ALEXANDRIA, Va. – Credit unions and their CUSOs are mounting a broad opposition against NCUA’s proposal to require financial reporting from CUSOs, even as evidence emerges of CUSO ties causing big losses at credit unions.
CUNA and the National Association of CUSOs have organized letter-writing campaigns urging withdrawal of the NCUA proposal, with many commenters asserting the regulator’s efforts may be illegal. Jack Antonini, president and CEO of NACUSO, noted that NCUA has failed in prior efforts to win congressional authority over CUSOs and other third-party service providers and may be running afoul of Congress in its latest effort.
“While the agency recognizes in its own statements that it does not have statutory authority to regulate CUSOs, NCUA has expanded its existing reach over CUSOs through their credit union owners through this proposal by requiring CUSOs to provide financial information directly to NCUA which NCUA will retain and evaluate,” Antonini wrote in a comment letter on the proposal. “This looks and feels like vendor authority and the direct regulation of CUSOs, which has not been authorized by Congress.”
NCUA has been trying for years to obtain certain powers, including the ability to examine, third-party credit union vendors because of the financial exposure many of them – especially credit union service organizations – pose to credit unions and the National CU Share Insurance Fund. The latest effort stops short of examination power but would require CUSOs to provide the regulator with their business plans, customer lists, balance sheets and income statements, so that NCUA could monitor the potential exposure posed to federally insured credit unions and the NCUSIF.
The NCUA effort comes as some of the biggest credit union failures in recent years have been directly tied to CUSO activities.
Eastern Financial Florida CU, the biggest credit union failure ever, was saddled with tens of millions of dollars of failed member business loans made through its MBL CUSO. Texans CU, a one-time $2 billion credit union taken over by NCUA in April, has lost tens of millions on bad MBLs made through its CUSOs.
CUSOs also have been closely tied to failures of Norlarco CU, Huron River Area FCU, Cal State 9 CU and Members United Corporate FCU. In another case, the 2009 bankruptcy of Central States Mortgage, a CUSO owned by more than 20 credit unions, threatened the health of 25 Wisconsin credit unions, forcing state regulators to take over one of them.
But Guy Messick, general counsel for NACUSO, asserted that compared to the broader benefits CUSOs have provided the industry the problems have been few. “For every CUSO that has been involved in a material loss, there are scores and scores of CUSOs that are making a positive difference,” wrote Messick.
The vast majority of the 100 comment letters sent to NCUA have identical wording and are apparent form letters offered them from either NACUSO or CUNA. They cite three major reasons for opposing the rule: that it will increase regulatory burden and costs, that it will compromise trade secrets, and that NCUA does not have the legal authority to pass the rule. Most of the letters cite identical data provided by NACUSO that less than 2% of individual credit union assets and only 22% basis points of the total industry assets are represented by CUSOs.
“We believe that NCUA’s regulation will hurt CUSOs’ ability to innovate and provide an unlevel playing field against non-credit union owned competitors while increasing the costs of our operation,” wrote Timothy Mitsiansky, president of Wright-Patt CU’s myCUMortgage, LLC.
Several commenters noted that their CUSOs are already regulated by either state or federal agencies overseeing mortgage lending or securities broker-dealers. “While we understand the desire to protect the fund, we do not see that the additional regulation by NCUA would provide any recognizable regulatory value beyond what already exists, as both of our business lines already face regulation by the California Department of Insurance and the California Department of Motor Vehicles,” wrote Brett Martinez, president of Redwood CU.
“Although the NCUA may be well-intentioned as it acts in the name of ‘safety and soundness,’ the proposal has provided little evidence to support the need for direct regulation of CUSOs,” commented Cheryl Hubbeling, president of Telco FCU. “As the NCUA has the ability to indirectly influence CUSOs through its regulation of credit unions, I see little value in the addition of requiring CUSO business plans, balance sheets, income statements, and customer lists.”
