Credit union service organizations (CUSOs) have long attracted interest from credit unions interested in collaboration and innovation, but they’ve been drawing increasing regulator scrutiny as well.
The NCUA has been trying to increase oversight on CUSOs for years. That’s taken various forms, such as seeking congressional authority to examine third-party vendors and a November 2013 rule that requires all CUSOs to provide basic profile information to the NCUA every year.
CUSOs had until March 31, 2016, to comply with the rule that requires them for the first time to provide information such as who owns them, what they own, and what services they provide.
So far the agency’s CUSO Registry hasn’t been too onerous.
“We’re big believers in CUSOs and are involved in a number of them as owners and users, but the only one we had to register is the one that we own 100% of, our insurance CUSO,” says Tim Smith, senior vice president and CFO at Workers’ Credit Union ($1.3B, Fitchburg, MA). “There wasn’t much impact on us from that standpoint.”
Rick Wargo, senior vice president and general counsel at the Pennsylvania Credit Union Association, says much the same of its CUSO, shared branching provider PCU Service Centers Inc.
The big question policy-wise is: Where is this going next?
“We completed our registration in March, along with hundreds of other CUSOs,” Wargo says. “In all candor, it was a lot of busy work, but we understand the NCUA wants to understand the extent to which a credit union has an investment or extended a loan to a CUSO.”
Indeed, in announcing the registry was open, the agency itself recognized the growing role of CUSOs in providing scale and expertise and cited the consequential risk as the primary driver for its actions.
“While CUSOs often provide substantial benefits to credit unions, some can create risks to credit unions,” the NCUA wrote. “In fact, several failed CUSOs have caused significant losses to the credit union system. The NCUA needs more accurate information about CUSOs in order to better evaluate the risks to credit unions, as well as the inter-relationships between credit unions and CUSOs.”
Although the registry has received much attention across the industry, there is a litany of regulatory issues that CUSOs and their credit unions need to keep an eye on. According to NACUSO, they include the NCUA’s FOM proposal, risk-based capital rule, the final fixed asset rule, the CECL proposal, the GAO report on consolidation of regulators, network credit unions, small entity regulatory relief, and legal opinions.
That’s a short list. There’s more, but add possible vendor examination to the top. Wargo says he sees much of the new compliance beginning with the registration required by changes to rule 712 jibe with what the PCUA CUSO has been doing since it formed in 1992 but still expresses some concern.
“We recommitted to maintaining our books according to GAAP and to provide the NCUA with access to our books and records,” he says. “The big question policy-wise is: Where is this going next?”
CUSOs can voluntarily submit to an annual review process, something that Credit Union Student Choice has done three times, says Scott Patterson, president/CEO of the CUSO affiliate of Callahan & Associates. He says the process was exhaustive and expensive, with a dozen examiners on-site for two weeks.
But there was an upside.
“It was helpful for our team, for the evolution of our CUSO, to learn from the NCUA how we can improve our operation and to be able to offer our ideas to them,” Patterson says.
But it’s what they have in mind that concerns others. Is the registry just the beginning of things to come? Outgoing NCUA chair Debbie Matz has called securing direct vendor oversight a top legislative priority, but her departure has raised some uncertainty.
“It’ll be interesting to see what happens now,” says Katherine Weber, a Philadelphia-based attorney who specializes in counseling CUSOs and credit unions. “It depends largely on what the board wants to do. If you’ve heard anything (board member) Mark McWatters has said lately, he doesn’t seem to be moving in the direction of regulating vendors.”
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“We need to address the risks that are actually presented by CUSOs to the NCUSIF and to the credit union community,” McWatters said at the NACUSO conference in early April. “If there is something we see coming, let’s make sure those regulations are targeted to that specific threat to the credit union community and to the share insurance fund.”
The Republican board member has one vote. His Democratic counterpart, Rick Metsger, has the other. No tie-breaker is expected soon, since Matz’s successor would have to be nominated by the president and approved by the Senate. Compared with, for example, the Supreme Court vacancy, the vacant NCUA post is not likely to attract much media attention.
The idea of direct vendor and thus CUSO examination, meanwhile, is not likely to attract many fans in credit union land.
“Vendor examination would be a mistake,” says Smith at Workers’ Credit Union. “Most things we do are already using the same vendors that banks use, so the FDIC already takes care of it, especially with the high-risk ones.”
Meanwhile, the voluntary reviews continue, and one participant in those has some parting advice.
“Set good, foundational expectations and then be upfront with the examiners,” says Patterson at CU Student Choice. “And try to have an open mind.”