NEWPORT BEACH, Calif.-Reaction to NCUA's proposed rule changes regarding CUSOs has been swift and negative.
Jack Antonini, CEO of NACUSO, did not pull his punches, saying the rule "is the first of what will become a series of regulatory events that will allow NCUA to regulate CUSOs."
"Frankly, this is pretty intrusive," he said. "We are worried greater regulation will inhibit CUSOs' abilities to compete and innovate. If they have to go through a long approval process, it will take away from credit unions using CUSOs to save money. We are not sure the NCUA has the legal authority to directly regulate CUSOs just because they are a credit union subsidiary, and CUSOs that provide insurance or investments services are already regulated, so in those cases this is duplicative."
Antonini was particularly bothered by the proposal to require all CUSOs to file financial reports directly with NCUA and their state supervisory authorities. He said several CUSOs contacted the trade group after the proposed rule was announced noting the proposal could violate confidentiality clauses they have in place.
"In many cases CUSOs provide services to a credit union but is not disclosed as the source," Antonini said. "Looking at the balance sheets and income statements, business plans and client lists puts CUSOs at a competitive disadvantage versus non-regulated, third-party competitors because other people can go to the NCUA and ask for those documents under the Freedom of Information Act. There is no reason to ask for these things, because they wouldn't lead to evaluation anyway. CUSOs are not balance sheet lenders, as credit unions are."
Protecting The NCUSIF
When NCUA released its proposal, the agency said that increasing governance of CUSOs is necessary due to their "potential impact on credit unions and the NCUSIF."
Having complete and accurate financial information about CUSOs and the nature of their services ensures protection of the NCUSIF and helps identify emerging systemic risks that CUSOs can pose within the credit union industry," NCUA stated.
The portion referring to "systemic risks" drew the ire of Stan Hollen, president and CEO of Rancho Cucamonga, Calif.-based CO-OP Financial Services, which has relationships with some 3,300 credit unions.
"It is highly unlikely CO-OP will fail, and if we did, each investor credit union has a very small investment," he said. " 'Systemic' means a much larger amount of risk to the share insurance fund."
Currently, Hollen noted, the 5300 report filed by every credit union lists the amount loaned to a CUSO and the aggregate value of its investment. What also concerns Hollen about the proposal, he said, is that it "is trying to make a plausible case for an investment in CUSOs making a systemic risk for the share insurance risk."
"That is difficult for several reasons," according to Hollen. "The aggregate amount is limited to 1% of a credit union's assets. So it is a real stretch to say there is a systemic risk. Likely this is fallout from the overall financial crisis and the way bank regulators treat the equivalent of a CUSO. That is the overall concern I have."
Where's The Argument?
NACUSO's Antonini said an NCUA representative foreshadowed the risk issue at the group's annual conference earlier this year. He said Jay Johnson, EVP at Callahan & Associates, immediately pointed out the aggregate investment in CUSOs is just 22 basis points of industry assets.
"So how can NCUA argue there is systemic risk?" Antonini said. "There is so much more risk on balance sheets than CUSOs. There was a problem at Texans' CUSO that caused Texans Credit Union to be conserved, but that was only one CUSO out of 700. Most CUSOs do not originate loans. If NCUA has to raise additional examiners and train them to examine CUSOs, that is an additional cost the entire industry is going to have to bear."
Added Hollen: "This raises the issue of a CUSO investing in another CUSO, which does happen. If we are a 1% investor, does that make it a CUSO? He said he is "fine" with the proposal that a credit union under Prompt Corrective Action would to have to ask for permission to make a further investment in a CUSO, but remains concerned about the data gathering requirements.
"There is Freedom of Information Act potential for competitors to look at the list of credit unions involved in the CUSO," he said. "If NCUA has that information, there is a disadvantage for CUSOs that compete with third-party providers. There is much more systemic risk from the failure of a large processor, so this is an overreaction to a very small instance that has raised this level of concern. NCUA should be encouraging CUSOs, which allow credit unions to work together and reduce the cost of operations."
Antonini said NACUSO is working on developing its comment letter. "It is a misguided attempt to regulate the industry and it is, frankly, bad policy the way the regulator is doing this. It will be negative and harmful for the industry overall, will cause fewer credit unions to invest in CUSOs, and will reduce their competitiveness. It is overkill."
"We don't see there is a strong enough reason to jeopardize CUSOs," he added.
