A proposal to tighten regulations on credit union service organizations has the industry concerned about the future of the collectives.
Credit union service organizations, or CUSOs, help financial cooperatives do everything from make larger loans to manage back-end operations.
The National Credit Union Administration — the equivalent of the Federal Deposit Insurance Corp. — wants these organizations, and their subsidiaries, to submit annual financial reports.
As it stands, the agency can only regulate the organizations through the credit unions that invest in them. Examiners can compel a credit union to divest from the organizations, if participation creates too much risk on the institution’s balance sheet.
All credit unions can invest no more than 1 percent of their total assets, and under-capitalized federal credit unions are restricted from participation. The NCUA wants to expand that capitalization restriction to federally insured state-chartered credit unions.
“As a result of the economic crisis, we’re very attuned to situations that pose risk to our shared insurance fund, and CUSOs fall into that category,” said NCUA Chairman Debbie Matz. “CUSOs can pose systemic risk because of how large some of them are, some of the risky activities they’re involved in and how intertwined they are with credit unions throughout the nation.”
The Washington area has one of the largest concentrations of credit unions in the country, and is home to credit union giants such as Navy Federal Credit Union and Pentagon Federal Credit Union. Many of these institutions participate in service organizations, and will be affected by the proposed rule.
Regulators have long been uneasy about credit union collectives, but have been unable to secure enough congressional support to rein in on them. Matz said the proposal is “a backdoor approach” to gain greater control.
Matz noted that several credit unions, whose names she would not disclose, were recently placed in conservatorship because losses in their service organizations left them undercapitalized.
The chairman anticipates the final rule will be handed down mid year. The comment period on the proposal closed in September, with responses from more than 100 individuals and groups. A majority of respondents came out against the regulations.
“NCUA is taking advantage of the economic crisis to try accomplish a long-standing agenda,” said National Association of Federal Credit Unions President Fred Becker. “Only 22 basis points of all credit union assets have been invested in or loaned to CUSOs; so the risk to the insurance fund is minimal.”
Investments in CUSOs have jumped since 2008 as credit unions struggled to generate net income amid weak loan demand, low interest rates and increased costs. There are approximately 760 of these organizations with more than $2 billion in funding from credit unions, according to Callahan & Associates, a District-based provider of analytical services for credit unions.
Operating as a collective provides credit unions with more cost effective options for credit card management, mortgage origination and brokerage services that may be difficult to offer on their own, said Callahan chief executive Sean Hession. Callahan is a partner in the Credit Union Student Choice, a cooperative of 215 credit unions offering education financing to their members.
While Hession supports “a strong regulatory system,” he argued that the “NCUA already has access to CUSOs through the credit union examination process.” He is concerned that “overregulation runs the risk of creating an imbalance, an unfair playing field between CUSOs and their non credit union-owned competitors.”
Matz stressed that the agency will not hinder credit union collectives providing back-end functions or brokerage services, but monitor those engaged in activity that may pose systemic risk.