CUSOs Prospering Even Though Many Expected A Decline

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To paraphrase Mark Twain: the demise of the CUSO may have been premature.

That's because the for-profit subsidiaries which have enabled credit unions to deliver a host of non-traditional services such as investments, insurance and car buying advice, have proven to be more resilient than many observers believed.

When NCUA passed its Incidental Powers Act four years ago allowing credit unions to do many of the things previously done through their CUSOs in-house, many observers in the credit union movement thought it would mean the end of CUSOs.

But the CUSO model has survived Incidental Powers and is thriving in many instances, as illustrated during last week's annual conference of the National Association of CUSOs (NACUSO) here. CUSOs are performing are offering new and innovative products and services and new CUSOs are forming all the time. In fact, last week's gathering of almost 400 CUSO executives and associated service providers was one of the largest ever in the 20 years of NACUSO.

There are many reasons for the CUSO resiliance, according to Guy Messick, general counsel for NACUSO and who is known as one of the fathers of the CUSO movement. Among them is the ability of credit unions to use CUSOs to pool their resources to create solutions that are generally available only to the largest financial institutions. But just as important is the ability to serve non-credit union members, according to Messick, a partner in Philadelphia-based Messick & Webber.

Under NCUA regulations, which serve as the model for most states' regulations, a CUSO must conduct a majority of its business with the credit union's membership. "What this really means," said Joseph Melchione, a well-known credit union attorney, "is that you can do up to, but not quite, 50% of your business with non-members."

As a result, the CUSO model has long been used by credit unions to reach out and sell services and products to non-members, helping defray the costs of providing those services to members, while earning additional income for the credit union, according to Melchione, a partner in Styskal, Wiese & Melchione, of Santa Barbara, Calif.

It has also enabled credit unions to recruit new members. That's why analysts say it may actually help save, rather than kill, the CUSO movement. That's because of a recent legal opinion letter issued by NCUA governing the use of dual employees, that is, employees that work for both the credit union and a third-party vendor providing an approved incidental power. In the legal opinion, NCUA states that a credit union can allow a dual employee to serve members and to share in the revenues or commissions generated by that dual employee by serving its members.

But, NCUA insisted, while that dual employee can also serve non-members, the credit union may not share in the revenues or commissions generated by the dual employee serving the non-members. Not even as reimbursements for costs accrued by the credit union to serve the non-members.

What's more, the credit union cannot provide what has been traditionally known as correspondent services to other credit unions, like check cashing for another credit union's members.

Most important are the affects this will have on the ability of credit union's to provide investment services to members of other credit unions after they bring their investment programs in-house. The legal opinion stated that a credit union may not provide investment services to non-members of another credit union through a correspondent services agreement.

"What this means," said Brian Witt, a credit union attorney with Portland-based Farleigh, Wit, "is that a credit union cannot help another credit union with their program. You may have to go back to a CUSO."

The NCUA opinion has caused some head-scratching within the credit union movement, as it appears to be a step backwards.

"I don't know where this (legal opinion) letter fell off the wagon. It just doesn't make any sense," said Melchione. "This is just the wrong direction we want to be going."

Messick acknowledged the NCUA position may have a political connotation because of the issues it raises with credit union critics, primarily the banks. "When you mention the words 'non-member' it raises questions about the tax issue," he said. "But this doesn't even allow for the reimbursement of expenses."

The credit union lawyers, who represent hundreds of credit unions and CUSOs between them, hope to negotiate with NCUA to clarify or even ease this legal opinion.

Otherwise, it could have dire affects on service to non-members.

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