WASHINGTON-CUs should be prepared for, but not fear, a pending rule giving NCUA direct regulatory authority over CUSOs, according to one analyst.
Katherine Weber, an attorney with Media, Penn.-based The Weber Firm, LLC, which advises credit unions and CUSOs, said she does not see the NCUA proposal being withdrawn, but the 250 comment letters received could have an effect. "I do not see it being withdrawn," said Weber during a webcast hosted by NAFCU, "but there might be some favorable modifications. The NCUA has indicated there might be a distinction for 'risky' services provided by CUSOs from the basic services such as operational support to credit unions."
The final rule is expected late in the second quarter. Even before the final rule is released, CUSOs already have been experiencing heightened scrutiny, Weber observed, citing investment limitations and more requests for documentation.
Although the current regulator of a CUSO often depends on the business it performs-for example an insurance CUSO is overseen by its state's department of insurance-Weber said if NCUA determines the activities of a CUSO could threaten the safety and soundness of a CU, it could require divestment. "This is a pretty big hammer that NCUA holds, so the best thing to do is be like the Boy Scouts and be prepared," she advised. "Preparation is the best line of defense during examinations. The top priority is to understand the business of the CUSO to be able to explain it to the examiner, followed closely by maintaining corporate separateness."
Weber said the core issue is NCUA's concerns over systemic risk to the NCUSIF and the agency's position that "all CUSOs create risk." "I would argue that if a CUSO is properly organized it segregates risk from credit unions," she opined. "But we must address the perception, regardless of what the reality is."
Weber forecast that Parts 712 and 741 of NCUA regulations will see "major changes" as a result of the revision. Specifically, CUSOs will be required to report directly to NCUA, CUSOs belonging to state-chartered credit unions would be added to NCUA's outreach (it already oversees CUSOs owned by federal charters), and there will be limitations on CUSO investments by less-than-adequately-capitalized credit unions.
One of the chief concerns expressed by Weber's clients regards the reporting requirement. The fear is this potentially would expose a CUSO's workings to a competitor in the event of a Freedom of Information Act request. "NCUA needs to decide how it is going to handle a FOIA request," she said.
Preparation, Preparation, Preparation
Weber urged credit unions to be prepared to tell examiners how successful their CUSO is and the benefits it provides. "Credit unions need to know any compliance requirements and regularly evaluate the risk related to CUSO activities-this is not something to 'set it and forget it,'" she counseled. "Credit unions should prepare now for direct inquiry of their CUSOs. The CUSO boards should know how they will respond; they should have all books and records in one place including all due-diligence and ongoing audits."
Although some CUs are concerned about making investments in CUSOs in an uncertain climate, Weber insisted there is no reason to be concerned as long as they are prepared. "CUSOs help credit unions save money or provide services one credit union would never be able to provide by itself," she said. "Credit unions should continue to invest in CUSOs because they will help make the credit union movement stronger. Don't be afraid of new regulations. I am hopeful NCUA will address the concerns expressed in the comment letters."
