NEWPORT BEACH, Calif. — Credit unions frequently cite compliance as one of their biggest burdens. And now, so are credit union service organizations.
Between NCUA's recent rule calling for the collection of CUSO data, to the treatment of credit unions' CUSO investments in the agency's new risk-based capital rule, CUSO executives say they are feeling unfairly targeted by a regulator that — some claim — doesn't even have authority over them.
Last November NCUA declared it has the authority to request information on the CUSO investments of all credit unions it regulates and insures. Under the new rule, all CUSOs must provide their name, tax ID number, contact information, the names of all credit union investors, lenders and clients, as well as any CUSO parent and subsidiaries.
Financial information is needed if the CUSO is engaged in lending activity, information technology services and credit union investment management services.
The risk-based capital rule proposal, currently in comment period through May 28, would weight all credit union investments in CUSOs at 250%.
Jack Antonini, president of the National Association of Credit Union Service Organizations (NACUSO), said the CUSO rule raises concerns regarding security and confidentiality, and is a potential "end run around" the fact NCUA has no statutory authority to directly regulate and examine CUSOs.
He told Credit Union Journal the proposed investment weighting in the risk-based capital rule is nothing less than a fundamental misunderstanding of the banking regulations the credit union regulator is attempting to emulate.
"The CUSO rule has several implications, including additional reporting," he said. "It has a lot of people concerned. We want to know how it is going to shake out. To start, it only applies to 'complex' CUSOs; those involved in lending, technology and trust services. But there is concern about how is it going to be implemented, and if others will be defined as 'complex' in the future."
The risk-based capital proposal sends the "wrong message" about CUSOs, he continued.
"NCUA says it is not negative on CUSOs, that it understands CUSOs, but we have let them know the two rules back to back are pretty negative," Antonini said.
When told of the opinions expressed in this story, an NCUA spokesman said the regulator would not respond until after the public comment period ends May 28 other than to say, "NCUA will carefully review all comments we receive."
Antonini said NCUA told him it was trying to implement rules similar to Basel III in the manner of banks and their subsidiaries. However, he countered, the risk in the banking world is not the same.
"Not all bank subsidiaries are comparable to CUSOs," he said. "NCUA looked at risk weighting for all subsidiaries, but banks make at-risk investments that have high-risk factors. With the banking industry background I have, once I understood what they were looking at I realized they were not coming down hard on CUSOs. They looked at subsidiary investments banks could make, which are rated pretty high, and averaged the risk weights together."
According to Antonini, NACUSO communicated its thoughts on the subject and expects the risk weighting to "come down considerably" when the final rule is released later this year.
Risk Proposal 'Out Of Line'
Rancho Cucamonga, Calif.-based CO-OP Financial Services is arguably the largest CUSO, according to Stan Hollen, its president and CEO. It serves 3,500 credit unions and is owned by 1,200 of those.
When asked the main issue affecting CUSOs today, Hollen quickly replied, "NCUA."
He said the regulator sees bank regulators have statutory authority to examine and review third-party providers, so NCUA would like to have that authority. This led to the proposed CUSO rule and adoption of the CUSO regulation, he noted.
"This is a concern, along with the risk-based capital proposal," said Hollen, who added he expressed his thoughts to NCUA Chairman Debbie Matz at an open session at GAC in February. "There is a negative perception NCUA is giving about CUSOs. CUSOs are essential for a lot of good reasons. I know NCUA does not intend this, but the regulator gives the perception it is not supportive of CUSOs."
As with NACUSO's Antonini, Hollen was particularly bothered by the 250% risk weighting for CUSO investments. He pointed out this contrasts to 150% for delinquent mortgages and credit cards.
"The CUSO allocation is out of line, unreasonable and sends the wrong message," declared Hollen, who believes the CUSO risk weighting should not be more than 125%. "There is no basis for saying the CUSO investment is that risky. If you look at the NCUA's CUSO rule, there are only five cases where CUSOs cost the share insurance fund money, and all involved commercial lending or mortgage lending. You cannot treat all CUSOs the same."
'Stifling Innovation'
Tony Boutelle, president and CEO of CU Direct, Ontario, Calif., also is bothered by the proposed risk weighting, as well as the fact his company has to be reviewed by NCUA.
"We have to report to the regulator annually on all we are doing, which is more onerous than what other vendors have to do," he said. "I am concerned NCUA has overstepped its legal authority, and I think it is unfair that we are treated differently than other vendors. We have to endure auditors, but NCUA does not examine any of my competitors."
Boutelle said part of the problem is the regulator is not treating CUSOs as something that actually benefits the industry. He insisted there are "hundreds" of examples where CUSOs have helped credit unions, with only a handful of negatives.
"But [the negatives are] what NCUA is focusing on," he asserted. "The 250% premium on CUSO investment makes no sense. The only money you can lose on a CUSO investment is the investment. It is stifling the industry and stifling innovation."
