NCUA Proposed CUSO Regulation and Industry Response

By David S. Brown, Esq.

In late July, the National Credit Union Administration (“NCUA”) proposed a rule that would require all Credit Union Service Organizations (“CUSO”) to file financial reports directly with the NCUA and the appropriate state supervisory authority.  The rule would require CUSOs to use GAAP accounting, prepare quarterly financial reports and get annual audits.[1]  The board also proposed limiting federally insured state-chartered credit unions’ aggregate cash outlays to a CUSO.[2]  Finally, the rule would expand the definition of a CUSO to include CUSO subsidiaries.[3]  NCUA stated two reasons for regulatory authority over all CUSOs.  First, the NCUA desires parity with banks’ regulatory authority over bank operating subsidiaries and third party service providers.[4]  Second, NCUA believes that CUSOs are a systemic risk to credit unions as a whole.[5]

As a whole, the credit union movement and CUSOs all across America have voiced a unified opposition to NCUA’s proposed rule.  Many have questioned NCUA’s legal authority to approve the proposed rule.  Although the NCUA has the authority to examine the books and records of CUSOs under section 712.3(d)(3), it is undisputed that NCUA does not have regulatory authority over CUSOs.[6]  Moreover, critics agree that the new rule will put CUSOs at a competitive disadvantage with non-CUSO competitors.  Obviously, the regulation will increase costs for CUSOs.  More importantly, though, “the requirement to disclose confidential business plans and customer lists, documents that compromise a corporation’s intellectual property, would potentially expose private business secrets to public dissemination through Freedom of Information Act requests. These same risks would not be faced by CUSO competitors and could, in fact, be exploited by them.”[7]

The credit union movement also fears that the new rule will “single-handedly kill the one competitive advantage the credit union has.”[8] After all, CUSOs are “a unique business model that enables collaboration and innovation so credit unions can achieve economies of scale, increase efficiencies, share intellectual capital, provide better service to members, and mitigate risk.”[9] In simpler terms, CUSOs are innovative entities that let the credit unions approach risks collaboratively, minimizing the risk to any single institution.[10] 

Finally, the credit union movement questions the need for the new regulation by pointing out that “the aggregate amount invested in and loaned to CUSOs is only 22 [basis points] of industry assets.”[11] “Each credit union’s CUSO investment risk is less than 1% of its assets.”[12] As one opponent said, “[t]his is hardly ‘systemic risk’ to the industry”.

Now that the September 26, 2011 comment deadline has passed, NCUA will consider whether to implement the new rule.  The board is in the process of reviewing the more than 140 letters it received in response to the proposed regulation.

David Brown is an associate in Commercial Collections based in the Cleveland office of Weltman, Weinberg & Reis Co., LPA. He can be reached at 216.685.1062 or dbrown@weltman.com.
Footnotes:
[1] Marx, Claude R., NCUA Wants More CUSO Disclosure, Credit Union Times, July 27, 2011, http://www.cutimes.com/2011/07/24/ncua-wants-more-cuso-disclosure.
[2] Samaad, Michelle A., New CUSO Regs Prompt a Mountain of Concern: NACUSO CEO Says Clarifications Needed, Credit Union Times, August 17, 2011, http://www.cutimes.com/2011/08/17/new-cuso-regs-prompt-a-mountain-of-concern; see also Proposed Rule, http://www.ncua.gov/GenInfo/BoardandAction/DraftBoardActions/2011/July21/Item2b11-0721.pdf.
[3] Marx, Claude R., supra.
[4] Letter from NACUSO, Jack M. Antonini to NCUA, Mary Rupp, dated August 4, 2011, https://www.nacuso.org/wp-content/uploads/2011/08/NACUSO_Comment_Letter_to_CUSO_Rule_8_4_2011-FINAL.pdf.
[5] Id.
[6] Letter from CU Direct Corporation, Tony Boutelle to NCUA, Mary Rupp, dated September 2, 2011, https://www.nacuso.org/wp-content/uploads/2011/08/CommentLetter-CUDirect-TonyBoutelle.pdf; see also Letter from Mazuma Credit Union, Brandon Michaels to NCUA, Mary Rupp, dated August 15, 2011, https://www.nacuso.org/wp-content/uploads/2011/08/CommentLetter-MazumaCreditUnion-BrandonMichaels.pdf.
[7] Tony Boutelle, supra.
[8] Samaad, Michelle A., supra.
[9] Id.
[10] Russell, Jeff, Newest NCUA Proposed CUSO Regulation Will Likely Stifle Innovation, September 1, 2011, https://www.nacuso.org/2011/09/01/newest-ncua-proposed-cuso-regulation-will-likely-stifle-innovation/.
[11] Brandon Michaels, supra.
[12] Id.