The CU-Management BLOG
CU-Management Blog

The CU-Management BLOG

The NCUA and the future of CUSOs

by Michael Hales on 05/10/11

As many of us are aware, the NCUA is once again seeking "Vendor Authority" over CUSOs.  The Regulator bases its current argument on several facts, the two most noteworthy of which are (a) all other members of the FFIEC have direct regulatory authority over third party vendors, so the NCUA should have direct regulatory authority over CUSOs, and (b) the demise of certain large credit unions was in large part due to the NCUA's inability to directly regulate the CUSOs they owned.  Both arguments are flawed.

The FFIEC is a formal interagency body empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) and to make recommendations to promote uniformity in the supervision of financial institutions.

The OCC, FDIC and OTS enjoy authority over third party providers of services to banks and thrifts primarily for the purpose of protecting those insitutions and their customers from financial, data, and indentity theft.  The ability of the FFIEC-member agencies to examine third party providers of services is a logical extension of their regulatory responsibilities.  CUSOs, however, are unique to the Credit Union industry and should not be considered "vendors" under the framework of FFIEC regulatory authority.

The CUSO model, as prescribed by Rule 712, is a unique, sacred and under-utilized collaborative business model with which credit unions can level the playing field against the financial institutions that control 94% of the Nation's market share.  All CUSOs, by definition, require single or multiple credit union ownership.  Many operate as an efficient shared cost center under the direct management of their credit union owners.  Others operate as for-profit businesses generating needed non-interest income back to their credit union owners who supervise the CUSO's activities.  All CUSOs must be created to serve credit unions or credit union members and are designed to provide economies of scale and scope.

The NCUA historically has had the ability to examine a CUSO through its power to regulate and examine the CUSO's owner credit union(s).  By taking its regulatory authority a step further (vis-a-vis "vendor authority") it is not unlikely that the NCUA will then seek to assess CUSOs in the same manner in which it assesses federally insured credit unions.  Double taxation of the credit union owners, if you will.

The NCUA has recently taken the position that it was the wholly owned commercial lending CUSO that brought down Texans Credit Union and uses that argument to support its request for vendor authority.  Make no mistake, Texans was brought down by its management and the "throw caution, safety and soundness to the wind" philosophy that fueled their greed.  The NCUA already had the ability to examine and regulate both the credit union and its commercial lending CUSO.  It is difficult to see how "vendor authority" would have resulted in a different outcome.

Rule 712, the "CUSO Rule", is up for its 3-year review by the NCUA this year.  Please get ready to jump on the bankdwagon during the official comment period.  While the NCUA should be given the same regulatory authority as the OCC, FDIC and OTS, CUSOs should be exempted from any regulation that would subject them to additional costly oversight and potential regulatory assessment.  While I agree that third party vendors should be subjected to NCUA authority, CUSOs already are, through their credit union owner(s)/investor(s).  It is disturbing enough that the Regulator thinks of CUSOs as "vendors"; the additional regulatory authority sought by the NCUA is unwarranted and unnecessary.