parent if the parent or subsidiary qualifies as a CUSO, i.e. provides products and services primarily to credit unions and members. CUSOs that provide more complex or high-risk activates as defined by NCUA have enhanced reporting requirements. This enhanced reporting includes details on loans the CUSO originates and helps credit unions originate.
In response to our concern about proprietary information being made available to competitors through FOIA requests, NCUA has stated that it will do everything in its power to protect the client lists and other proprietary information provided by CUSOs under the trade secrets exemption to FOIA and, where appropriate, the credit union examination exemption.
The CUSO Rule now requires that state chartered federally insured credit unions follow certain of the NCUA CUSO Rules, e.g. require their CUSOs to file annual reports, follow GAAP, file quarterly and annual financial statements and provide NCUA access to a CUSO’s books and records.
Federal credit unions that are less than adequately capitalized or would be after making a CUSO investment has to obtain NCUA approval to invest if the aggregate cash outlay over the past seven (7) years would exceed the 1% CUSO investment limit. State chartered credit unions under similar circumstances would apply to their state credit union regulators for permission but NCUA receives notice of the application.
The deadline to change the CUSO – credit union agreements to incorporate this new annual reporting requirement is June 30, 2014. The annual reporting requirement does not become effective until December 31, 2015 as NCUA has to wait until it completes the technology to receive and organize the information.
The dynamics of the interaction between the regulator and the regulated is a job of constant vigil to insure that balance and fairness to all concern is recognized and respected. NACUSO welcomes input from credit unions and CUSOs on their concerns as this new amendment is implemented to insure that NCUA hears these concerns. The conversation will continue at the NACUSO Annual Conference in Orlando in April which will include representatives from NCUA and Dennis Dollar. Join us there.