The NCUA board passed the final CUSO regulation at its November meeting. It took more than two years to develop and will not collect any meaningful information until early 2016. The rule’s four-and-a-half year gestation period the board alleges is due to systemic risk is an example of a greater problem: NCUA’s inability to use current resources in an effective and productive manner. The board’s explanations in support of the rule are a clear demonstration of the immediate challenge.
Lack Of Information?
In a statement supporting the rule, NCUA board chairman Debbie Matz said, “It’s particularly embarrassing to me when I go to the Hill to talk to members of Congress. They ask, well how many CUSOs are there? Well, we don’t have any information on that. Well, what is the size? Well we don’t have that information. Which credit unions have a relationship with CUSOs? Well, we don’t have that information. And so, in order to do our job as well as we can, we need to have this information … .”
For several decades, NCUA has been collecting quarterly information on both wholly owned and all other CUSO investments in the 5300 Call Report (call report schedule C). This data includes much of the registration information the new rule requires plus the credit union’s financial investment in CUSOs. Using this data, Callahan & Associates has prepared a semi-annual CUSO directory that, among other information, shows the number of wholly owned CUSOs, multi-owned CUSOs, and the total financial exposure of credit union owners.
Moreover, the CUSO guides also include tables showing the top 25 multi-owned by total CUSO assets, top 25 multi-owned by total revenue, top 25 by number of owners, and top 25 by number of credit union clients. The final table lists the top 50 credit unions with the largest amounts invested in all CUSOs, whether wholly owned or as investments.
The data is available to answer Congress’ queries. NCUA even used this call report data in the final rule when estimating the amount of hours needed to complete the registration form. The problem is not a lack of data, it is whether NCUA is effectively using the data available. Adding more data to an ineffective system increases credit unions’ cost burden and creates administrative confusion, as demonstrated by the chairman’s inability to provide answers to Congress.
Are CUSOs Causing Losses To Credit Unions?
At the board meeting, chairman Matz also said, “Since 2008, those nine CUSOs cost credit unions more than $200 million in losses … Risks that exist on all credit unions’ balance sheets due to CUSOs will finally be transparent and we will be in a better position to reform credit unions behind CUSOs that pose excessive risk.”
In the rulemaking memorandum, NCUA’s staff outlined a number of losses attributable to CUSO activity. In several examples, staff said these losses contributed to the failure of the credit union and resulted in costs to the NCUSIF.
That rationale again points blame in the wrong direction. NCUA does not insure CUSOs. A loss due to CUSO activity can come from only one of two sources: a direct investment or a loan to a CUSO that the credit union must write off — and the maximum for federal credit unions is 2% of total shares and net worth — or from assets, normally loans, that a credit union has on its own balance sheet.
In either case, the asset information is fully available to examiners. Credit unions must fully document loans to CUSOs — whether direct, indirect, participations, or other forms of asset purchase — just like any credit union loan. If these assets are poorly underwritten or risky, they have been fully visible to examiners since they were on the books earning revenue. If for any reason the underwriting, servicing, or borrower data is insufficient, then these assets are subject to the same examination enforcement actions as any other loan or investment.
The problem is not the source of the asset but the effectiveness of the examination review. Since 2008, credit unions have charged off almost $30 billion in total loans, written off another $5 billion in conserved corporates capital, and contributed $4.8 billion in TCCUSF assessments. Having some $200 million in losses due to loans or other CUSO-sourced assets in the same period does not suggest systemic risk. Individual credit union failures must be a concern, but that is why examiners go on-site to identify, analyze, review, and address singular problems.
Today, as in all prior years, any such risks from CUSO activity are fully visible on credit unions’ balance sheets for examiner review and action. That is the only way any credit union exposure or loss could occur.
The income and competitive benefits of CUSO involvements far exceeds the minimal .005% of credit union total losses since 2008, which is the relative number NCUA used as justification for the rule. Again, the issue is not lack of a rule but the effectiveness of existing exams.
"You Get What You Pay For": NCUA’s Rule Authority
When he explained his support on the issue, board member Michael Fryzel said, “We moved forward to discussing what would be in a CUSO rule back in July 2011, when the first rule was considered. We were relatively close to a decision in 2012, but some questions came up. Number one was whether or not NCUA had the legal authority to accept this information from CUSOs. I was concerned about that and asked our general counsel to get a legal opinion from outside counsel as to whether or not we had the authority to collect this type of information. That legal opinion was obtained, and I had an opportunity to read it as well as the other board members and staff. My conclusion from reading it is we did have the legal authority. Now I’m well aware of that fact that anyone else could hire another law firm that could produce another opinion saying they don’t have the legal authority, but that’s the way the legal system works. Otherwise attorneys would be out of business.” (emphasis added)
NCUA did not make the legal opinion Fryzel references public as part of the board package. Why not? Should credit unions provide the board with their own legal analysis, as he suggests?
Ignoring The Public Record Of Comments
In creating the CUSO rule, NCUA exercised its unilateral ability to enact a regulation that virtually none of the 290 commentators supported. According to page 7 of the board action memo summary, “Most of the commentators expressed opposition to, or raised concerns about, one or more aspects of the rule.”
NACUSO and other commenters questioned the legal basis for the rule. In its post-rule commentary, NACUSO repeated its position on why the rule was unnecessary: “Because we continue to see no compelling reason for such a regulation when less than 2% of credit union assets are invested in CUSOs and therefore systemic risk is hardly in play, NACUSO feels the need to remind NCUA that — under the existing regulation — a CUSO agrees to permit NCUA to inspect its books and records as a condition of the credit union’s investment. Therefore, NCUA already has the power to look at the CUSO’s business information under the current rule.”
After almost three years in the making, NCUA’s CUSO rule does not enhance the cooperative system’s soundness; rather, it is an effort to portray an activist regulator and disguise the increasingly suspect management of the agency’s primary resources of examination and supervision.
A December Postscript: Yet Another Rule
In another rule-passing exercise, the NCUA board passed a new rule at its December meeting that will prohibit the management of any credit union from a private home. The board defended the rule, which affects only 81 federal credit unions, under its general safety and soundness authority, although it cited no examples of safety and soundness per se. Most of the 81 credit unions have operated in this manner for several generations.
In a post board meeting Credit Union Times interview, chairman Matz said some of the credit unions didn’t have phone numbers, so neither their members nor NCUA could contact them. If the chairman had asked NCUA’s examination and insurance staff, she would have learned that in the third quarter freedom of information act tape provided to the public, a phone number is listed for every credit union. Moreover, these phone numbers are readily available in the annual credit union directory published by Callahan & Associates.
Expectations For Board Leadership
By supporting staff’s recommendation to extend the Agency’s regulatory reach into CUSOs, the board passed a rule with no supporting detail about what this means to the Agency’s supervisory role, its budget, or the confidence of credit unions that alone start CUSOs. The entire CUSO rule process is troubling: The board passed a rule to study something? To gather data? Does it need rules to do marketplace studies because it is so ineffective in partnering with the industry? How will the rule affect its trust with its new CUSO clients and credit union owners?
The leadership problem for the board is that it was sold a bill of goods by NCUA staff’s claims that it cannot make the case to extend its market influence without anything but formal powers invoked. This is not a case the board should have accepted. Leadership would have required options that all interested parties could support.