NEWPORT BEACH, Calif. — The National Association of Credit Union Service Organizations says NCUA is in the wrong for asking Congress to expand the federal credit union regulator's authority over CUSOs and vendors that do business with CUs.
Jack Antonini, president of NACUSO, told Credit Union Journal the trade group believes NCUA "already has all the legal authority" it needs to oversee CUSOs. Granting additional authority to NCUA "will only increase costs to the credit unions that will ultimately have to pay the price for the additional oversight NCUA performs of hundreds, if not thousands, of vendors in a wide variety of industries," according to Antonini.
Earlier this month, NCUA presented testimony to the Senate Banking Committee hearing on Regulatory Relief for Community Banks and Credit Unions. Larry Fazio, director of NCUA's Office of Examination and Insurance, represented the regulator.
Fazio told lawmakers the "most critical reform" Congress could make would be to provide the credit union regulator with examination and enforcement authority over third-party vendors. He urged Congress to give the agency parity with other federal and state financial regulators in this area. The agency's lack of authority, he said, actually creates an additional regulatory burden for credit unions.
"NCUA's inability to oversee third-party vendors means the agency must rely on credit unions to report certain information on the vendors with which they do business," Fazio said. "NCUA may only examine vendors with their permission and cannot enforce any corrective actions."
The need for third-party vendor authority is best illustrated by the growth of cybersecurity threats, according to Fazio.
"This is a major concern," he noted. "The complexity of online communications is growing, as is the number and sophistication of hackers, thieves and terrorists seeking to exploit vulnerabilities in the system. Credit unions are increasingly using third-party vendors to provide technological services, including security. Member data are being stored in these vendors' servers."
Removing Regulatory Burden
NACUSO said, in its view, NCUA "seemed to be out of touch with the purpose of the hearing, which was to examine means of removing regulatory burden for credit unions and fostering greater investment in local communities."
Instead of suggesting how NCUA can help meet the growing need of credit unions and credit union service organizations to reduce unnecessary regulatory burdens, NACUSO said NCUA took the opportunity to ask Congress for additional regulatory authority.
"We learned with great interest from NCUA's testimony that the Agency's No. 1 legislative priority in 2015 is to obtain Congressional authority to dramatically expand the Agency's statutory authority to enable NCUA to directly regulate and examine all CUSOs and third party vendors that do business with credit unions," NACUSO said in a statement. "This will give NCUA new powers over thousands of non-credit union organizations. This sweeping expansion of regulatory authority is at odds with the Senate Committee's stated goal of reducing regulatory burdens that drive-up the costs of financial services."
Taking A Risk
NACUSO said it does not understand why NCUA would "take the risk" of asking Congress to open the Federal Credit Union Act for this purpose, "since history has demonstrated that direct regulatory powers over CUSOs is not needed in order for NCUA to protect the safety and soundness of the credit union system."
According to NACUSO, NCUA already has all the ability, through its regulation of the credit unions that are the owners of CUSOs, "to see what CUSOs are doing and to enforce its will upon CUSOs."
Because NACUSO anticipated NCUA would continue its "campaign" for direct regulatory authority over CUSOs and third party vendors, the trade group has created an Advocacy Fund funded by NACUSO members. It also has retained the services of a governmental relations entity to communicate to Congress NACUSO's opposition to giving NCUA the authority to directly regulate CUSOs.
NACUSO leadership has visited the offices of key House and Senate members on the respective banking committees to advocate NACUSO's position, Antonini noted.
Compelling Need
"In order to justify new regulatory powers, it is the position of NACUSO that there must be a compelling need for the regulation," the trade group declared. "History has shown us that NCUA currently has all the ability it requires to oversee what CUSOs are doing. For more than 20 years, NCUA has required credit unions to have their CUSOs contractually agree to open up their books and records to NCUA."
NACUSO said NCUA's lack of congressional authority to regulate CUSOs has not hindered NCUA from amending the CUSO Regulation in November 2013 to require CUSOs to directly report to NCUA certain information on an annual basis. "As can be seen by this history, NCUA has always had the power to see exactly what a CUSO is doing and can clearly see that CUSOs are producing considerable savings through collaborative risk sharing and significant non-interest income."
According to NACUSO, only 22 basis points of credit union assets are invested in CUSOs — "hardly a systemic risk," the trade group said, adding there have been "very few" CUSO failures.
"We would submit that, where there have been occasional CUSO failures, they did not result from a lack of NCUA authority over third-party vendors and CUSOs — but rather a failure of NCUA to effectively utilize the authority the Agency already has under existing law and regulation."
Congress needs to "seriously vet" the underlying facts that are used to support the assertion by NCUA that CUSOs have caused the losses that NCUA ascribes to them, NACUSO insisted. In the example cited in NCUA's Congressional testimony, NACUSO said the CUSO provided underwriting advice but the credit unions made the credit decisions and the loans were on the books of the credit union — not the CUSO.
"Were the losses caused by the CUSO or the credit union's credit decisions?" NACUSO asked.
When asked if NCUA wished to respond to the assertions made by NACUSO, a spokesman for the regulator said the agency will let Fazio's testimony "speak for itself."
CUSOs Provide Savings
NACUSO said any examination of credit union service organizations needs to keep in mind CUSOs save credit unions "millions of dollars annually" on operational costs and provide "millions more" in non-interest income. The trade group said CUSOs help credit unions deliver products and services "more conveniently" to 100 million members through shared ATMs and branches, and by providing brokerage services, trust services and more.
"CUSOs are innovators and incubators of new ideas, which are sorely needed to deal with changing economic realities," NACUSO said. "The law and regulations already deal with the risk issue by limiting the power to invest and loan to CUSOs to a nominal amount of 2% of the balance sheet."
Innovation is "never fostered in a highly regulated environment," NACUSO said, adding it fears the direct regulation of CUSOs will "smother" the ability of credit unions to share risk and utilize CUSOs to experiment and innovate.
"Without a compelling reason for additional regulation, no additional regulatory authority should be granted NCUA to directly regulate CUSOs and third party vendors beyond that already available to it — which is considerable," NACUSO asserted.
According to Antonini, CUSOs are a "unique asset" to the credit union industry, and NACUSO will continue to advocate to prevent the "excessive regulation of CUSOs that would hinder the tremendous value CUSOs bring to credit unions."
