Credit Union Service Organizations (CUSOs) – the companies that exist to provide operational services for credit unions – last week eked out a victory from the NCUA Board that could have long-lasting, negative, systemic impact for the safety and soundness of the industry.
At Reform Credit Unions we are deeply concerned that the industry regulator finalized a rule that will make CUSOs even more unregulated and untaxed, and gives them more unfettered access to the public while easing consumer protections.
Under the final rule, which was approved by a 2-1 vote with NCUA Chairman Todd Harper voting against the rule, CUSOs will be allowed to become indirect auto lenders and make payday loans, two businesses that carry substantial compliance and reputational risk.
CUSOs, which are owned at least in part by credit unions, are third-party vendors that often offer financial products, such as mortgages and other consumer loans. While they are not themselves credit unions, they need not adhere to the industry’s “common bonds,” such as field of membership. This allows them to grow their business based on taxpayers’ shoulders.
Chairman Todd Harper, who opposed the final rule from the agency he leads, warned, “Because the agency lacks the third-party vendor authorities that the other federal banking agencies and several state regulators have, the NCUA has no power to supervise CUSOs for compliance with federal consumer financial protection laws and regulations and compliance with prudential standards like concentration limits, maximum loan-to-value ratios, and minimum capital levels.”
“A lack of supervision is a reason for even more guardrails, not fewer,” said Harper, who added that “This final rule will create an unregulated wild west within the credit union space with little accountability for protecting consumers and credit unions.”
As previously reported, if any of these CUSOs fail because they take on too much risk, others in the credit union industry will be on the hook.
The NCUA itself noted that CUSOs nearly brought down the credit union system with risky lending, inadequate capital, and lax oversight during the 2008 financial meltdown: “CUSOs have caused credit unions more than $300 million in direct losses and led to failures of credit unions with combined assets of more than $2 billion.”
At Reform Credit Unions we ask: Is the NCUA ready to repeat history?